Question

Patterson and Landry, (P and L) CPA firm is contemplating accepting an audit of a new client, UMO Catering. UMO Catering uses two accountants that rotate between the accounting department and the internal audit function. Two years one will serve as the accountant and then they switch to two years an the internal auditor. P and L could would like for you to inform them of some of the business risks involved in accepting this new engagement. Also, please explain what factors are considered when determining to use the work of the internal auditor? Finally, please explain if they should use the internal audit staff?

Answer 1

Business Risks invloved -

1. As the accountant and internal audit staff were same so there is risk of hiding errors.

2. Fraud due to the same staff is there for both accounting and internal audit.

3. The weakness in Internal audit work.

4. Threatness to independence of internal auditor.

Factors considered when determining to use the work of the internal auditor -

Before considering internal auditor work CPA should check their their expertise and their qualifications and the approach followed by the internal auditors.

There should be no probihition on using the work of internal auditor.

Competance of the internal auditor.

Exitence and significance of the threats to objectivity of the internal auditors.

Judgements and assumptions used by the internal auditors.

They can use internal audit staff after considering the above factors and also take in written the working papers and should cross check the internal audit work because they are not independent from management.