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Auditing is the process through which the chartered accountants, income tax lawyers, accounts all together helps in accessing the business transactions of the company and filing reports as per the government norms and conditions of that particular country. Auditing is done on a yearly basis. It includes all the requirements related to the economic health and finance of the company that has to be required to be presented before the government agencies for legal and taxing purposes. The effectiveness of auditing can be seen by observing the effectiveness of the audit committee itself which does the external and internal audit of the company. Thus its composition and independence of the members of auditing confirms the free and fair auditing followed in the company. the presence and absence of the audit committee helps in figuring out the quality of the financial reporting that a company adopts. Thus presence of audit committee confirms an attempt of the company to develop a fair reporting system, while on the other hand, the absence of audit committee clearly signifies the not so good intensions of the company. With the present laws in force the audit committee formation is compulsory in case of company crossing a certain amount of turnover, thus it becomes easier to keep a close eye on the working of the companies which earlier did not had any audit committee. Thus the audit committee members are now more answerable to the government than their corporate owners.
The important duty of the audit committee members is to interact with the external auditors during auditing.Audit scope negotiation process is also done by the audit committee.When the auditors assign lower control risk to clients with high corporate governance quality, the auditors may expend less audit effort.Expertise,independence and experience are lacked by many audit committee members.Audit committee acts an effective vehicle in pursuing the interest of shareholders.Less pressure is exerted on the high quality audit members to increase the audit effort.The responsibilities of an auditing committee are:
- Checking the choice of accounting policies and principles.
- To hire an external auditor
- To oversee the audit process
- To monitor the internal control process.
In many countries audit committee was introduced to alleviate the weakness of corporate governance.High profile corporate failures which involves fraud,poor accounting and internal control failure made the organizations to realize the importance of auditing committee.AC plays an important role on the quality of financial reporting.The earnings quality of a company is improved by the audit committee.Meetings,independence and background of the members are also affect the quality of the financial report.The absence of an audit committee affects the financial report’s quality.Audit Committee helps an organization to develop a fair reporting system.The formation of audit committee is made compulsory in many countries.Therefore companies which do not have AC is working on the audit committee formation.It is the responsibility of the audit committee members to answer than the government rather than the corporate owners.
A businees’s financial status is officially evaluated with the combination of auditor’s opinion and data collected on the business’s financial transactions and situation is known as audit report.This is the common process used by companies to examine their own records and to release their financial information to investors and shareholders. (TylerLacoma, 2009)
Auditing may occur either inside or outside the company.An accountant who works in the company perform internal auditing.Internal auditing is easier than external auditing because the auditors are familiar with company records and they have experience in generating such records.The investors and official agencies do not have trust in internal auditing.Some business may not have proper resources to perform internal auditing.Therefore external audit is practiced in some companies.For this purpose, companies hire a firm to perform audit for them. (TylerLacoma, 2009)
In order to assess the effectiveness of business operations internal auditors are appointed on behalf of management.Internal controls of the business is the main concern of internal auditors. An accountant who works in the company perform internal auditing.External auditors can be appointed by the shareholders of the company to perform external audit.These external auditors are independent of the company and management. (Anon., 2011)
For both internal as well as external audit a common code of conduct and ethics is applicable.However, they differ in terms of whom they report to.An internal auditor’s report is private and it is only for the directors and management of the business.An external auditor’s report is presented to the shareholders and public. (Anon., 2011)
External audit is performed beyond scope to avoid conflict of interests.The main aim of external audit is to check whether the financial report is free from any misstatement and whether they depict a true and fair view of the entity.Financial and non financial aspects of a firm is focused by internal audit.Fraud is detected by internal audit.Internal audit also provide advise on internal controls and performance appraisal on corporate governance.A business’s risk management strategies are evaluated by internal audit. (Anon., 2011)
A opinion on the financial statement of an entity is expressed by external audit.Functions of external audit are determined by the statutes.The internal audit’s functions are determined by the board and management.The value to operations of an organization is added by internal audits.Operational audits and compliance procedures are the main focus of internal audits. (Anon., 2011)
