Assessing The Internal Audit Function

Furthermore, when the internal control is fixed, the outside auditor can rely on the clients system and less audit testing can be conducted. When everything is improved, the management letter is given to the organization’s top management and not disclosed to the public, (Finkler, S. A., Ward, D. M., & Calabrese, T. D., 2013). Next, is the auditor’s report that entails the opinion letter usually written in three paragraphs and given to the board of trustees. Then, the opinion paragraph is added on to state the organizations financial statements are in accordance of the financial position and followed through with (GAAP). The clean opinion addresses the opinion of the auditor and the overall exercising of professionalism. Also, the complete opinion of the financial statements is to give a representation of the organization. All other opinions may be included and can be addressed by adverse opinions if (GAAP) was not in accordance. A qualified opinion can be added if a specific area wasn’t included in the financial statement when needed. Finally, the management reports are conducted by the management team and not the auditors. The management report is the annual report the topics included in the report are the internal control system and the responsibility of the audit committee.

Auditor Independence contains 9 parts which stablish standards for external auditor independence, so it will have limit conflicts of interest, also contains that an approval requirements for new auditor, audit partner rotation, and auditor reporting requirements. Also restrict auditing organization from providing non audit services for the same clients they audit.

Having internal controls is one thing, but how the company evaluates that control is a matter all by itself. Being an independent auditor, it is our job to understand an entity and

The first title of the Sarbanes-Oxley Act of 2002 relates to the Public Company Accounting Oversight Board (PCAOB) division. The Sarbanes-Oxley Act provided for the creation of PCAOB as an oversight organization to regulate the methods and procedures for auditors while they are performing an audit on a publically traded company. PCAOB is in charge of registering auditors that will be participating in publically traded company audits in addition to monitoring the quality of the audit work that is produced. PCAOB also establishes guidelines and directives that are applicable to all publically traded company audits. Lastly, PCAOB not only monitors the work and actions of independent audit firms, they sanction and enforce disciplinary measure against firms

Auditing standards that give guidance for internal control reporting are AS 2 & AS 5.

According to the Public Company Accounting Oversight Board (PCAOB), The primary objective and responsibilities of auditor is to express an opinion on the fairness with which all financial statement including all of its (material aspects, financial position, the result of the company operation and its overall level of cash flows) AU Suction 110. Thus, what this means is that auditor must be fully independent and must be fully able and willing to apply professional judgment as it relates to the audit engagement under consideration.

Audit planning details change from client to client, no matter the complications presented. Each evolution of society’s business world prompts rule makers to update authoritative accounting standards in order to allow for changes, auditors are then responsible to certify their client’s financial reports adhere within compliance according to current authoritative standards. Many cite the Sarbanes-Oxley Act (SOX) of 2002 as being legislation that has had the most profound impact on the auditing profession; incidentally, an auditor’s job is to certify financial statements are a fair representation of a company’s financial position, at a given point in time, using current acceptable standards. Society deems auditors as gatekeepers and expects the auditing profession to find and report fraud, prevent fraud, and make certain financial statements are true, fair representation of a company’s financial position. Even though the rules, regulations, and generally accepted accounting principles can sometimes be difficult to find and translate, the public expects auditors to prevent events such as those that sparked SOX. The Financial Accounting Standards Board (FASB) developed the Accounting Standards Codification (ASC) that became the authoritative source July 2009 (FASB, 2009). Perhaps the hardest impact auditors experience with FASB ASC is attempting to ascertain clients’ FASB ASC references in disclosures on financial statements; “management cannot delegate this function to the

You are the internal audit senior responsible for conducting an assurance engagement of the XYZ Company payroll process. This process has not been audited for three years and, as such, is due in the normal audit cycle. There have been no significant changes since the previous audit, that is, there were no system changes, no reorganization of personnel, and no substantive procedural changes. However, during the last assurance engagement, the internal audit function identified several observations, some of which were considered significant. The significant observations related to:

Company’s new CAE can explain to the non-audit employees that IAD’s objective is to add values and help improve the business processes as well as company performance, which will affect each employee significantly. It is important to let all employees understand that the answers or thoughts they provide to the internal auditors will not be used against them. Moreover, establishing good relationship and providing ongoing communication with the non-audit employees can make them feel more comfortable to share their feedback and thoughts, and can reduce the “us vs. them” relationship between company’s non-audit employees and the staff of internal auditors.

The final responsibility for the integrity of an SEC registrant’s internal controls lies on the management team. U.S. companies need to refer to a comprehensive framework of internal control when assessing the quality of financial reporting to determine that financial statements are being presented under General Accepted Accounting Principles, GAAP. The widely used framework is referred as COSO, Committee of Sponsoring Organizations of the Treadway Commission, sponsored by the following organizations American Accounting Association, the American Institute of CPA’s, Financial Executives International, the Institute of Internal Auditors, and the Institute of Management Accountants. COSO’s defines internal control as:

According to ICAEW, auditor independence mainly refers to the independence of the external auditor from parties that have an interest in the financial statements of the business being audited. It requires having both integrity and an objective manner to the auditing process. In order for the concept to be deemed effective the auditor needs to carry out their work freely. One of the main purposes of auditing is to increase credibility of the entity’s’ financial statements, as they have expressed their own professional opinion on the truth and fair view in accordance with the proper accounting standards used. This is only possible if the audit is made with reasonable assurance that it has come from an independent source and has not been influenced by other parties, such as managers, directors or by conflict of interest.

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

These changes were outlined in the Sarbanes Oxley Act of 2002 (SOX). SOX completely revolutionized financial reporting, requiring senior management of firms to sign off on each financial statement that the company issues. It also stipulated that wrongful doing can result in not only termination but also imprisonment. SOX amplified the requirement for companies, requiring firms to maintain proper levels of internal controls when it comes to operating activities. SOX also established the creation of the Public Company Accounting Oversight Board (PCAOB) which implemented stricter auditing standards for public accounting firms. Not only were accounting firms required to consider internal controls, but they were also required report any significant deficiency directly to the board of directors. SOX stressed the importance of internal controls, and within internal controls it established the need for segregation of duties. Since this time, there have been many additions to accounting policies regards segregations of duties, and many functions of the business process dedicated to it.

The aim of this essay is to study the function of external auditors in order to analyze why it is important to be independent. The primary mission of external auditors is to review and evaluate all the financial records of a company or corporation. They provide an objective opinion on the organization’s financial statement and effectiveness of the accounting polices in order to help management to make decisions. If the independence of the external auditors is impaired, the public will doubt the quality of professional auditing services, and the consequence would be very serious, just like the bankruptcy of Enron led to the disorganization of Arthur Andersen, once a giant accounting company in the world. In order to maintain and increase

This includes the indirect ability of management to influence the career prospects of internal auditors, as well as the budget and planning of the internal audit function. This is exacerbated by internal auditors themselves using the function as a stepping stone to advance their career objectives. It also can be argued that the independence theory may be lost in such a culture, especially if it is combined with people within the organization perceiving internal auditors as partners, thereby subjecting the internal audit function to pressures threatening its independence, rather than recognizing the internal audit function as an independent assurance function("A Critical Analysis Of The Independence Of The Internal Audit Function: Evidence From Australia: Accounting, Auditing & Accountability Journal: Vol 22, No