The function of an internal auditor being an integral part of the system of internal control, it is obligatory for a statutory auditor to examine the scope and effectiveness of the work carried out by the internal auditor. As a matter of information, the students may note that under the Companies (Auditors Report) Order, 2003 issued under section 227(4A) of the Companies Act, the statutory auditor is required to comment (as amended by in Nov., 2004)on the internal audit system. For the purpose, he should examine the organisation of the Internal Audit Department, the strength of the internal audit staff, their qualification and their powers. Afterwards the procedures should be studied ; also the scope of the audit examination carried out should be ascertained on referring to audit programmes, reports submitted, points raised in audit and how these had been dealt with subsequently. The extent of independence exhibited by the internal auditor in the discharge of his duties and his status in the organisation are important factors for determining the effectiveness of his audit. In a large business, it has been increasingly recognised that, if their functions and those of statutory auditors could be integrated, it
might not be necessary for the statutory auditors to go over the same facts and figure as have been previously examined by a competent and trustworthy internal audit staff. But so far, the practice of audit being conducted jointly by the internal auditors are of great assistance to statutory auditors.
If the statutory auditor is satisfied on an examination of the work of the internal auditor, that the internal audit has been efficient and effective, he often decides to curtail his audit programme by dispensing with some of the detailed checking already carried out by the Internal Audit Department after or without testing the work already done. He, at times, also decides to entrust certain items of work to the internal auditor. Given below are items of audit work in regard to which the statutory auditor accepts the checking that has already been carried out by the internal auditor ;
- Verification of the system of internal control ;
- Verification of assets, e.g., stock in trade, fixed assets, book debts, etc. ; and
- Verification of amounts provided for expenses as well as amounts adjusted as prepaid expenses. It must however be mentioned that the area of co-operation between the statutory and the internal auditor is limited by the fact that the statutory auditor and the internal auditor owe their allegiance to separate authorities, the shareholders in one case and the management in the other. Therefore, the former is not protected against the liability for negligence which may arise in such a case.
