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THE “INTERNAL AUDIT” VERSUS “EXTERNAL AUDIT” IN DETAILS

May 23, 2011 By rcrconge 100 Comments

(A). Definition of the internal auditor’s & external auditors:

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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Extension of external audit Internal audit developed as an extension of the external audit role in testing the reliability of accounting records that contribute to published financial statements. The external auditing standards are very much focused on the effectiveness of external audit (with efficiency being a secondary consideration). Emphasizing audit effectiveness can be sourced back to the imperative that the external auditor must be, and be seen to be, independent. From the perspective of the external auditor, internal audit is a component of the control environment of the entity,

 

 

(B). Renowned the internal auditor’s & external auditors:

 

A statutory audit is one required by a country’s laws, sometimes called an external audit, since it is carried out by independent external auditors. They are renowned from internal auditors for two main reasons:

 

(1) The internal auditor’s primary responsibility is appraising an entity’s risk management strategy and practices, management (including IT) control frameworks and governance processes, and

 

(2) They do not express an opinion on the entity’s financial statements. Besides providing audit services, external auditors also provide different other kind of services. Most common of them are reviews of financial statements and compilation

 

In review auditors are generally required to tick and tie numbers to general ledger and make inquiries of management. In compilation auditors are required to take a look at financial statement to make sure they are free of obvious misstatements and errors

 

(C). Objectives of internal auditor’s & external auditors:

 

The External Auditor: The external auditor seeks to test the underlying transactions that form the basis of the financial statements.

 

The internal Auditor: The internal auditor, on the other hand, seeks to advise management on whether its major operations have sound systems of risk management and internal controls.

 

(D). Involvements organizational Activities of Internal & External Audit:

 

I. Financial systems may be considered by the external auditor as a short-cut to verifying all the figures in the accounts to complete the audit process. The internal auditor will also cover these systems as part of the audit plan.

II. Overall risk management arrangements are the main preoccupation of the internal auditor who is concerned with all those controls fundamental to the achievement of organizational objectives.

III. The final accounts are the main preoccupation of the external auditor who is concerned that the data presented in the accounts present a true and fair view of the financial affairs of the organization:

 

 

(E). Relationship between internal audit and external audit:

 

 

The first relevant study regarding the interaction between internal audit and external audit the relationship with external audit is only ostensibly a very good one. This assessment was conducted of two groups: first group was represented by internal audit directors, and the second group was formed by staff auditors who work directly which external auditors. Both groups were asked to evaluate the overall performance of their organization’s external auditor and their perceived relationship with the external auditor. Next, we present the main results obtained through this assessment:

 

 

 

• 92% from internal audit directors appreciated that external auditors make full use of the expertise of the internal audit staff;

 

• 50% of internal audit directors perceived that relationship between internal audit and external audit is an “excellent” one, while 31% appreciate this relationship as “good”;

 

• Staff auditors differed substantially in their perceptions of the external auditors’ of the internal auditor’s expertise. Only 39% of staff auditors considered that the external auditors fully utilized their expertise;

 

• The majority of the respondent directors reported that they were furnished access to the letter of external audit either before or after presentation to the board of directors. They are also asked to comment on its findings;

 

• another conclusion of this survey was that, generally, individual external auditors do not recognize the contribution of individual internal audit staffs, internal auditors considering that that they perform more than one third of the external audit work;

 

• Internal auditing emphasizes operational auditing and may involve non-financial data, whereas financial auditing is concerned primarily with historical data, in order to be able to identify possible ways of improving future business operations. Internal audit staffs consider their external audit tasks to be less important that the work they perform as operational auditors.

 

• General conclusion of this assessment was that internal audit directors perceived a good

Relationship between internal and external auditors, and this perception could be the result of company policies which give internal auditing

 

(1) A direct reporting relationship to the audit committee of the board of directors, and

(2) The opportunity to respond to any criticism by the external auditors in the management letters

 

(F). Career Path

 

Many students are attracted to the IA profession by the idea of helping corporations keep on the straight and narrow when it comes to producing truthful information about a company’s financial health. Many are also interested in the systems and processes used throughout these giant organizations to keep their operations running smoothly on a day-to-day basis. a greater number of employers are seeking internal auditors. Growth in accounting and auditor positions is expected to increase 18% within a few years,

 

(G). Auditing Standards that Apply to Internal Auditors:

 

Members of the Institute of Internal Auditors (IIA) are required to comply with the International Standards for the Professional Practice of Internal Auditing. The requirements that guide the relationship with the external auditor are set out in:

 

•Performance Standard 2050: Co-ordination; and

•Practice Advisory 2050-1: Co-ordination.

 

“The chief audit executive should share information and co-ordinate activities with other internal and external providers of relevant assurance and consulting services to ensure proper coverage and minimize duplication of efforts.”

 

(H). Auditing Standards that Apply to External Auditors:

 

The relationship with internal audit is specified in the New Zealand Institute of Chartered Accountants (NZICA) Auditing Standard AS-604: Considering the Work of Internal Audit and the accompanying Auditor-General’s Statement AG-6041.

 

(I). Formal Protocols between Internal and External Auditors:

 

In recent times we have seen the development of formal protocols between internal and external auditors. Protocols can be useful if they contribute to improved audit transparency and an understanding of the respective roles of internal and external auditors.

 

Some protocols we have seen are unacceptable in that they are worded in the form of a contract or agreement that gives the appearance that the external auditor is not independent of the entity.