An Audit committee is meant to monitor the companys financial reporting process on fair grounds by making internal controls and risk management. Thus the committee is meant to bring forth the truth about the company’s financial condition that its financial gains and losses, future investment and past requisitions. Thus the audit committee confirms all the facts and figures about the financial conditions of the company. This committee should consist of the non-executive directors of the board. The number of non executive directors should be at least three and in case of chairman included in the board than he should be an independent candidate. (Anon., 2011)
Audit reports are used by the accountants to publish the data collcted by them during their fieldwork of a company. Seven elements are needed to complete the audit report.These seven elements are report title, introductory paragraph, scope paragraph, executive summary, opinion paragraph, auditor’s name and auditor’s signature. (Andrew, 2009)
The audit date and the addressee of the report are included in the title of the report.The auditor’s last day of fieldwork is the date and the board members and stockholders are the addressee.The word independent is also mentioned in the title to set it apart from the internal audits. (Andrew, 2009)
This is a boilerplate text which states that audit has been carried out.Financial document used to perform the auditing are identified here and it also credits the responsibility of the management for the accuracy of the financial statements.The time frame covered by the audit is determined in this section. (Andrew, 2009)
This paragraph emphasize that the rules and standards set by Generally Accepted Audit Standards were followed during audit.A reasonable assurance is provided to indicate the claims made by the financial statements are accurate.The test methods carried out by the auditors to test the accounting methods followed by the company is indicated in the scope paragraph. (Andrew, 2009)
The findings of the auditing is summarized here.The auditor determine the content of the summary.Executive summary does not provide much opinion but it clearly expresses the findings of the audit. (Andrew, 2009)
The financial situation of the company and the methods and procedures used to reach a conclusion are included in this paragraph.Auditors opinion on the financial stability of the company is included here.Conformity or non conformity of the auditor’s opinion based on the Generally Accepted Accounting Principles are included in this section. (Andrew, 2009)
At end of the audit report it is the responsibility of the auditor to print his name.The auditor must also included the name of the firm or the certified accountant he is working for.
The auditor is accountable for the audit results up to the date stated in the audit report’s title.The signature of the auditor below his name is the acknowledgement for this accountability. (Andrew, 2009)
The following steps are included in the audit process.
- The audit objectives,timing and format of the report and distribution are discussed by scheduling a conference.
- The internal controls and operations are assessed for the soundness.
- To ensure proper operation the internal controls are tested.
- All preliminary observations are discussed with the management.
- Before the release of the audit report, a discussion on the draft is done with the management.
- The critical issues raised in the audit report are followed to check whether they have been successfully resolved. (CaliforniaUniversity, 2012)
Four types of audit reports are:
- Unqualified opinion
- Qualified opinion
- Adverse opinion
- Disclaimer of opinion (TylerLacoma, 2009)
It is also known as clean opinion.In an unqualified opinion an auditor determines the financial statements provided by the firm does not have any misinterpretations.This also indicates that the financial record of the firm is maintained in accordance with the standards of Generally Accepted Accounting Principles(GAAP).Unqualified opinion is considered as the best type of report. The word “independent” is ddedin the title of the report to indicate that the audit is done by an unbiased third party.Main body is followed by the title.The main body includes the auditor’s responsibilities,audit purpose and the findings of the audit. (TylerLacoma, 2009)
Qualified opinion is given when the financial record of a firm is not maintained in accordance with GAAP but there is no misinterpretation in the financial statement.The writing of qualified opinion is extremely similar to that of unqualified opinion.An additional paragraph,providing the reasons why the audit report is not unqualified is included in the qualified opinion. (TylerLacoma, 2009)
Adverse opinion is the worst type of opinion given for a business.Adverse opinion indicates that the financial record is not maintained in accordance with GAAP and also indicates there are misinterpretations in the financial statements.Adverse opinion is the indication of fraud.When adverse opinion is given it is the responsibility of the firm to correct its financial statement and have it re-audited, because the investors,lenders and other requesting parties will not accept adverse opinion. (TylerLacoma, 2009)
When the financial record of a firm is unavailable, an auditor cannot complete the accurate audit report,in this case the auditor issues disclaimer of opinion, stating that the financial status of the firm cannot be determined. (TylerLacoma, 2009)
In order to gain support from the investors, board of directors and interested public, business and non-profit organization carry out audit as a part of their annual financial reporting.Auditor’s report acts as a certificate that an external auditor has audited the financial statement of the organization.The auditor’s opinion in the report is considered as the essence of the reports.For the well being of any organization auditor’s report is very important.The auditor’s report helps to find out the financial stability of a firm. (wisegeek, 2013)
The finances of a firm is ensured by the auditor’s report,keeping in with the legal requirement, both the accounts payable and accounts receivable are conducted.External auditors are used to conduct the audit because they are unbiased.Auditor’s report is a useful tool for small companies.Auditor’s report helps the new firms to make sure there is proper accounting for all assets, cash flow and liabilities incurred during the calendar period under consideration. (wisegeek, 2013)
