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The internal auditors review internal controls to improve information for managers and help them run the company efficiently. They recommend control changes and search for fraud. External auditors review controls to determine audit work, then report on the fairness of financial statements, not directly on controls. Internal auditors should report to the board or audit committee for independence, but not to the chief accountant who oversees controls.

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94 views

Solved Question & Practice Assignment

The internal auditors review internal controls to improve information for managers and help them run the company efficiently. They recommend control changes and search for fraud. External auditors review controls to determine audit work, then report on the fairness of financial statements, not directly on controls. Internal auditors should report to the board or audit committee for independence, but not to the chief accountant who oversees controls.

Uploaded by

N Zaib
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Solved Question:

The growing recognition by management of the benefits of good internal control and the
complexities of an adequate system of internal control have led to the development of internal
auditing as a form of control over all other internal controls. The emergence of internal auditors
as experts in internal control is the result of an evolutionary process similar in many ways to the
evolution of external auditing.
Required
(a) Explain why the internal and independent external auditors' review of internal control
procedures differ in purpose.
(b) Explain the reasons why internal auditors should or should not report their findings on
internal control to the following company officials:
(i) The board of directors
(ii) The chief accountant

SOLUTION:
(a) Internal auditors review and test the system of internal control and report to management in
order to improve the information received by managers and to help in their task of running the
company. They will recommend changes to the system to ensure that management receives
objective information which is efficiently produced. They also have a duty to search for and
discover fraud. The external auditors review the system of internal control in order to determine
the extent of the substantive work required on the year-end accounts.
The external auditors report to the shareholders rather than the managers or directors. They
report on the truth and fairness of the financial statements, not directly on the system of internal
control. External auditors usually however issue a report to management, laying out any areas of
weakness and recommendations for improvement in the system of internal control. They do not
have a specific duty to detect fraud, although they should plan their audit procedures so as to
detect any material misstatements in the accounts on which they give an opinion.

(b) (i) Board of directors


A high level of independence is achieved by the internal auditors if they report directly to the
board. There may be problems with this approach.
(1) The members of the board may not understand all the implications of the internal audit
reports when accounting or technical information is required.
(2) The board may not have enough time to spend considering the reports in sufficient depth.
Important recommendations might therefore remain unimplemented. A way around these
problems might be to delegate the review of internal audit reports to an audit committee, which
would act as a sub-committee to the main board. The audit committee should be made up largely
of non-executive directors who have more time and independence from the day-to-day running
of the company.
(ii) Chief accountant
It would be inappropriate for internal audit to report to the chief accountant, who is in
charge of running the system of internal control. It may be feasible for him or her to receive
the report as well as the board. Otherwise, the internal audit function cannot be effectively
independent as the chief accountant may suppress unfavourable reports or may just not act
on the recommendations of such reports.

Assignment:
An internal control system has been described as comprising 'the control environment and
control activities. It includes all the policies and procedures (internal controls) adopted by the
directors and management of an entity to assist in achieving their objective of ensuring, as far as
practicable, the orderly and efficient conduct of its business, including adherence to internal
policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy
and completeness of the accounting records, and the timely preparation of reliable financial
information'.

Explain the meaning and relevance to the auditors giving an opinion on financial statements
of each of the management objectives above.

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