Difference of Internal and External Auditor

Topics: Auditing, Internal control, Audit Pages: 5 (1520 words) Published: December 23, 2012
2. Compare the responsibilities of internal auditor and external auditor in relation to: I. The design and operations of systems and controls
Internal auditor| External auditor|
Internal auditing activity is primarily directed at improving internal control.  Internal auditors perform audits to evaluate whether the systems and processes are designed and operated effectively as well as providing recommendations for improvement.| External auditors may be called upon to determine if an organization's internal controls are adequate. This involves investigation into internal auditing practices. If, after evaluation, the internal controls are found to be lacking, the external auditor can report the problems to the company, which can make any changes necessary to ensure more accurate accounting. Hence, external auditor regards the internal control system only from the materiality perspective, which permits them to eliminate those errors that are not significant.|

II. The responsibilities in detecting fraud and errors in an organization Internal auditor| External auditor|
An internal auditor is responsible to detect frauds and errors from all activities in the organization. The internal auditors will use an internal controls system to detect fraud and any errors that may have been committed, so that, the auditors will be able to make the ultimate judgment on whether everything is recorded correctly. In conclusion, the external auditors are concerned on overall frauds and errors occurred in the organization as a whole.

| Current auditing standards require that external auditors provide reasonable assurance that the financial statements are free from material misstatement. It is the responsibility of the external auditors to report fraud and error that he sees or suspects. External auditors need to bring suspicions to management. If management is hesitant to take the proper action, the auditor has the right to stop working for the company, and may be obligated to report the potential fraud to state or federal regulatory agencies. In conclusion, the external auditors are to focus on fraud and error in the financial statement.|

3. Explain whether the internal audit firm was negligent in its role as the internal auditor of Shop IT. Azad Solutions was negligent in its role as internal auditor and failed to detect the recorded fictitious sales and overstatement of value of inventory. The situation resulted to Shop IT went bankrupt. The safeguard that the internal auditor should take regarding fictitious sales that resulted from the false customer order online and sales recorded even though the payment was not made is the auditor should review the customer order online system and check whenever the system function is properly done. For example system should distinguish between the orders that already made payment and which are not. The sales should be recognized whenever the actual return is received. In addition for the overstatement of value of inventory that resulted from obsolete and outdated product can be prevent by following several safeguard. The safeguard that Azad Solutions can taken is they can make regular checking or stock counts in order to make sure the number of the exact inventory value. In addition internal auditor also can detect any obsolete and outdated product.

4. Explain whether a duty of care existed between Azad Solutions and the shareholders of Super IT. Duty of care should be exercised by Azad Solution towards the shareholders of Super IT. Super IT can never give a total assurance that control weaknesses do not exist but they must demonstrate that due care is exercised. Based on Caparro Industries plc v Dickman stated that there are three conditions that should be considered whether the auditor is owed duty of care. The three conditions are whether the other parties suffer or the damages is foreseeable, if there is any proximities relationship and is it reasonable for the auditors to...
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