Internal and External Auditors

Topics: Auditing, Audit, External auditor Pages: 7 (2089 words) Published: August 17, 2013
Table of contents

1. Introduction..................................................................................................................2 2. The role of internal and external auditors in corporate governance..............................2 3. Difficulties faced by auditors in contribution to corporate governance……………....4 4. Conclusion…………………………………………………………………………….6 5. References…………………………………………………………………………….7

1. Introduction
Corporate governance involves measuring, reporting, transparency, and monitoring, relevant and reliable information for decision-making. Therefore, numerous business journals and articles suggest that a board of directors, internal and external audit and management contribute as main tools to decent corporate governance. Number of authors discussed the contribution of external and internal auditors in the modern corporate governance. For example, Alabede (2012) stated: “The external auditor is highly regarded in the corporate governance framework because unlike the internal auditor, is appointed by the shareholders.” The internal audit plays an important role as it provides services to the other three components of corporate governance (DeZoort, 2002). The collaboration of internal and external audit, has received huge attention for the most part over the last decade due to the understanding that strong corporate governance systems help reduce the overwhelming impact of corporate fall down (Rusak and Johnson, 2007). If auditors will not perform their job well it can affect not only the company and its investors but in some cases the whole economy, therefore, when external auditors engage in audit processes, they automatically become legally responsible. The aim of this paper is to discuss these hazards and to recognize the role internal and external auditors play in achieving effective corporate governance.

2. The role of internal and external audit in corporate governance In order to distinguish the roles of internal and external audit in corporate governance, we must first define what they mean. The Chartered Institute of Internal Auditors define internal audit as: “an independent, objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.” While, the external audit is defined as a periodic examination on whether the accounting records provided are accurate and complete, prepared in accordance with the provisions of IFRS, and examined financial statements prepared from the accounts give a true and fair view of the financial statements of the organisation. In other words, external auditors are appointed by shareholders to perform the statutory audit, therefore, they report to the shareholders, they check the annual financial statements of the entity; statutory audit is a legal requirement, and therefore it is required external auditor to be independent of the client that is receiving the service. While internal auditors are appointed by the directors and report to the directors, they mainly audit internal and controls systems, the internal audit is not a legal requirement thus being independent is not a legal requirement as well. The independent auditing has been the major corporate governance role of external auditors. However, all financial matters regarding earnings measurement should not be left to the external auditors alone. The relationship between external and internal audit is playing a big role for today’s corporate governance requirements. According to Rusak and Johnson (2007), the coordination of internal and external audit or reliance of the external audit on internal audit leads to stronger corporate governance, and it is very much in line with Bernd Schartmann (2007) that stated: “In performing audit, the...

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DeZoort, F.T., 2002. Audit Committee Effectivness: Asynthesis of the empirical audit committee literature. Journal of Accounting Literature, 21
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International Federation of Accountants. 2010. Handbook of the code of ethics for professional accountants. Available at : www.ifac.org/publication-resources. [Accessed: 5th February 2013].
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Rusak, A., Johnson, R. 2007. The Responsibilities of Audit Committees, Readings in Auditing.
Schartmann, B., 2007. The Role of Internal Audit in Corporate Governance in Europe: Current Status, Necessary Improvements, Future Tasks. 1st ed. Berlin: Erich Schmidt Verlag Gmbh & Co
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