## Using the Work of the Internal Audit Function

### Examples of IAF Work Eligible for External Auditor Reliance

1. Testing of operating effectiveness of controls

2. Substantive procedures involving limited judgment

3. Observations of inventory counts

4. Tracing transactions through information systems relevant to financial reporting

5. Testing of compliance with regulatory requirements

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### JOLA – When to Use LESS IAF Work and Do More Directly

The external auditor must make all significant judgments in the audit. To prevent undue reliance on IAF, the external auditor shall plan to use less IAF work and perform more directly when:

Letter	Factor	Direction
J	Judgment involved in planning/performing procedures AND evaluating evidence	More judgment → Use less IAF work
O	Objectivity — IAF's organizational status and policies	Weaker objectivity → Use less IAF work
L	Level of competence of the IAF	Lower competence → Use less IAF work
A	Assessed risk of material misstatement at assertion level (especially significant risks)	Higher risk → Use less IAF work

> Mnemonic: JOLA (J = Judgment, O = Objectivity, L = Level of competence, A = Assessed risk)

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### Procedures When Using IAF Work (Q10)

If the external auditor plans to use IAF work, they shall:

(A) Discuss and coordinate:

Discuss planned use with the IAF to coordinate respective activities, covering:

Timing of the work
Nature of the work performed
Extent of audit coverage
Materiality (overall and performance materiality)
Proposed methods of item selection and sample sizes
Documentation of the work performed
Review and reporting procedures

(B) Read IAF reports:

Read reports of the IAF relating to the work to be used — to understand the nature and extent of procedures performed and the related findings.

(C) Perform audit procedures on IAF work:

Perform sufficient audit procedures on the body of IAF work as a whole to determine its adequacy for audit purposes.

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### Effective Coordination Indicators

Discussions take place at appropriate intervals throughout the period (not just at year-end)
External auditor informs IAF of significant matters that may affect the function
External auditor has access to relevant IAF reports and is informed of significant matters that may affect the audit

Worked example

### Example 1

Example – Applying JOLA:

The external auditor is planning the audit of LMN Ltd. Consider these facts:

Inventory valuation involves complex estimates (high judgment)
Management override risk assessed as significant
IAF reports to the CEO (weak objectivity)
IAF staff are newly appointed with limited experience (low competence)

Application of JOLA: All four factors (J, O, L, A) indicate the external auditor should use less IAF work and perform more procedures directly. The external auditor should conduct inventory valuation testing independently.

### Example 2

Example – Reading IAF Reports:

The external auditor of STU Ltd. plans to rely on the IAF's payables testing. Before relying on it, the external auditor reads the IAF's work papers and notes that: (i) sample sizes were very small (5 items), (ii) the IAF did not test cut-off.

Assessment: After reading the reports (step B), the external auditor determines the IAF work is not adequate for audit purposes. The external auditor must perform their own payables testing covering cut-off and an appropriate sample size.

⚠️ Common exam mistakes

Writing 'JOLA' factors incorrectly — 'O' stands for Objectivity (weaker → use less), not 'Operations'. 'L' is Level of competence (lower → use less), not 'Limitations'.
Stating that the external auditor should use MORE IAF work when risks are high — it is the opposite; higher assessed risk means the external auditor should do MORE work directly.
Omitting that the external auditor must perform audit procedures on the body of IAF work to assess adequacy — simply reading reports is not sufficient alone.
Forgetting that coordination should happen throughout the period, not only at planning stage.

Bare-Act text Circumstances Requiring Less Use of IAF Work (JOLA) · SA 610 – Using the Work of Internal Auditors · click to expand

The external auditor shall make all significant judgments in the audit engagement and, to prevent undue use of the work of the internal audit function, shall plan to use less of the work of the function and perform more of the work directly if: the more judgment is involved; the higher the assessed risk of material misstatement at the assertion level; the less the organizational status and policies adequately support objectivity; and the lower the level of competence of the internal audit function.

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JOLA – When to Use Less IAF Work; Coordinating and Reviewing IAF Work

Worked example

⚠️ Common exam mistakes