Introduction: Why "Use the Work of Others"?
Welcome to this guide! As you progress through your audit studies, you will realize that auditors are like detectives, but they can't be experts in everything. If an auditor needs to value a complex diamond mine or calculate complicated pension liabilities, they might need a helping hand. This chapter focuses on how we, as auditors, can safely and effectively use the work of Internal Auditors and Auditor's Experts to help us form our audit opinion.
Don't worry if this seems a bit technical at first. Think of it like building a house: you are the main architect (the External Auditor), but you hire a plumber or an electrician (the Expert) to handle specialized tasks. You are still responsible for the final house, but you don't have to do the wiring yourself!
Important Note: Even when we use someone else's work, the External Auditor (you!) is solely responsible for the audit opinion. You cannot blame the expert if something goes wrong later!
1. Using the Work of an Auditor’s Expert (HKSA 620)
An Auditor’s Expert is an individual or organization possessing expertise in a field other than accounting or auditing. We use their work to help us obtain sufficient appropriate audit evidence.
When do we need an expert?
We need an expert when the matter is complex and requires specialized knowledge. Common examples include:
• Valuations: Complex financial instruments, land and buildings, or precious stones.
• Actuarial Calculations: Calculating insurance liabilities or employee pension plans.
• Physical Condition: Estimating the quantity of oil in a reserve or minerals in a mine.
• Legal Opinions: Interpreting complex contracts or the likely outcome of a lawsuit.
How to "Vet" the Expert
Before you trust their work, you must evaluate three things (Memory Aid: C.C.O.):
1. Competence: Do they have the right professional qualifications and experience?
2. Capabilities: Do they have the time and resources to do the job?
3. Objectivity: Are they independent? If the expert is the CEO’s brother, their work might be biased!
Evaluating their work
You can't just take their report and file it away. You must check:
• The Source Data: Did they use accurate data from the client?
• The Assumptions: Are their assumptions realistic and consistent with other audit evidence?
• The Findings: Do their conclusions make sense in the context of the overall audit?
Quick Review: An Auditor's Expert is for non-accounting fields. If you hire someone to help with tax accounting, they are usually just part of the audit team, not an "expert" under HKSA 620.
2. Using the Work of Internal Auditors (HKSA 610)
Many large companies in Hong Kong have an Internal Audit (IA) department. They are employees of the company, but their job is to monitor controls and risks. As External Auditors, we can sometimes use their work to make our audit more efficient.
Did you know? Internal auditors and external auditors have different goals. Internal auditors focus on internal efficiency and risk, while we focus on whether the financial statements are true and fair.
The Three Criteria for Using IA Work
Before you use the IA's work, you must assess:
1. Objectivity: Does the IA department report to the Board or the Audit Committee? If they report to the Finance Manager, they aren't very objective because they are checking their boss's work!
2. Competence: Are they members of professional bodies? Do they have proper training?
3. Systematic and Disciplined Approach: Do they plan their work, keep good files, and perform quality control? If their "audit" is just a few messy notes on a napkin, you can't use it!
Two Ways to Use Internal Auditors
A. Using existing work: Reading the reports they have already written during the year and using their findings as evidence.
B. Direct Assistance: Having the internal auditors work directly under your (the external auditor's) supervision to perform specific audit procedures.
Common Mistake to Avoid: Never use IA for high-risk areas or areas involving significant judgment (like a complex impairment calculation). Those tasks must be done by the external auditor to remain independent.
Key Takeaway: The more judgment required and the higher the risk of material misstatement, the less we should rely on internal auditors.
3. Summary of Responsibility
This is a favorite topic for exam questions! Students often get confused about who is "to blame."
The Golden Rule: The External Auditor has sole responsibility for the audit opinion expressed. This responsibility is not reduced by the fact that the auditor used the work of an expert or internal auditors.
Think of it like this: If you are a chef and you buy ingredients from a supplier, if the meal tastes bad because the ingredients were rotten, the customer still blames you, the chef. You were supposed to check the ingredients before cooking!
4. Step-by-Step Process for Planning
When you are in the Planning Phase of the audit (which is where this chapter fits in your curriculum), follow these steps:
1. Identify if there are areas requiring specialized knowledge or where IA exists.
2. Assess the risk in those areas.
3. Determine if you need an expert or if you can rely on IA.
4. Evaluate the "C.C.O." (Competence, Capability, Objectivity) of the person.
5. Communicate clearly with them about what you need (the scope of work).
6. Review their work once it's done to ensure it's reliable.
Quick Review Box
Auditor's Expert: Non-accounting specialist (e.g., Engineer). Check their C.C.O. and their assumptions.
Internal Auditor: Company employees. Check their objectivity, competence, and methodology. Avoid using them for high-risk judgments.
Responsibility: Always stays with the External Auditor. No excuses!
Don't worry if this seems a lot to memorize. Just remember: As an auditor, you are the leader. You can hire helpers, but you must make sure they are good at their job and you must double-check their work!