Audit Questions

zippy

Hello

Does anyone know a resource for information on audit?

I'm struggling to find an answer to a question about the differences between internal and external audit.

Any help would be much appreciated!

peugeot

Internal audit is where a company has an internal audit team whose primary purpose will involve ensuring that their internal control systems operate effectively. Their roles are independent and report to the company directors/shareholders if they find weaknesses in internal systems.

External audit is concerned with auditing the financial statements of a company. The external auditors purpose is to form an opinion as to whether or not the financial statements give a 'true and fair' view of the state of the company's affairs.

Internal auditors report to the company directors/shareholders as to whether or not internal control systems work.

External auditors report to the shareholders as to whether or not the financial statements give a true and fair view.

kind regards
Steve

zippy

Thanks for getting back to me Steve.

The full question wants me to:

"explain the difference between the responsibilities of internal auditors and the external auditors for the prevention, detection and reporting of fraud and error"

So are you saying that internal auditors would be more likely to be involved in actual prevention of error by looking at internal controls, both are responsible for detection although one would find it through the financial statements and the other through process checking, and in terms of reporting i guess it depends what they find?!

peugeot

In terms of fraud - I did an article last year about the external auditor's responsibility in terms of fraud which is on the AAT's online magazine:

http://www.accountingtechnician.co.uk/atonline/archive/display/store690/item47408/

Internal controls are the processes and procedures a company puts in place and the internal audit function should be looking at how effective these controls are. The directors have a legal duty to safeguard the assets of the company on the shareholders behalf, so you need to look at what sort of internal controls the internal audit department would be looking at to prevent fraud/error. To answer a question like this, you have think like a fraudster!! For example, how easy would it be to create a fictitious supplier/fictitious employee on the payroll.

The internal audit function is very much different than the external one. My article will tell you the auditor's responsibility in respect of fraud and does give examples of how fraud in a company can be commited, which should help you plan your answer.

Kind regards
Steve

zippy

Thats great Steve thanks, I'll have a read through the article and hopefully manage a sensible answer. Cheers!

zippy

I'm pretty much there, I'm just struggling with how external audit would be involved in preventing fraud/error?

peugeot

It can't prevent fraud/error totally, but what the external audit does do is look at the company's internal control environment. If the external auditor spots weaknesses within the control environment then they should communicate those weaknesses to the directors as soon as is reasonably practical (see ISA 260 - Communication of matters with those charged with governance) - the directors should then improve the internal controls.

If the auditor believes that internal controls exist, the auditor will test these controls using various methods - the most common being a 'walk through' test - i.e. observing the controls in operation and seeing how they have worked during the year. For example, invoice authorisation - the auditor will check a sample of purchases to see if they have been properly authorised - if they haven't this indicates a weakness which should be communicated to the client. This is how the external audit can prevent fraud.

You might want to look at this article also:

http://www.accountancystudents.co.uk/cms/news/read/an_overview_of_auditing/

This article details the testing (both substantive and tests of control) which might help explain this more clearer for you.

Best regards
Steve

zippy

Ah, so it really overlooks some of the work done by internal audit.

Thanks once again for your help, it really is appreciated.

peugeot

Yes it does review the internal audit function, but you should also consider the legalities of the two functions and the purposes they serve. External audit is statutorily imposed - i.e. if a company exceeds the audit thresholds, it is legally obliged by the Companies Acts to have an audit. A company does not have to have an internal audit function - but most larger companies often do have.

Also external auditors form an opinion as to whether the financial statements give a 'true and fair' view, whereas internal auditors don't form an opinion on the financial statements, they merely look at the controls in place and advise management. If you can differentiate the purposes of both internal and external audit and understand their roles, you will then be able to produce an excellent answer to your audit questions.

Kind regards
Steve

zippy

I think I'm getting there!

Cheers