Internal Audit Function and ISA 610: Role in External Audit
This paper examines the role of the internal audit function in supporting external audit activities, with particular focus on the International Auditing and Assurance Standards Board's (IAASB) Exposure Draft revising ISA 610, "Using the Work of Internal Auditors." The paper outlines the major issues the IAASB sought to address, including ambiguity around the external auditor's permissible use of internal audit work, independence concerns, and jurisdictional restrictions. It identifies the conditions under which an internal audit function is considered effective — objectivity, competence, and a systematic approach — and discusses the practical difficulties internal auditors face. The paper concludes by analyzing how the global financial crisis has heightened the importance of coordinated internal and external audit efforts in mitigating fraud risk and ensuring audit quality.
- Introduction: Case for internal audit's role in corporate governance
- Major Issues Raised in IAASB's Exposure Draft: Ambiguities in ISA 610 the IAASB aimed to resolve
- Proposed Changes to ISA 610: IAASB's recommended revisions to auditor guidelines
- Conditions for an Effective Internal Audit Function: Objectivity, competence, and systematic approach criteria
- Difficulties Faced by Internal Auditors: Management resistance and coordination challenges
- Audit and the Global Financial Crisis: Heightened audit importance during economic crisis
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What makes this paper effective
- It grounds its analysis in a specific regulatory document — the IAASB Exposure Draft on ISA 610 — giving the argument a concrete, authoritative focal point rather than relying on abstract claims.
- The paper moves logically from regulatory context, to proposed rule changes, to practical implementation conditions, and finally to real-world relevance in a crisis environment, creating a coherent progression.
- It balances both the standard-setter's perspective and the practitioner's challenges, acknowledging difficulties such as management non-cooperation and scope conflicts between internal and external auditors.
Key academic technique demonstrated
The paper demonstrates regulatory analysis — the careful reading and interpretation of a standards document (ISA 610) to extract its implications for practice. The student identifies ambiguities the IAASB aimed to resolve, explains proposed remedies, and evaluates their practical significance. This technique requires the writer to move between the text of the standard and its real-world application, showing comprehension of both regulatory intent and auditing practice.
Structure breakdown
The paper opens with a broad case for the internal audit function's importance in corporate governance, then narrows to the specific IAASB Exposure Draft and its motivating issues. Subsequent sections address proposed rule changes and the criteria for audit effectiveness before pivoting to practitioner-level challenges. The paper closes by contextualizing its argument within the global financial crisis, reinforcing the topic's contemporary relevance. References follow the Harvard author-date citation style.
Introduction
In large organizations, the existence and effectiveness of the internal audit function is always a critical concern. Not only must an internal audit department exist, but it must also work effectively. An effective internal audit department can serve as the backbone of an organization's success. The International Auditing and Assurance Standards Board (IAASB) continuously revises its standards to ensure that both external and internal auditors carry out their duties effectively. The board recently revised the internal auditing standard that assists external auditors in using the work of internal auditors. Although external auditors are primarily concerned with auditing a company's financial statements, limitations of time and, in some cases, resources raise questions about audit quality.
In order to ensure that external audits are carried out effectively, the IAASB recognized the importance of the internal audit function and how it can serve as a valuable tool for external audit purposes. The internal audit function always has a broader scope than the external audit function across each of an organization's departments, allowing for a more detailed scrutiny of particular organizational functions. The importance of the internal audit function is growing in every organization, as management recognizes that internal auditors can not only help reduce the extent of the external auditor's work but also relieve the organization of the burden of providing large volumes of data to external auditors.
There is no doubt that the internal audit function is one of the major components of corporate governance. Management gains a deeper insight into business issues simply by reviewing internal audit reports that summarize key matters. This also protects an organization from significant fraud, as control testing performed by internal auditors prevents weak controls from persisting in any area or department. The internal audit function ensures that controls exist and that existing controls are sufficient to counter both financial and non-financial risks. Internal auditors assist organizations by making recommendations on how and where to adjust controls in order to achieve a better control environment.
Major Issues Raised in IAASB's Exposure Draft
The IAASB conducted its Exposure Draft (ED) with the purpose of clarifying the ambiguity surrounding ISA 610, "Using the Work of Internal Auditors." The IAASB's concern arose from the fact that the standard created confusion regarding the external auditor's use of internal audit work. The first issue addressed was the practice, common in many parts of the world, of internal auditors assisting external auditors in areas under the direct supervision of the external auditor — an arrangement that the standard states it does not cover. Ambiguity existed as to whether ISA 610 supports the use of the internal audit function by the external auditor in such circumstances.
The IAASB was particularly concerned that direct interaction between internal and external auditors — to the extent that internal auditors work under the supervision of external auditors — could impair the independence of the external auditor. This concern arises because the internal audit function is part of the entity's management and is not independent of the entity. The IAASB therefore discussed how appropriate safeguards could be implemented by external auditors to preserve their independence with respect to auditing the organization's financial statements. The IAASB also sought to establish that external auditors should seek assistance from the internal audit function only in relevant areas.
In some jurisdictions, local law restricts the external audit function from using the work of internal auditors. The IAASB clarifies in its Exposure Draft that complying with such local laws does not render the external auditor non-compliant with ISA 610. The IAASB further explains that external auditors shall not be compelled in any way to use the work of the internal audit function; the decision rests solely with the external auditor as to whether using the internal auditor's work would enhance audit effectiveness.
The IAASB also discusses the requirement for the external auditor to communicate with those charged with governance regarding the scope and timing of any planned use of internal audit work, where such use is considered necessary. The IAASB's overarching objective is to revise ISA 610 so that it provides clear guidance to external auditors on the conditions under which using the work of the internal audit function would be effective.
Proposed Changes to ISA 610
The IAASB intends to revise the standard in a way that requires the external auditor to make a clearly bounded judgment about whether to use the work of the internal audit function. Because ambiguity exists regarding whether internal auditors can directly assist external auditors under their supervision, the IAASB proposed changes designed to prevent confusion. Specifically, the IAASB recommends that an external auditor be required to assess the level of objectivity exercised by the internal audit function within the organization, as well as the skills and competencies of the internal auditors. If the external auditor finds that the objectivity of the internal audit function is impaired in any respect, the external auditor should not rely on that work, as doing so could compromise the quality of the external audit.
Furthermore, the IAASB requires external auditors to consider the judgments and estimates used by internal auditors when planning audit procedures, alongside an assessment of the scope of the internal audit. The IAASB clarifies that external auditors need not rely on internal auditors' work in areas requiring significant judgments, since the external auditor bears sole responsibility for the audit opinion on the financial statements and the internal auditor cannot be held accountable for that opinion. The external auditor is also permitted to inquire of the internal auditor about the auditor's understanding of the entity and its environment, enabling the external auditor to gain a better appreciation of the entity's controls and the areas that present significant risks requiring further audit procedures.
The IAASB also requires that the relationship between ISA 315 and ISA 610 be made explicit, so that external auditors understand the requirements they must fulfill regarding their understanding of the internal audit function. This clarity could considerably reduce the time and cost associated with the external audit (International Accounting Standards 2010).
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