Lecture 15
Internal and External
Auditors.
Lecture overview
Internal Auditors
Internal Auditors Responsibilities
What happens during an internal Audit?
Certification
How to improve effectiveness of internal Audit?
Steps to perform internal Audit
What is internal Control?
Type of internal Control
External Auditor
Who hires external Auditors?
Contents of Audit Report
Difference between Internal and External Auditor
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Internal Auditors
According to the Definition of Internal Auditing in The
IIA's International Professional Practices Framework
(IPPF),
“Internal auditing is an independent, objective
assurance and consulting activity designed to add
value and improve an organization's operations. It
helps an organization accomplish its objectives by
bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management,
control, and governance processes”.
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Internal Auditor (cont)
Internal auditors can bring to Fully empowered to
their operations by
identifying opportunities for provide a critical
enhancing efficiencies and check for
effectiveness.
management.
To add value to the
organization’s governance,
risk management, and
internal control processes.
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Internal Auditor Responsibilities
Offer Insight and Improve Operation
Advice Promote Ethics
Evaluate Risk Review Process and
Assess Control Procedures
Ensure Accuracy Monitor Compliance
Investigate Fraud Assure Safeguard
Communicate Results
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What Happens During An Internal
Audit?
When an internal auditor comes into a company or
organization, they analyze documents regarding
the company’s risks, objectives and performance, as
well as observe how particular strategies are being
implemented.
During the audit, skilled professionals who know
what to look for will observe, take notes, review
documents and interview employees. Auditors will
often test employees’ knowledge of company
objectives, safety standards and compliance rules.
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Certifications
Certified Internal
Auditor®
Certification in Risk
Management
Assurance
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How to improve effectiveness of
internal Audit
Reporting Structure
Build trust with other
members
Clear Parameters
Add Value
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Steps to Perform an Internal Audit
Create an Audit Interview Users
Calendar Document Results
Alert Department Report Findings
Related to Audit
Schedule
Be Papered
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What is Internal Control?
An internal control is a In other words,
procedure or policy put an internal
in place by
control is a process
management to
safeguard assets, put in place to
promote accountability, prevent employees
increase efficiency, and from stealing assets
stop fraudulent or committing fraud.
behavior.
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Internal control (cont)
Sarbanes Oxley Executives found
Act requires guilty of not properly
management to managing the
design, implement, internal control
and personally structure of their
evaluate the companies can face
effectiveness of fines and even
internal controls prison time now
within the business.
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Types of Internal control
Preventive Controls: These controls are introduced in the firm to
stop errors and irregularities from taking place.
Detective Controls: These controls are implemented to reveal
errors and irregularities, once they take place.
Corrective Controls: These controls are designed to take
corrective action for removing errors and irregularities after they
are detected.
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External Auditor
External Auditors inspect clients'
accounting records and express an opinion
as to whether financial statements are
presented fairly in accordance with the
applicable accounting standards of the entity,
such as Generally Accepted Accounting
Principles (GAAP) or International Financial
Reporting Standards (IFRS).
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Who Hires External Auditor
External auditors are appointed by the
shareholders of a company, although this
usually comes through discussion with
directors. External auditors must be
appointed from a different
company independent of their own whilst
internal auditors are usually employees of
the organization.
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Role of External Auditor
External auditors serve a
Monitoring role
To ensure the quality of financial reporting
(Iatridis 2012),
Reduce agency costs arising from managers’
opportunistic behavior,
Lessen asymmetric information between
firms and stakeholders (Francis and Wang
15 2008).
Contents of Audit Report
Title
Addresses
Introductory Paragraph
Managements responsibility for financial Statements
Auditors Responsibility
Auditors Opinion
Date and Place of Auditor Report
Auditor Signature
Reading and Inspections of Audit Report
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BIG 4 Auditors
Big Four:
Price Waterhouse Coopers (A.F Ferguson & Co. )
Deloitte & Touche (M. Yousaf Adil Saleem & Co. )
Ernst & Young
KPMG(KPMG Taseer Hadi And Co )
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Difference between Internal and
external Audit
Objective
Objective
The objective of an internal The objective of an external
audit is to educate audit is to give reliability and
management and employees credibility to the financial
about how they can improve reports that go to
business operations and shareholders.
efficiency Owed Responsibility
Owed Responsibility External auditors have no
An internal auditor is a trusted responsibility to the
consultant charged with organization other than
advising upper management determining the accuracy of
on how to best manage the annual financial statements.
18 company’s risks and goals.
Difference between Internal and
external Audit
Reporting
Reporting
An internal auditor reports to An external auditor
those within an organization reports to shareholders
who are outside the
governing structure of an
organization
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