Chapter 22 Internal and external audit

Chapter 22 Internal and External Audit

Part 2 The Purpose of Internal and External Audit

2.1 Internal Audit

2.2 External Audit

-Purpose - to report his opinion on whether the financial statements give a true and fair view in accordance with an identified financial reporting framework.

-Secondary Objectives - Encourages the employees of the company to document their work properly and dissuade them from fraud as their work may be inspected by external auditors. Also to suggest improvements.

Advantages of an External Audit

-Disputes between management may be more easily settled.

-Major changes in ownership may be facilitated if past accounts contain an unqualified audit report.

-Applications to third parties for finance may be enhanced by audited accounts.

-The audit is likely to involve an in-depth examination of the business and so may enable the auditor to give more constructive advice to management on improving the efficiency of the business.

Disadvantages of an External Audit

-The audit fee.

-The audit involves the client's staff and management in giving time to providing information to the auditor. Professional auditors should therefore plan their audit carefully to minimise the disruption which their work will cause.

Part 3 The Difference Between Internal and External Audit

Internal auditing

• role - advise management on whether the organisation has sound systems of internal controls to protect the organisation against loss.
• legal basis - not a legal requirement. The combined code on corporate governance recommends that if a listed company does not have an internal audit department.
• scope of work - determined by management. It covers all areas of the organisation, operational, financial
• approach - increasingly risk-based; assess risk; evaluate systems of controls; test operation of systems; make recommendations for improvements
• responsibility - to advise and make recommendations on internal control and corporate governance.

External auditing

• role - provide an opinion to the shareholder on whether the financial statements give a true and fair view.
• legal basis - legal requirement for large companies, public companies and many public bodies.
• scope of work - determined by the auditor in order to carry out his statutory duty on report, financial focus.
• approach - increasingly risk-based; test underlying transaction that form the basis of the financial statements.
• responsibility - to form an opinion on whether the financial statements give a true and fair view.