1.2What qualities must an ‘assurer’ have in order for you to feel that their statement has high credibility?
An assurer must have the knowledge and expertise to assess the truth and fairness of the information being presented by the preparers. Auditors of financial reports need to be trained accountants with detailed knowledge about the complex technical accounting and disclosure issues required to assess the choices made by the financial report preparers. When undertaking an audit, the auditor should use professional scepticism, professional judgement and due care. Auditors should be independent of the client. Independent auditors have no incentives to aid the entity in presenting their results in the best possible light. They are concerned with ensuring that the information contained in the financial report is reliable and free from any significant (material) misstatements (error or fraud). A user needs to believe that the auditor is acting independently. This means that not only should auditors be independent (i.e. not have any undue personal or financial incentive to protect the client), auditors should avoid doing anything that would cause a reasonable person to doubt their independence.
1.6Are internal auditors independent? Which internal auditor would be more independent: an internal auditor that reports to the chief financial officer (CFO) of the company, or an internal auditor that reports to the audit committee?
Internal auditors are employees of the company, and therefore cannot be completely independent of the company. However, it is possible to increase the independence of the internal audit department through means such as funding, terms of reference, and reporting lines.
A well-funded internal audit department can investigate more issues and spend more time on each investigation, potentially increasing the chance of discovering fraud and other problems. An internal audit department with a small budget is likely to have fewer staff and less qualified staff (because they will be lower paid), and will have to make compromises on the issues to be investigated.
An internal audit department with wide terms of reference has the freedom to pursue the issues which the audit staff believe are most important or create the most risk for the organisation. A department with narrow terms of reference could be limited to investigating only certain matters, or must seek the approval of higher levels of management before commencing any investigation.
If the internal audit department reports to the CFO it is possible that the CFO will prevent some issues from reaching other members of the management team, or the board of directors. Often, the problems will be within the CFO’s department, creating a conflict of interest for the CFO when deciding whether to report the issue more widely. An internal audit department that reports directly to the audit committee is outside the normal lines of management and reporting. The audit committee is part of the board of directors. Therefore, reporting to the audit committee increases the chance that the highest level of the organisation is aware of the problems and will approve the investigation. The audit committee also deals with the external auditor. If the internal auditor reports directly to the audit committee it can communicate the issues to the external auditor and ask them to consider them, where relevant, as part of the financial report audit.
Not all companies have an audit committee. Where the audit committee does not exist, the internal auditor could report directly to the full board of directors.
1.7What is an ‘emphasis of matter’ paragraph? When do you think an auditor would use it?
As defined in ASA 706 (ASA 706 (5)):
Emphasis of Matter paragraph means a paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial report that, in the...
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