engleski

Using the Work of Internal Auditors in Financial Statement Audits – Necessity or Hassle?

Contemporary extremely complex, dynamic, flexible, and unpredictable business surroundings emphasise more than ever before the importance of a sound corporate governance, an effective risk management, and an efficient internal control system of a company. Regarding global corporate and financial scandals, history unfortunately repeats in a surprisingly, or not, uniform, and cyclical patterns. What is worse, the causes of these events are almost always the same – the deficiencies and/or weaknesses in the company’s internal control system, that consequently impact the quality of its risk management processes, and, in the end, the overall effectiveness and efficiency of the corporate governance structures. Furthermore, as a part of the company’s internal control system, more precisely, part of the last component of this system, monitoring activities, external and internal audits are, therefore, fundamental elements, or cornerstones, of an effective and efficient corporate governance. Respecting their specifics and differences, it is also important to recognize that external and internal audits are complementary functions, and because of that, it is important to establish an appropriate relationship for their cooperation and coordination of their activities for the purpose of minimizing duplication of efforts and increasing their performance, in favour of the company they both serve. In that way, external and internal audits strengthen corporate governance structure by improving risk management processes and internal control system of the client’ company. Relevant external and internal audits’ international professional standards recognize the importance of the collaboration between external and internal auditors, and allow their coordination and reliance on each other, but with respect and obtainment of their professionalism, independence, objectivity, competence, and due professional care. This paper looks at this cooperation and reliance from the external audit’s point of view. Relevant guidelines for external auditors gives International Standard on Auditing (ISA) 610 Using the Work of Internal Auditors. Even though there exist previous studies on the topic of the usage of the internal audit function’s work by external auditors or the reliance of external auditors on the work of internal auditors that are conducted in different countries in different global regions, as well as in the Republic of Croatia, there still exist gaps that this paper tries to fulfil by conducting theoretical and empirical research with the application of new and innovative approaches to investigating this interesting topic from scientific and professional aspects. The main research objectives of this paper were: 1) to investigate the frequency of the cooperation between external and internal auditors, and 2) to determine the most important determinants that external auditors need to take into consideration when deciding to rely or not to rely on the internal auditors’ work. To achieve these objectives, desk research and survey research were conducted. Survey research was conducted on a sample of external auditors in the Republic of Croatia. The empirical data were analysed, in order to test the research hypotheses, by means of a binomial test, parametric independent sample t- test, non-parametric independent-samples Mann- Whitney U test, and a multiple regression model. Results of the empirical research showed that the majority of external auditors are commonly using or would be using the work of internal auditors in the financial statement audit engagements. Regarding the ways internal auditors’ work can be used by external auditors, the results revealed that within those external auditors who use the work of internal auditors in the financial statement audit engagements, the majority of them are more likely to obtain audit evidence than to ask for internal auditors’ direct assistance. In the end, the research results also showed that the nature and scope of the internal audit function in the context of financial reporting are the most crucial determinants for external auditors in assessing will they use the work of internal auditors in financial statement audits, or not. The research results and conclusions can help the institutions, professionals, and academics to obtain comprehensive insights regarding the application of ISA 610 Using the Work of Internal Auditors in practice, and as a basis for future scientific and professional researches.

external auditors ; internal audit function ; International Standard on Auditing (ISA) 610 Using the Work of Internal Auditors ; audit evidence ; direct assistance

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