Roles Of Internal And External Auditors Accounting Essay
An internal auditor is responsible for evaluating the company’s financial activities, they report to the management of a company regarding any issues or concerns which they might have regarding their internal control systems, provide advice regarding risks to management, concoct audits and investigate the occurrences of fraud within the company. Internal auditors have no legal requirements which need to be met. Internal auditors are employed by the company, however; still require independence from the organisation and management so as to allow an unbiased assessment of the activities of management.
Their role includes monitoring and analysing the company’s internal control and risks. They also ensure that procedures, laws and policies are being complied with. Internal auditors assure management that risks are alleviated and that the company’s corporate governance is durable and operative. When possible, internal auditors make recommendations for potential improvement by increasing the effectiveness of processes and procedures.
Internal auditors classify relevant risk factors and evaluate their significance to the company. The changing economy is a key factor to the way risk is assessed by the auditor. Over recent years, the methods of internal auditing have changed from a control based approach to a more risk based approach. This allows them to predict future apprehensions or openings as well as detecting and resolving existing issues.
Typically, management are in charge of the company’s internal control systems, the policies which have been put in place and also the processes necessary for achieving certain goals. Internal auditors merely assess these internal control systems, processes and policies and provide an opinion on their efficiency and whether they need improving or not.
Internal auditors and management work closely together as they need to be aware of the objectives of the company, this is so the operations of the company can be reviewed and feedback given on their efficiency. Also, any changes that may be needed can be reported back to management.
Compliance is also reviewed regularly by internal auditors. This is to verify that the codes of practice, rules and regulations are being adhered to throughout the organisation.
External auditors, on the other hand, are independent from the company. They are brought in to objectively examine the organisations financial statements and give an independent opinion as to whether they reflect a true and fair view of their financial standing, to their intended users. These statements are also checked to see that they comply with the financial standards set by the accounting bodies.
Auditors have a set of primary objectives that they aim to achieve when carrying out an audit. These are to express an opinion on the financial reports on an organisation and to ascertain and evaluate the reliability of the underlying accounting systems which are being used internally in the organisation.
Many people mistake the primary objectives of an auditor to be what their secondary objectives are, such as, to guide the management of a company regarding their accounting and internal control systems, to identify fraud and error and also to be a possible deterrent to the occurrences of fraud.
There are certain standards which auditors must follow when examining financial reports. These standards are set by a government body. An audit report is written once the auditors have completed their work; the report explains what they have done and includes an opinion on what they have audited. Most companies, subject to the Corporations Act, must be audited at least once a year. Some companies may request an audit for a special purpose or depending on their ownership and structure.
What don't auditors do?
Auditors do not check every single figure in the financial statements or look at every transaction made by the organisation; audits are based on selective testing which are determined before the audit.
Likewise, auditors do not give an opinion on the business’ activities or strategies or the financial decisions made by the directors.
External auditors don’t test the internal controls of a business as this would take too much time and also because they did not create them in the first place there is a lot of liability lying on the auditors.
Auditors do not provide an opinion to the shareholders regarding the management of the company by the directors.
What can't auditors do?
Audits are related to a specific past accounting period, auditors cannot judge what may happen in the future, and therefore, auditors cannot give assurance as to whether a company will continue running indefinitely.
Audits are carried out within a definite timeframe, as mentioned earlier; the primary objective of an audit is to form an opinion on the data in the financial statements as a whole and not to detect all possible irregularities.
How is the audit conducted?
The management of the company prepares the financial statements which are prepared in accordance with financial reporting standards and legal requirements.
Once the directors have approved of these statements, auditors start their work by checking the activities of the company. Economic issues, during the period, which may have had an effect on the business, are taken into consideration.
The auditors classify and evaluate any risks which may have had a substantial impact on the financial position of the organisation and also some internal controls which have been put into practice to mitigate those risks.
A judgement is then made and an opinion is given by the auditors as to whether the financial statements as a whole present a true and fair view of the financial position of the company. Finally, an audit report is prepared for the company’s members/shareholders with the auditor’s opinion.
Independence is maintained by auditors from management so that judgements are made subjectively. The type of procedures and their extent will depend on the risks that the auditors have identified. These can include:
Asking a range of questions.
Examining financial statements from previous accounting periods.
Asking for written confirmation by third parties regarding significant matters.
Testing some of the internal controls the company.
Keeping an eye on certain processes being performed.
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