## SA 610 — Using Work of Internal Auditors

### What is the Internal Audit Function (IAF)?

IAF is an internal function of the entity that performs assurance and consulting activities designed to evaluate the effectiveness of:

Area	IAF Activities
Governance	Assess governance processes; support achieving objectives and values; performance management; accountability; communicating risk & control information
Risk Management	Identifying risks; contributing to improvement of risk management; assisting in fraud detection
Internal Control	Evaluation of specific controls; review of controls

#### Three Categories of IAF Work

Category	What It Covers
(A) Evaluation of Controls	Review specific controls; evaluate operations; recommend improvements; provide assurance on controls
(B) Internal Examination	Examination of financial & operating information; inquiry into individual items; detail testing of transactions, balances & procedures
(C) Review of Operating Activities	Review of Economy, Effectiveness, and Efficiency; review of compliance with laws & regulations (e.g., GST returns)

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### Evaluating the IAF — Can External Auditor Use IAF's Work?

Before using IAF work, External Auditor (EA) must evaluate IAF on three dimensions:

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#### A. Objectivity

Definition: Ability to perform tasks without allowing bias, conflict of interest, or undue influence of others to override professional judgements.

Factors considered by auditor:

Factor	What to Check
Organisational Status	Does IAF report to TCWG directly (or at least two levels up from management)?
TCWG Oversight	Does TCWG oversee decisions relating to IAF (e.g., determining remuneration policy)?
Restrictions	Has management/TCWG imposed any restriction on IAF — e.g., restriction on communication between external auditor and IAF?
Conflicting Responsibilities	Is IAF free from managerial or operational duties?

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#### B. Competence

Definition: Attainment and maintenance of knowledge and skills sufficient to perform tasks diligently.

Factors considered:

Whether IAF is adequately and appropriately resourced relative to the size of the entity and nature of operations
Whether established policies exist for hiring, training, and assigning internal auditors to engagements
Whether IAF possesses adequate training and proficiency in auditing
Whether IAF has the required knowledge related to entity's applicable FRF

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#### C. Systematic and Disciplined Approach

Factors considered:

Whether IAF has appropriate quality control policy and procedures
Existence, adequacy, and use of documented internal audit procedures covering:
Risk Assessments
Work Programs
Documentation and Reporting
Whether the nature and extent of these is commensurate with the size and circumstances of the entity

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### Objectives of the External Auditor as per SA 610

Objective	If Using → Then
(i) Determine whether work of IAF can be used	If yes → determine adequacy of that work
(ii) Determine whether direct assistance of IAF can be used	If yes → appropriately direct, supervise, and review their work

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### Approach 1 — Using Work of IAF

External Auditor shall:

(a) Discuss planned use of IAF work with the function → enables better coordination of IAF activities

(b) Read IAF Reports to understand:

Nature and extent of audit procedures performed
Audit findings

(c) Perform sufficient audit procedures on the body of work of IAF as a whole → to determine its adequacy for audit purposes

Topics for Coordination Discussion with IAF:

Nature of work performed
Timing of such work
Extent of audit coverage
Overall FS materiality level and performance materiality
Documentation of work performed
Review and reporting procedures
Proposed methods of item selection and sample sizes

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### Effective Coordination between EA and IAF — Conditions

Condition	Description
(A)	Discussion takes place at appropriate intervals throughout the period
(B)	EA informs IAF of significant matters that may affect IAF's function
(C)	IAF provides relevant reports to EA; IAF informs EA of significant matters that may affect the external audit

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### When EA Should Plan to Use LESS Work of IAF

Situation	Reason
More judgement involved in planning/performing audit procedures & evaluating evidence	Higher judgement areas require EA's direct professional assessment
Higher assessed ROMM at assertion level, especially for significant risks	High-risk areas need EA's own work
Lower competence of IAF	Unreliable outputs
Less organisational status / weak policies supporting IAF's objectivity	IAF may be influenced or biased

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### Examples of IAF Work That CAN Be Used by EA

Testing operating effectiveness of controls
Substantive procedures involving limited judgement
Observations of inventory counts
Testing compliance with regulatory requirements
Tracing transactions through information systems relevant to financial reporting

Worked example

### Example 1

Example 1 — Evaluating IAF Before Using Its Work:

The external auditor of PQR Ltd considers using IAF's work for testing internal controls. Findings during evaluation:

IAF reports directly to the CEO (not TCWG)
Management has restricted direct communication between EA and IAF
IAF has no documented audit procedures or work programs

Conclusion: EA should NOT use IAF's work because:

Objectivity is compromised — IAF reports to management, restrictions imposed by management on communication
Systematic approach is absent — no documented procedures (fails the 'C' criterion)

EA must perform all control testing independently.

### Example 2

Example 2 — Coordination with IAF (Approach 1):

External auditor of XYZ Ltd plans to use IAF's observation of inventory counts (limited judgement area). Steps taken:

1. EA discusses with IAF: scope of count, locations covered, timing (quarter-end), documentation approach, and sample sizes

2. EA reads IAF's inventory count report — finds IAF identified a variance of ₹2 lakh at one location

3. EA performs sufficient procedures on IAF's work (e.g., rechecking count sheets, verifying reconciliation)

4. EA concludes IAF's work is adequate and reduces own attendance to high-value locations only

This is a valid use of IAF work because inventory counts involve limited judgement and IAF demonstrated objectivity, competence, and systematic approach.

### Example 3

Example 3 — When to Use LESS IAF Work:

The auditor is assessing whether goodwill impairment (₹50 crore) is correctly recognized. This involves:

Management judgement on future cash flows
Significant estimation uncertainty
A risk identified as significant by the EA

Conclusion: EA must perform this work directly. It involves high judgement and high ROMM → EA plans to use less (or no) IAF work for this area and obtains an independent valuation expert instead.

⚠️ Common exam mistakes

Treating 'using work of IAF' and 'direct assistance of IAF' as the same thing — they are two separate approaches under SA 610 with distinct requirements.
Skipping the evaluation of IAF (objectivity, competence, systematic approach) before deciding to use IAF work. Students jump straight to 'how to use' without first establishing whether IAF work can be used.
Forgetting the three conditions for effective coordination — students describe coordination activities but don't state the conditions under which coordination IS effective.
Not knowing when EA should use LESS work of IAF — students only learn the positive case (when to use IAF) and cannot identify the four situations requiring reduced reliance.
Confusing IAF objectivity factors: the key issue is whether IAF reports to TCWG (not just management) and whether there are restrictions on communication with the external auditor.
Listing all IAF work as usable by EA — in reality, high-judgement areas (impairment, provisions, going concern) must be done by the EA directly.

Reference: — SA 610 — Using the Work of Internal Auditors

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