## Evaluating Whether IAF Work Can Be Used

Before relying on IAF work, the external auditor must evaluate the IAF on three criteria:

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### (A) Objectivity

Definition: Ability to perform tasks without bias, conflict of interest, or undue influence overriding professional judgment.

Factors the external auditor considers:

1. Does the IAF's organizational status (authority + accountability) support freedom from bias?

2. Do those charged with governance (TCWG) oversee employment decisions for the IAF?

3. Are there any constraints/restrictions on the IAF — e.g., management restricting communication of findings to the external auditor?

4. Is the IAF free from conflicting responsibilities (e.g., managerial/operational duties outside the IAF)?

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### (B) Competence

Definition: Attainment and maintenance of knowledge and skills at the level required to perform assigned tasks diligently and per applicable professional standards.

Factors the external auditor considers:

1. Is the IAF adequately and appropriately resourced relative to the entity's size and operations?

2. Are there established policies for hiring, training, and assigning internal auditors?

3. Do internal auditors have adequate technical training and proficiency in auditing?

4. Do internal auditors possess knowledge of the entity's financial reporting and applicable framework?

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### (C) Systematic and Disciplined Approach (including Quality Control)

What it means: A systematic and disciplined approach to planning, performing, supervising, reviewing and documenting distinguishes IAF activities from other internal monitoring controls.

Factors the external auditor considers:

1. Existence, adequacy and use of documented internal audit procedures covering: risk assessments, work programs, documentation, and reporting

2. Whether the IAF has appropriate quality control policies and procedures

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### The Continuum (Note 3 — critical examiner point)

Objectivity and competence exist on a continuum — the higher both are, the more IAF work the external auditor can use.
Strong objectivity CANNOT compensate for lack of competence.
High competence CANNOT compensate for poor objectivity.
Both must be sufficient; they are complementary, not substitutes.

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### When IAF Work CANNOT Be Used at All

The external auditor shall not use IAF work if any one of the following applies:

(a) Organizational status/policies do not adequately support objectivity of internal auditors
(b) The function lacks sufficient competence
(c) The function does not apply a systematic and disciplined approach, including quality control

Worked example

### Example 1

Example – Objectivity Impairment:

The Chief Internal Auditor of PQR Ltd. reports directly to the CFO (not to the Audit Committee). Management has also restricted the IAF from sharing its fraud investigation findings with the external auditor.

Assessment: Two objectivity red flags exist — (1) reporting line to CFO creates potential management influence, and (2) active restriction of findings communication. The external auditor should conclude objectivity is not adequately supported and cannot use the IAF work.

### Example 2

Example – Competence Evaluation:

DEF Ltd. is a large listed entity in the financial services sector. Its IAF has three members — all freshly recruited graduates with no prior audit training or financial reporting knowledge, and there are no structured training policies.

Assessment: Competence is insufficient given: (a) no training policies, (b) no technical audit proficiency, (c) no knowledge of financial reporting framework. External auditor cannot rely on IAF work.

### Example 3

Example – Continuum Application:

GHI Ltd.'s IAF has excellent objectivity (reports to Audit Committee, full independence) but its staff lack sufficient technical competence in complex IFRS areas.

Question: Can the strong objectivity compensate for the competence gap?

Answer: No. Per SA 610, strong objectivity cannot compensate for insufficient competence. The external auditor must assess each criterion independently.

⚠️ Common exam mistakes

Assuming that if objectivity is strong, the external auditor can overlook competence gaps — the two criteria cannot compensate for each other.
Forgetting 'systematic and disciplined approach' as the third criterion — students often only remember objectivity and competence.
Listing 'quality control' as a separate fourth criterion instead of recognising it is part of the 'systematic and disciplined approach' criterion.
Treating the evaluation as pass/fail on all three simultaneously — if any ONE criterion fails, the IAF work cannot be used at all.

Bare-Act text Evaluating the Internal Audit Function · SA 610 – Using the Work of Internal Auditors · click to expand

The external auditor shall determine whether the work of the internal audit function can be used for purposes of the audit by evaluating: (A) The extent to which the internal audit function's organizational status and relevant policies and procedures support the objectivity of the internal auditors; (B) The level of competence of the internal audit function; and (C) Whether the internal audit function applies a systematic and disciplined approach, including quality control.

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Evaluating the Internal Audit Function – Objectivity, Competence, Systematic Approach

Worked example

⚠️ Common exam mistakes