2001. It was the year that every individual; man, woman and children on Earth would remember. There was the September 11 event which was considered the worst terrorist attack that has happened in U.S. history, killing a total of 2, 977 people. And not long after that, in the business world, on December 2, the greatest corporate failure was exposed. The crash of Enron in US, followed by the worldwide collapse of its auditor, Arthur Andersen became one the most popular accounting scandal where it is still being talked about even after a decade has passed. Following this scandal, other massive organizations like WorldCom (2002), AIG (2004), and Satyam Computer Services (2009) shared the same fate. Since then, there have been questions being …show more content…
The presence of an external auditor allows creditors, investors or bankers to use financial statements that have been prepared with confidence. Although it does not guarantee the accuracy of a financial statement, it provides users with some reassurance that a company’s financial statements give a true and fair view of its financial position and its business operations. It also provides credibility, where in business, is a major asset. With credibility, the willingness of investors, bankers and others to relate and undertake business projects with a company increases. Credibility is also important to build positive reputations.
Internal auditors cannot effectively provide an analysis on the company’s internal dealings as they are part of the company. External auditors, however, can observe these processes from the outside and then determine where the funds of the company and whether the dealings adhere to the regulations. Using external auditors in a company prevents conflict of interest from happening. Conflict of interest is a situation where an individual or organization has multiple interests and of those multiple interests, one could possible corrupt the motivation for an act on the other when the auditor has any kind of beneficial interest in their client’s performance. In other circumstances, there is also the threat of familiarity where auditors become
In the last decade, the world of business has been subjected to significant changes. Globalization has given a new meaning to the way in which business is now conducted; i.e. business in a world devoid of geographical boundaries or time zones. Global expansion has also given rise to many emerging firms and laid the foundations for fierce competition amongst existing industries. Internal auditing is no exception. In order not to face complacency or obsolescence, the internal auditing industry has to be proactive and adapt to changing market trends.
The company should hire it’s own internal auditor’s to ensure that the staff understand the company’s accounting procedures. This also helps the external auditor as it give the external auditor another viewpoint when assessing fraud risks. The internal auditors are apart of those charged with governance and that helps take the pressure off of the external auditor if a fraud should be discovered.
I-4) The role of the external auditor is to audit the financial statements of a company to check for accuracy and completeness and then issue their opinion on the reliability of the financial statements. The external auditor is independent of the firm that he or she is auditing so they report to their bosses in their company and issue reports for the public to see.
1a). A company would want to hire a member of its external audit for a number of reasons. The external auditor would have extensive knowledge of how the company works due to analyzing statements and performing many audit procedures and tests on the company and therefore would reduce time in order to become effective as an employee. The company would know the former auditor personally and have a good idea of how they would fit in with the existing staff. The former auditor could prepare working papers and assist with the auditors to reduce the time and cost of the audit. However, the former external auditor would know what the existing
Audits are meant to contribute to a company’s financials by bringing assurance that they are in accordance with GAAP. Auditors provide high quality audit opinions on a client and one
Internal audit and management operations are independent. Internal audit’s independence of executive managements is complying through its functional reporting line to the chair of the audit committee and an administrative reporting line to the chief executive, as the most senior executive. Therefore, when the external auditor making financial reports from the organization to its stakeholders by giving opinion on the report, they can have a better view about the company they are
According to the conceptual frameworks used by both the Financial Accounting Standards Board and the International Financial Standards Board, one of the main reasons why companies prepare financial reports is to allow users of financial statements make decisions regarding the provision of resources to the firm (Financial Accounting Standards Board, 2010; International Financial Standards Board, 2010). These decisions relate to the buy, sell, or hold moves that investors make based on the information received from the company. Both conceptual frameworks also include credit investors as being interested in the company’s performance as reflected in the financial reports. Apart from proving information to investors on the company’s projected cash flows, financial statements also play the important role in enhancing stewardship responsibilities that rest with managers. These requirements have connotations of financial statements being relevant to the targeted audience. In addition, financial statements are expected to be reliable from the audience’s viewpoint.
In a scenario wherein such a theory is in operation the external auditor acts as the representatives of the stakeholders in upholding the ethical and academic correctness of the accounting framework adopted by the managers. They need to demand the basis of incentives to the managers and ensure that in case of the borrowed funds the accounting based controls are in place to protect the interests of the lenders and
Concentrates for recognizing and evaluating examples What 's more events past the control of an outright firm.
Users of accounting information, who do not have day to day access to the record of the business, rely on the integrity and judgment of management to provide suitable information of a high quality. All financial statements are essentially historical documents they shows the financial performance of the company. Most users of financial statements are concerned about what will happen in the future and decision making upon the present or past financial records of the company. Stockholders are concerned in future earnings and dividends. Creditors are concerned with the company’s future ability to repay its debts. Managers are concerned with the company’s ability to finance future expansions. Despite the fact that financial statements are
Internal auditors are directly hired or contract employees of the company being audited. Their overall objectivity might be doubtful as they need to satisfy management levels to get paid. Rules to minimize bias focus on eliminating conflicts of interest. The audit result will be questionable when there is conflict of interest between auditors and their employers. Effective internal auditors cannot audit their own work or processes, functions
External auditors are responsible for ensuring a company’s financial statements are free from material misstatement. These individuals work to provide comfort and reliability to third parties, such as investors or creditors, who may rely on a company’s financial performance. As such, auditors must objectively perform audits in a systematic and consistent manner to limit the risk of material misstatement and false representation. However, to conduct an effective audit, extensive planning and supervision is necessary, as defined under the first auditing standard of field work under the Generally Accepted Auditing Standards (GAAS) created by the Public Company Accounting Oversight Board (PCAOB) (find source). This standard states that “the
Internal auditors deals with problems that are fundamentally important to the continuous existence and prosperity of any organization. Contrasting external auditors, they look beyond financial risks and statements and also considers wider issues such as the organization’s growth, reputation, its impact on the environment and also the way it manages its employees.
The role of internal audit is to provide independent declaration that an organization’s threatadministration, governance and internal control processes are functioning effectively. Internal auditors deal with concerns that are essentially important to the existence and success of any organization. Unlike external auditors, they aspect beyond financial possibilities and statements to reflect wider problems such as the organization’s reputation, development, its power on the location and the approach it treats its organizations.In summary, internal accountantssupport organizations to thrive.
Internal auditors must freely disclose all the necessary information to the external auditors without pressure from authorities with governance. External auditors must also be able to freely give concerns about the matters that may affect the internal audit functions.