Auditor’s report helps the organizations to enhance their current method of bookkeeping.The auditor’s report may suggest to for some basic changes in the accounting process which may eliminate duplication of efforts.Other suggestions may include appropriate expense classification,processing reports on employee expenses and similar matters.Many believe auditing is conducted when there is suspicion of wrong doing.Annual auditing is carried to check whether internal audit is done properly.Auditing also point out the area which can be improved.Auditor’s report plays a major role in the investor’s decision making process.Auditor’s report helps a firm to gain the trust of investors, shareholders and interested public.Auditor’s report also give suggestions to the firm to improve certain areas. (wisegeek, 2013)
An external audit checks the effectiveness of internal controls,process,guidelines and policies and incompliance with government requirements,industry standards and company policies.The errors in the financial statement is prevented by the external audit. (MarquisCodjia, 2012)
A full assurance to the investors and financial market participants are provided by the external audit.External audit indicates the accounting records of the firm, are fair and they comply with GAAP,industry standards and regulatory requirements.Full assurance indicates the confidence of the investors and the audit results are accurate.Balance sheetmprofit/loss statement,owner;s capital statement and cash flow statement are included in a financial statement. (MarquisCodjia, 2012)
Throughout the year, an external audit process is carried out.When the company closes its accounting records and prepares financial statement, an external auditor start testing the financial statement of the company.An external auditor along with the internal auditor review areas with problem.In accordance with such review the external auditor carry out the auditing process.The external auditors discuss audit planning,resource allocation and testing schedules with the head of the department of areas under review. (MarquisCodjia, 2012)
Audit report is useful for three groups.They are management,regulators and investors.Operating breakdowns and segments showing risks are learnt by the top management and audit committee.Business trends and corporate practices are detected by the investors.The company’s economy standing is gauged by the investors with the help of the audit report. Company's economy standing and management's short term and long term initiatives are gauged by the investors with the help of audit report. (MarquisCodjia, 2012)
Auditing a financial statement is the primary audit requirement from a company.A financial statement audit is done to ensure the correctness of financial statement.Errors and breakdowns in internal control and procedures are detected by operational audit.How employees abide by regulations in performing tasks are evaluated by senior management with the help of compliance audit.The control around software and technology infrastructure are ensured by information systems audit. (MarquisCodjia, 2012)
Financial audit is performed by a certified public accountant.For performing other audits there s no need of certification for external auditors. (MarquisCodjia, 2012)
Corporate governance consists of board of directors,audit committee and other supervisory committees.An auditor does not have any direct corporate governance responsibility. The auditor's report provides a check on the information aspects of the governance system. The auditor's report helps the corporate governance to increase the soundness of the operations and internal control. The reports also helps the audit committee to use an effective method in preparing the financial report of the firm. Audit report helps the management to identify the operation breakdowns and segments with high risks. Regulators can identify the business trends and corporate practices. Audit report helps the corporate governance in decision making process,accountability and monitoring. Audit report provides confidence.Uncertainty and risks are reduced by audit reports. The information required by the corporate governance for decision making is provided by audit report.Audit report focus on internal controls. The audit report assists the corporate governance in achieving the goal. (wisegeek, 2013)
Auditing is the process of checking the financial report. For every firm it is necessary to conduct auditing. Auditing carried out by the external auditor is effective compared to that of internal auditor. Auditing is done to check the financial record of a firm.investors and shareholders always wants an unbiased external auditor to cheche k the financial statements.exernal auditing gains the trust of investors and shareholders. Financial stability of of an organization can be identified with the help of the audit report.audit report also helps to take investment decision.audit report also identifies the misinterpretation in the financial statements.
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Anon., 2011. DianaWicks. [Online] Available at: http://www.ehow.com/info_8478956_difference-between-internal-external-auditing.html [Accessed 20 December 2014].
CaliforniaUniversity, 2012. Internal auditing. [Online] Available at: http://daf.csulb.edu/offices/univ_svcs/internalauditing/audits.html [Accessed 20 December 2014].
MarquisCodjia, 2012. ehow. [Online] Available at: http://www.ehow.com/about_6614835_purpose-external-audit.html [Accessed 20 December 2014].
TylerLacoma, 2009. ehow. [Online] Available at: http://daf.csulb.edu/offices/univ_svcs/internalauditing/audits.html [Accessed 20 December 2014].
wisegeek, 2013. wisegeek. [Online] Available at: http://www.wisegeek.com/what-is-an-auditors-report.htm [Accessed 20 December 2014].
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