handling of correspondence and minutes of meetings, and so on, may be required as
in Colombia or a tax compliance “audit” may be required as in Mexico. In these
cases, materiality standards may not apply and the penalties, and hence the risk, faced
by the auditor in the event of an error in the reports or underlying information may
be significant. Accordingly, the company’s expectations of its auditors in these areas
must be clearly understood by them.
RELIANCE ON INTERNAL AUDIT. Internal audit capabilities at international companies
range from very little to very extensive. Similarly, the focus of internal audit func-
tions can range from project or program audits to systems and controls audits to full
financial statements audits. Some companies desire that their external auditors place
the maximum reliance possible, within the requirements of applicable professional
standards, on their internal audit group. In other cases, international companies want
their external auditors to place little or no reliance on their internal auditors. The ef-
fect on the scope of the external auditor’s work from placing reliance on the internal
auditors can be very significant, resulting in a similarly significant effect on external
audit fees.
The degree to which external auditors are able to rely on the work of internal au-
ditors is based on several factors, including:
- The degree of independence of the internal auditors within the company, that is,
do they report directly to the audit committee or only to management - Their competence and their experience
- The relevance of their work to the external auditors
- How responses to their reports are monitored and implemented
When the evaluation of each of these factors is very positive, the key issue becomes
a question of allocation, within the confines of applicable professional standards, of
the total audit effort between external and internal auditors.
TIMING. Expectations as to timing of auditors’ work and reporting are crucial to a
company’s successful relationship with those auditors. Audit firms are normally flex-
ible and able to meet company desired timing for work and reporting. However, the
concentration of December 31 year ends among companies, particularly in the United
States, results in a peak load or “busy season” in the months of January through
March. Most audit firms desire to move as much work as possible out of the busy sea-
son. In any event, the company’s expectation for timing of the audit and related re-
porting must be clearly set forth. This includes:
- Opinion and earnings release dates
- Publishing dates for printed annual reports and reports filed with governmental
agencies - Audit committee and annual meeting dates
(ii) Business Advice. Historically, auditors have provided general business advice to
companies that they were serving on a variety of matters, including the effectiveness
of the company’s operations and organization, financial structure, internal control
policies, and regulatory matters. More recently, some companies have received only
31 • 6 MANAGING THE AUDIT RELATIONSHIP IN AN INTERNATIONAL CONTEXT