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Kevin et al explains that corporate governance is the way in which a firm is managed or controlled. Corporate governance has been a problem in the past following the scandals such as Enron and WorldCom which led to the biggest accounting fraud in history. Companies are now required to comply with the corporate governance to strengthen and run the firm effectively (Cattrysee J, 2005).
In this report, the author will carry out a research and find out what are the main roles of an internal auditor in the corporate governance framework. The author will be exploring the why companies audit their statements, why internal auditors are required and also discuss their role in the corporate framework.
What is an audit?
Manson (2005) explains that audits is an inspection of a company's financial statement to give a true and fairness opinion and also increase credibility of the statements.
The main reason why companies carry out auditing is to check whether the information provided in the financial report gives a true and accurate reflection of the statements at a given date (Ziadat et al 2011). For example if it states in a company's financial report that they made a profit of £10,000, an auditor will cross check with their financial statements if they are accurate. The financial report that are audited are; statement of cash flow, statement of financial position, statement of changes in equity, and statement of comprehensive income. Manson (2005) states that auditors must comply with the auditing standards when auditing a statement and once they are done with the audit, they need to write and audit report which will be published in the company's annual report.
There are two types of auditing and they are:-
An external auditor is an auditor outside of the firm that are recruited to access the effectiveness and quality of the firm (Manson 2005).
In this report, the author will be focusing on the role of an internal auditor.
What is an internal auditor?
Ziadat et al (2011) explains that an internal auditor works in the firm and they examine the accuracy of their financial report to improve the company's operations. They are also responsible to assess the effectiveness of the risk management. Internal auditors are important to companies because they provide integrity and accountability to governing bodies and senior management in the firm (Manson 2005). Some examples of the roles of an internal auditor are: -
Measuring the risk management
Accessing the internal control of the company
Recommendations to the management team.
Measuring risk management
It is an important role for internal auditors to measure and evaluate the effective of these risks. They can do this by reviewing the objectives set by the company and access the risk(s) that can have an impact to achieve these objectives (Ziadat et al 2011). Manson (2005) explains that if risks are detected, auditor needs to measure how they can minimize the risk(s) and also access the likely chance of it to occur. When risk(s) are detected, the auditors need to inform the management team in order to take any possible action to eliminate or reduce the impact of the risk(s).
Accessing the internal control
Rezaee Z (2010) explains that the internal control is the process carried out by the auditor to provide assurance based on the company's objectives by accessing the reliability of financial reporting, the effectiveness and efficiency of the firms operations and whether they have comply with the laws and regulations. The purposes of internal control are:-
Transactions carried out by the firm are approved before they are recorded
Transactions must be accurate so the company must account for the original transaction and the others that are recorded in the financial statements
All the transactions recorded must be valid meaning that they should show a fair view of the economic events.
Although there are some limitations to internal control, if an auditor checks the internal control of a company, it can help detect any risk(s) and how they can resolve it (Manson 2005).
Recommendation to management team
Adukia (2010) explains that an internal auditor needs to evaluate all the possible risk that can be identified for example if the company has incorrectly valued their inventory stock. An internal auditor must report to the management team in order to improve their stock valuation.
Internal auditors in corporate governance
Yassin et al (2005) explains that corporate governance is an essential element which helps companies to be more efficient and also helps to build confidence for their investors. Staciokas (2005) sates that the corporate governance forms the following elements: -
The audit committee
Internal auditor and,
Board of directors
Companies need to work closely with their audit committee and their internal auditor because it can improve the effectiveness of the corporate governance. Internal auditor's opinion should reveal all the important information about the effectiveness of the company's governance and also to focus on all areas such as social, ethical and financial Rezaee Z (2010). As Rezaee (2010) stresses out that internal auditor opinion is very important in the governance framework, the Institution of Internal Auditors has set some standards that need to be followed by auditors to express an opinion. The following are some of the standards an auditor needs to follow to express an opinion: -
Relevance: - internal auditors' opinion is very crucial to the stakeholders of the company because these opinions can be available to the public so they need to make sure that the opinion given is appropriate. (Rezaee, 2010)
Planning: - internal auditor needs to plan their opinion before the recommend it. For example if they provide an opinion, they need to verify if it is right, they also need to give more information when they provide a positive opinion to the board of directors.
Rezaee (2010) clarifies that if when an internal auditor gives an opinion and recommendations, it can improve the company's governance in accessing the risk management and also their internal control systems.
The Institute of Internal Auditors (IIA) also explains that corporate governance is the process and structure that needs to put in practice by the board of directors in order to manage and monitor the success of the company. Cattrysse J (2005) states that the audit committee depends on the internal auditor for their opinion about their internal control system so the Institute of Internal Auditors ensure that they guide their auditors to carry out good audit so that they can assist the management and board of directors. The Institute of Internal Auditors has some standards and practice for corporate governance that auditors should follow and they are: -
Performance standard 2100
Implementation standard 2120
Performance standard 2130