Final answer:
External auditors must understand the internal audit function and assess its objectivity and performance to determine if its work is adequate for external audit purposes. They evaluate factors such as competence, independence, scope of work, and adherence to standards.
Step-by-step explanation:
When determining whether to use the work of the entity's internal auditors, the external auditor must obtain an understanding of the internal audit function, assess its objectivity, and evaluate the performance of the internal auditors to determine if their work is adequate for the purposes of the audit.
The external auditor will consider factors such as the internal auditors' professional competence, the level of their independence from the management, the scope of their work, and their adherence to professional standards, such as those from the Institute of Internal Auditors (IIA).
This assessment will help the external auditor decide if the internal audit function's work can be used to modify the nature, timing, or extent of audit procedures. If the internal auditor's work is used, the external auditor must also evaluate and test this work to ensure it meets the necessary standards of audit quality.