If internal auditors are frustrated about the extent to which external auditors rely on their work, they should circle the wagons internally and initiate dialogue about how to get a better balance to improve audit efficiency.

That's the advice of audit profession leaders who presented a keynote panel discussion at Compliance Week 2013 regarding some of the biggest audit challenges facing public companies today. “Well-controlled, well-managed organizations cost less to audit,” said Greg Weaver, chairman and chief executive officer at Deloitte & Touche. “Internal audit is a key part of a well-controlled, well-managed organization. Our coordination with internal audit is very helpful in making sure that the work we do is efficient.”

In the early days following Sarbanes-Oxley, auditors were dissuaded by early auditing standards from putting any faith in the work of internal auditors in reaching their audit conclusions. After the Public Company Accounting Oversight Board rewrote the accounting standard on the audit of internal control over financial reporting, external auditors relied to a greater degree on internal audit work. Through a more rigorous inspections and guidance in recent years, however, the PCAOB has called on auditors to exercise more skepticism when relying on internal audit work and accepting management representations broadly.

Weaver said he sees plenty of organizations that have a great relationship with their internal audit groups and where Deloitte's external audit teams are well synchronized with internal audit departments in terms of scoping and coordinating audit work and determining where they can rely on one another. “How we work with and coordinate with internal audit is a big factor in how much the audit costs.”

Trent Gazzaway, national managing partner of audit services for Grant Thornton, said his firm has increased the amount of internal work that it relies on to conduct external audits from the earliest days following Sarbanes-Oxley, but there are plenty of things internal audit can do to raise the bar. “The number one thing that drives (cost) overruns is a lack of coordination and communication,” he said. Internal audit teams often fail to produce work that external auditors are expecting within the scheduled time frame, or they fail to assure it meet the external auditor's needs, requiring some back and forth, he said. “One of the things internal audit could do is to actually help marshall that,” he said. “Be on the front of assuring that even if internal audit is not responsible for doing audit in that work, help make sure the client has the information pulled together, and do some pre-audit work on it to make sure it's going to be right.”

Gazzaway also suggested internal audit teams spend more time with external auditors during the planning phase to discuss where internal audit has skills that meet the standards external auditors are required to following in relying on internal work. He said internal auditor should simply ask the outside auditor: “How can you use this? If the auditor says I can't, there ought to be a reasonable explanation for why.” There are some highly judgmental areas where auditors are required to do their own work regardless of the skills and expertise of internal auditors, he said. “When you get into the transactional type things, if the external auditor is not giving you a fair shake in using that information, you and the audit committee and management ought to be having conversations about that.”

Jeanette Franzel, a member of the Public Company Accounting Oversight Board, said she didn't want to address the best way for internal auditors and external auditors to divide up the work, but she said internal auditor should take a look at how they fit into their organizations' overall reporting process. “The internal audit function is a very important function in the whole system of accurate, reliable financial reporting,” she said. “to the extent a company has a good internal audit function that's really helping contribute to the overall good functioning of the company, that overall high quality of financial reporting and internal controls, that helps the external auditor tremendously. That big picture role for internal audit can make the financial audit go more smoothly.”

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