The Auditing Standards Board (“ASB”) has issued its Statement on Auditing Standards (SAS) No. 128, “Using the Work of Internal Auditors”. SAS 128 defines the external auditor’s responsibilities in situations where they are (a) using the work of the internal audit function to obtain audit evidence or (b) using internal auditors to provide direct assistance under the direction, supervision, and review of the external auditor. The goal is to ensure that such reliance is reasonable and disciplined.
SAS 128 supersedes SAS No. 65, “The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements”. It also amends Statement on Quality Control Standards No. 8 and various sections within SAS 122. It goes the extra strep of requiring an additional and explicit evaluation that the external auditor is required to determine whether the work of internal auditors can be used in obtaining audit evidence. Specifically, Paragraph 13 of SAS No. 128 requires
“as a prerequisite to being able to use the work of the internal audit function, the external auditor [must] evaluate the application by the internal audit function of a systematic and disciplined approach, including quality control.”
Paragraphs A12–A14 of SAS No. 128 provide guidance on how to evaluate whether the internal audit function meets the criteria of applying a systematic and disciplined approach. Of course, the external auditor is still free to design its audit plan, timing, and strategy, and perform whatever procedures it finds necessary. There is nothing in SAS 128 that requires an external auditor to utilize any work by the internal auditors. Further, exceptions are provided if the work of the internal audit department is not relevant to the audit, the external auditor does not intend to rely on their work in obtaining audit evidence, or when the internal audit team is not used to provide assistance in conducting the audit. More information regarding this SAS and its importance for auditor independence is available in this related article.