 

 

(J). “Hold Harmless” Letters

 

On occasions the external auditor is asked to sign a “hold harmless” letter before being given access to the internal audit files. This is often the case when the entity outsourcers its internal audit activity to a chartered accounting firm.

 

External auditors have no difficulty signing a hold harmless letter because the responsibility

To render an opinion on the financial statements rests solely with the external auditor. That responsibility is not divisible and cannot be reduced by internal auditor involvement irrespective of the existence of a hold harmless letter.

 

 

 

 

 

(K). Difference between external and internal auditors

 

External auditors can be government auditors or independent public accounting firms that Cornell hires. Government auditors focus primarily on compliance with government regulations and award terms. Since both federal and state governments fund a significant portion of the organizations activities, they want to make sure we use their money as they intended. Internal auditors sometimes look at the same data or perform some of the same steps as external auditors. If there is a problem, it’s better to find it and fix it before external auditors review our practices.

 

The main differences between internal and external audit functions is following

01. Position inside the organization:

Internal Audit: The internal auditors’ are part of the organization. Their objectives are determined by professional standards, the board, and management. Their primary clients are management and the board.

 

External audit: External auditors are not part of the organization, but are engaged by it. Their objectives are set primarily by statute and their primary client – the board of directors.

 

02. Objectives:

Internal Audit: The internal auditor’s scope of work is comprehensive. It serves the organization by helping it accomplish its objectives, and improving operations, risk management, internal controls, and governance processes. Concerned with all aspects of the organization – both financial and non-financial – the internal auditors focus on future events as a result of their continuous review and evaluation of controls and processes.

 

External audit: The primary mission of the external auditors is to provide an independent opinion on the organization’s financial statements, annually.

03. Independence:

Internal Audit: Internal audit must be independent from the audited activities.

 

External audit: External audit is independent from its client, the organization, its independence being specific to liberal professions.

 

04. Approach of internal control:

Internal Audit: Internal audit regards all the aspects regarding the organization’s internal

Control system.

External audit: External audit regards the internal control system only from the materiality Perspective, which permits them to eliminate those errors that aren’t significant, because they don’t have influences over the financial results.

 

05. Frequency of the audit:

Internal Audit: Internal audit performs during the entire year, having specific missions Established in according with the level of risks identified for each auditable entity.

External audit: External audit is an activity with a yearly frequency, as a rule, at the end of the year.

 

 

06. Approach of risk:

Internal Audit: The importance of risk for the planning of internal audit activity is very high

the assessment of risk being combined with other types of information like financial and operational.

 

External audit: External audit uses the information of risks for the determination of nature, period of time and necessary audit procedures that should be performed in the auditable area, taking into consideration only financial aspects.

 

 

 

(L).The Main Similarities:

 

The main similarities between internal and external audit are as follows

 

01. Both internal audit and external audit profession are governed by one set of international standards issued by the professional organism specific for each profession. This set of international standards includes the professional standards and the ethical code;

02. Both the internal auditor and the external auditor will be worried if procedures were very poor and/or there was a basic ignorance of the importance of adhering to them.

03. Risk is a very important element the planning process for both internal and external auditors;

04. Both are based in a professional discipline and operate to professional standards.

05. Both seek active co-operation between the two functions

06. For both professions, the independence of the auditor is very important;

07. Both tend to be deeply involved in information systems since this is a major element of managerial control as well as being fundamental to the financial reporting process.

08. Both are intimately tied up with the organization’s systems of internal control.

09. Both are concerned with the occurrence and effect of errors and misstatement that affect the final accounts.

10. Both produce formal audit reports on their activities.

 

 

(M).Conclusion:

According to IIA recommendations, the ideal situation is when the internal and external Auditors meet periodically to discuss common interests; although moving up in the field can involve some dues-paying work, IA also provides the opportunity to work with senior management and get involved in different areas of an organization. Benefit from their complementary skills, areas of expertise, and perspectives; gain understanding of each other’s scope of work and methods; discuss audit coverage and scheduling to minimize redundancies; provide access to reports, programs and working papers; and jointly assess areas of risk. In fulfilling its oversight responsibilities for assurance, the board should require coordination of internal and external audit work to increase economy, efficiency, and effectiveness of the overall audit process. Auditing processes for both internal auditors and external auditors have changed globalization of business, advances in technology, and demands for value-added audits have become very important figures in any corporation

 

MHOHAMMAD WAHID ABDULLAH KHAN

S/O MOHAMMAD SAADULLAH KHAN

Dhaka, Bangladesh

 

Mr. Mohammad Wahid Abdullah Khan is the Project director of “Max Textiles Ltd”.Mr. Wahid has been in accounting field since 1999. Prior to that he had completed over ten (10) years in various fields of Business like – Accounts, Finance, Internal & External Audit, project budgeting and project costing related positions in some of the largest group companies & the join venture companies in Bangladesh.

 

He consults with small- medium business owners and services professionals, business consulting service and project process. He is most experience in Financial Risk Assessment, Financial analysis, Financial Advising and Project Cost Analysis. Mr. Wahid also author of “WAK” Model - The way of best solution for an organization internal audit process,( 1st,2nd,& 3rd part) “WAK” Model- for successful financial resource , “Wahid khan“- cost analysis & PPBS Model, Mr. Wahid is the owner of “WAM” Associates and “WAK” business solutions; he can be reached at www.wakbs.350.com

 

Education:

• Master’s of commerce (Management)

• Master’s of business administration (MBA)

Proof of additional skill:

•Complete various certified & training courses in Finance, Financial risk management, Accounting, Auditing, & Project Management based,

 


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