How External Auditors Can Leverage Your Internal Audit Work

Kirsch CPA Group

Apr 26, 2023

If your organization has an internal audit function, you may be able to use your internal audit team to streamline financial reporting by external auditors. External auditors aren’t required to use internal auditors in any capacity. But collaboration between internal and external audit teams can be beneficial to both your organization and its external auditors.


What Are the Benefits?

Many organizations have an internal audit department that tests whether the organization is accurately reporting financial results and complying with U.S. Generally Accepted Accounting Principles (GAAP). This objective aligns with the goals of external auditors. So, collaboration between these two sets of auditors can help minimize disruptions to normal business operations that sometimes happen during external audit fieldwork. And internal audit personnel may have information that’s useful to the external auditor.

For example, documentation prepared by the internal audit team might help external auditors better understand the organization and its operating environment. In turn, this insight can help external auditors identify and assess risks of material misstatement, which might affect the nature and extent of the external audit team’s inquiry and testing procedures.

In some situations, external auditors may even be able to rely upon work performed by the internal audit team as direct audit evidence. This could potentially reduce the procedures that need to be performed during audit fieldwork.


What’s Required Under the Auditing Standards?

The Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards (SAS) No. 128, Using the Work of Internal Auditors, in 2014. This standard clarifies an external auditor’s responsibilities when using internal auditors.

SAS 128 differentiates between two types of assistance provided by the internal audit function. Specifically, an external auditor may consider using internal auditors to:

  1. Obtain audit evidence, and
  2. Provide direct assistance under the direction, supervision and review of the external auditor.

One of the most significant changes in SAS 128 was the requirement for the internal audit function to apply a systematic and disciplined approach to planning, performing, supervising, reviewing and documenting its activities. This includes having appropriate quality control policies and procedures. If the external auditor determines that the internal audit function lacks a systematic and disciplined approach to its activities, the external auditor can’t use the work of the internal auditor in obtaining audit evidence.

Additionally, SAS 128 requires management (or other parties charged with governance) to provide a written acknowledgment regarding the use of internal auditors. The statement must acknowledge that internal auditors providing direct assistance will be permitted to follow the instructions of the external auditor and that the entity won’t interfere in the work the internal auditor performs for the external auditor.


What’s Right for Your Organization?

Your internal audit department could play an important role in external audit procedures, depending on its level of sophistication. Let’s evaluate whether your internal audit function meets the requirements of SAS 128. If so, we can leverage our capabilities, ensuring that fieldwork will run as smoothly and effectively as possible.


Beyond Compliance: Making the Most of Your Internal Audit Team

Internal auditors who understand the big picture can expand their department’s influence by helping their organizations mitigate risk, improve financial and operational processes, and evaluate business strategies. The skill sets of internal auditors make the department ideally suited to participate in managing a broad range of risks, including:

  • Operational,
  • Strategic,
  • Investment,
  • Information technology (IT),
  • Merger and acquisition (M&A),
  • Foreign corruption, and
  • Business continuity risks.

To maximize its value, the internal audit team should take a forward-looking approach. Doing so can help your business anticipate and avoid obstacles before an adverse event occurs.

Your organization can tap into auditors’ expertise to evaluate and improve controls and ensure compliance before problems arise, instead of waiting for internal auditors to report possible control or compliance deficiencies. The department can also highlight ways for other functional areas — such as production, sales, HR, finance and procurement — to improve processes and eliminate waste and inefficiency.


We can help you tackle business challenges like these – schedule an appointment today.


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About The Author

Kirsch CPA Group is a full service CPA and business advisory firm helping businesses and organizations with accounting,…

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