An internal auditor is assigned to review a complex derivatives trading desk. The auditor has general financial services experience but limited knowledge of the specific valuation models and risk metrics. Management expects detailed conclusions on valuation accuracy and risk limit monitoring.
Required:
How should the auditor apply the principle of competency in this situation?

Question

An internal auditor is assigned to review a complex derivatives trading desk. The auditor has general financial services experience but limited knowledge of the specific valuation models and risk metrics. Management expects detailed conclusions on valuation accuracy and risk limit monitoring.

Required:

How should the auditor apply the principle of competency in this situation?

Accepted Answer

Inform the chief audit executive(CAE) about the limitations in technical expertise and request that the team be supplemented with or supervised by someone with specialised knowledge in derivatives valuation and risk.

✅

Answer

Focus the engagement only on governance and documentation instead of valuation and risk metrics, arguing that this narrower scope falls within the auditor’s current skill set.

Answer

Proceed with the engagement alone, relying on high-level process understanding and generic checklists, and avoid delving into technical valuation details. 
 Focus the engagement only on governance and documentation instead of valuation and risk metrics, arguing that this narrower scope falls within the auditor’s current skill set. 
 Focus the engagement only on governance and documentation instead of valuation and risk metrics, arguing that this narrower scope falls within the auditor’s current skill set. 
 Focus the engagement only on governance and documentation instead of valuation and risk metrics, arguing that this narrower scope falls within the auditor’s current skill set. 
 Focus the engagement only on governance and documentation instead of valuation and risk metrics, arguing that this narrower scope falls within the auditor’s current skill set.

Answer

Decline the engagement entirely and insist that it be outsourced to an external firm because the auditor is not currently an expert in derivatives.

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An internal auditor is assigned to review a complex derivatives trading desk. Th...

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