Answer

Question 1:
Your client Dury Limited is considering having an internal audit department. What factors
should they consider when deciding to set one up?

• Cost v Benefit
• Pressure from external stakeholders
• Whether better to outsource or not
• Management’s perceived need for assessing risk and Internal Controls i.e. if a small company
with very few controls would this really be of benefit to them?
• Ability of existing staff to carry out the work
• Complexity and scale of company activities
• Possible savings in consultancy fees going forward (as IA can provide advice that would
usually come from external consultants on operations etc )

Question 2:
Name 3 key difference between an external auditor and an internal auditor

Any 3 of the following:

Objective:
EA’s aim is to express an opinion on the financial statements whereas IA perform a variety of roles
such as reviewing the effectiveness of internal controls, investigating fraud or finding ways for the
company of save money.

Reporting:
EA report to shareholders in their audit report, whereas IA report to Directors/TCWG
All audit reports are publicly available, unlike an internal audit report which is solely for the Board.

Scope:
EA focuses solely on the financial statements whereas IA look at many other aspects of the
company e.g. operational controls not just financial.

Relationship:
EA is always an external independent 3rd party, however an IA can be an employee of the
company (but may also be outsourced).

Planning & collection of evidence:

IA do not have a legal framework to follow and how they collect evidence will depend on the nature
of the work they undertake. May still use a risk based approach but also procedural. They are also
involved in strategic long term planning of the organization.

Question 3:
Internal auditors try to be as independent as possible so that they can objectively review
the company’s operations and find errors or ways to improve. Are there any limitations on
their independence?

• Most Internal auditors are employees of the company therefore they lack independence
• Whilst lots of IA’s are professionals qualified accountants there is no requirement for this to be
the case therefore, they may not have the right skills and experience.
• The IA ultimately reports to the Audit Committee or in their absence the Board, and this makes
them less independent than EA who report to the shareholders.
• In smaller companies where the Internal Auditor is not a full time role, they may undertake
some operational duties too which will reduce their independence when it comes to reviewing
that area of the business

Question 4

Explain the difference between the ‘statutory audit” the ‘audit’ and the compliance audit.

• Students should now be able to outline the statutory audit (and the reasons for it).

• An EEE audit is very different.

• EEE’s main objective is to enhance ‘objectives’ (a measure of effectiveness) by focusing on

• Methods used fall much more in the ‘consultancy’ arm of the internal audit department (or
outsourced auditors) and management accountant. Although there can be ‘standards’ by which to
audit these are often difficult to measure, especially so in terms of outcomes/effectiveness.

• The benefit of EEE audit is to stimulate best economies, efficiency and effectiveness in a
not profit-making entity that does not have commercial pressures ‘forcing’ these issues.
Give one example for each of the 3 Es of factors that the auditors would consider if they were to
perform an compliance audit on Aqua’s behalf.

Suggested answer only – not an exhaustive list.

Economy
• Whether materials purchased to build wells are bought at the best price given the locations
they are built in.

Efficiency
• Whether all sites dug resulted in a well successfully being built, or whether some digs were
unsuccessful in finding a water supply.
• Whether any materials are wasted when building wells.

Effectiveness
• Consider cost of each well per the number of customers benefiting from the new water
supply to identify which projects were most successful.
• Look at how many wells have been built over a set time period.
• Have any projects not been successful (e.g. have they been unsuccessful in digging a well
in one site).

Question 5:
You are the external auditor of YL Tengo plc, who currently do not have an internal audit
department. This year YL Tengo’s audit committee have reviewed the need for internal audit and
decided that they should have internal auditors. Some of the Board of YL Tengo don’t agree with
the decision as they don’t think the internal auditors would be doing anything different from the
external auditors (i.e. testing financial controls) and therefore it would be a waste of money.
However, the Non-execs on the audit committee are determined and are interested in whether your
firm provides internal audit services.

• Some of the board think that the services IA provide are very limited. What other types
of work do IA provide, give 2 examples with a description.
• Any two of the following:
• Should your firm provide both internal and external audit services?
• Although there is risk of a management threat and the possibility of self review if a firm
provides both internal and external audit services, it is allowed as long as there are
strict safeguards.
• Management threat:
• Firm should not assume management’s responsibility e.g. setting IA policies or
strategic direction of the IA function, deciding which recommendations should be
implemented.
• Firm should ensure that Senior management at the client accepts responsibility
for the internal control and internal audit services
• Client should also approve all the work that internal audit does
• Self-Review threat:
• Separate teams for both IA and EA
• If the client is a public interest entity then IA should not be provided if they relate to a
significant part of the internal controls, financial accounting systems, or amounts which
are material to the financial statements.
• What are the advantages and disadvantages to YL Tengo of outsourcing the IA to your

firm rather than setting up an IA department for themselves?