Part (b) for 6 marks required an explanation of whether the external auditors would be able to rely on the work of the internal auditors. This question was answered reasonably well by candidates.

Some were able to take their knowledge of reliance on internal audit and provide an answer which covered areas such as; independence, competence, professional care as well as scenario specific points such as the possibility of management pressure on internal audit in order to obtain the crucial loan finance.

Some candidates tended to only focus on independence and so failed to generate a sufficient number of points. In addition a significant minority felt that as the bank had asked for the external auditors to review the cash flow forecast that this somehow meant that the internal auditors could not be relied upon and that the internal auditors had allowed the company to encounter financial difficulties and so were unreliable.

This shows a lack of commercial awareness as in the current economic environment a number of companies will be facing financing difficulties and this does not reflect on the quality of their internal audit departments.