As the global voice of the internal audit profession, The IIA regularly comments on proposed standards and guidance that impact the work of our members. As such, The IIA recently responded to the International Federation of Accountants’ (IFAC’s) exposure draft regarding a Proposed Change to the Definition of “Engagement Team”, developed by IFAC’s International Ethics Standards Board for Accountants (IESBA).
When appropriate, there may be situations when external auditors obtain the direct assistance of their audit client’s internal auditors to conduct certain activities of an external audit engagement. Understandably, this could be perceived as a conflict of interest. So to preserve the independence and objectivity of the external audit engagement, IFAC’s International Auditing Standards Board has defined how this type of work must be carried out (International Standard on Auditing 610). However, public feedback on this standard indicates that internal auditors performing external audit procedures, by definition, would be part of the engagement team and noted that the IESBA Code of Ethics for Professional Accountants (the Code) requires the engagement team to be independent of the audit client.
In response, the IESBA has proposed changes to the Code to clarify the definition of “engagement team” to avoid any perception that the Code is in conflict with the ISA 610, and that individuals in an internal audit function providing direct assistance to the external auditors do not meet the definition of the engagement team under the Code.
In an exposure draft dated February 2012, the IESBA’s proposed definition of “engagement team” reads, “Engagement team—All partners and staff performing the engagement, and any individuals engaged by the firm or a network firm who perform assurance procedures on the engagement. This excludes external experts engaged by the firm or by a network firm. It also excludes individuals within an audit client‘s internal audit function providing direct assistance on the engagement in accordance with ISA 610 Using the Work of Internal Auditors.”
In its response on May 25, 2012, The IIA concurred with the proposal and recommend adding a reference of “cosourced/outsourced staff” to read, “…It also excludes individuals, or cosourced/outsourced staff within an audit client’s internal audit function providing direct assistance on the engagement in accordance with ISA 610 Using the Work of Internal Auditors.”
The IIA’s proposed additional reference to cosourced/outsourced staff ensures that all internal audit resources loaned to an external audit engagement – including those conducted by service providers – are not required to meet the independence requirements that apply to members of the engagement team. This should help to avoid perceived incompatibility between the Code and the International Standards on Auditing (ISAs) regarding the independence.