Internal and external auditing of accounting are among one of the “best jobs” listed in the newspaper. They are similar, however, they do differ in some roles and responsibilities. To discover these similarities and differences, 5 articles were read and then discussed within the body of the manuscript. As a result of this explanation, I personally have put a lot of thought into which type of auditor I would like to become. Before this I had no idea, did you?
What is an internal auditor?
“Internal auditing is 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.”
An internal auditor seeks to advise management on whether its major operations have sound systems of risk management and internal controls. In other words, the internal audit function is one to ensure that the internal controls are adequate enough to maintain compliance with the policies, procedures and guidelines while being ethical. In this case, “being ethical” involves four main responsibilities of the internal auditor with the first being integrity. Internal auditors must be honest in their job as well as diligent in their work while following the law. Integrity establishes trust which provides them with the basis for reliance on their judgment. Some say that
The second ethical responsibility that internal auditors as well as external auditors should comply with is objectivity or independence. What is meant by this is that it is important to steer clear of any activity or relationship which could obstruct one’s ability to carry out an audit with an unbiased opinion. Accepting large gifts or payments could potentially impair one’s ability to do their job professionally. Gifts and other items of the same nature should be refused for the good of the audit.
Confidentiality being the third ethical responsibility for internal auditors means that extremely important information found during the audit should not be disclosed. Internal auditors need to respect the value and ownership of information they receive and do not disclose any of it without appropriate authority unless a legal issue or a professional obligation come up forcing them to do so. Some of the information acquired during an audit can be very valuable to people outside of the company which is why confidentiality is so important.
Finally, the fourth ethical responsibility which auditors have is competency. In this case, competency means that an auditor should only take on responsibilities in which they can apply enough knowledge, skills and experience needed to carry out the audit professionally. Internal auditors need to improve their skills over time which will help them to become more proficient in their job.
Having a strong ethical background is very important in the profession of being an internal auditor. These four guidelines are key in having a safe, legal and successful audit.
Some of the more important roles and responsibilities of internal auditors are:
· Developing the annual audit plan
· Facilitating compliance with Sarbanes Oxley 404 requirements
· Conducting field and management interviews
· Prepare the audit program according to GAAP
· Preparing working papers to summarize audit findings and recommendations
· Periodically evaluate effectiveness of internal control practices
· Coordinate audit activities with external auditors
· Implement an audit quality assurance system
What is an external auditor?
An external auditor seeks to test the underlying transactions that form the basis of the financial statements. In other words, an external auditor reviews the control procedures and many other operations as their overall evaluation of internal controls. It is expected that the auditor would identify significant weaknesses that exist and make sure that anything material in nature be reported to management and possibly to higher authority, depending on the company. They provide an opinion on the adequacy of the company’s financial statements. They review the general controls as well as the overall financial statement preparation and reporting.
External auditor’s primary purpose is to give a company feedback on the effectiveness of the internal control system by giving an opinion with four main paragraphs. First, the introductory paragraph is written to indicate that an audit has been conducted and then identifies the financial statements that the auditors examined during the audit. The second paragraph is the scope paragraph which describes the character of the work in the audit and stating that they abided by Generally Accepted Auditing Standards (GAAS). This paragraph explains that the auditors were trained and proficient, independent, exercised due professional care, planned and supervised the work, obtained a sufficient understanding of the business and its internal control system and gathered sufficient evidence. These are the general standards and standards of field work which make up GAAS.
The third paragraph is the most interesting and generally the most important paragraph. This is the opinion paragraph where all of the final audited information is explained. It is typically one long sentence explaining if the financial statements present fairly, in all material respects, the financial position of a company and the results of their operations and their cash flows for this year and preceding years. They must state that all of this is in conformity with GAAS in the USA.
The last and final paragraph of an auditor’s opinion is the internal control paragraph. This is where auditors evaluate and report on the operating effectiveness of the entity’s internal control over financial reporting. They then state that based on the criteria established in the internal control framework, they express some kind of an opinion. There are four distinct types of opinions an auditor can issue which are unqualified, qualified, adverse or a disclaimer of opinion. An unqualified opinion is the best kind of opinion a company can receive and is the last line of the opinion before the auditor’s signature.
Some of the more important roles and responsibilities of external auditors are:
· Advise management on areas at risk once the audit is complete
· Recommend ways to improve operations and strengthen controls
· Protect investors from receiving incomplete, inaccurate or misleading financial information
· Add value to the effectiveness of corporate governance
What are the main differences between internal and external auditors?
Besides the differences that were previously stated, a significant difference between internal and external auditors is that an external auditor is and external contract and not an employee of the organization being audited. Internal auditors, however, are typically employed at the organization but there are an increasing number of internal auditors from an external source.
Another main difference between the two is that external auditors look to provide an opinion on whether or not the accounts are presented fairly and show legitimate assets, debts, etc. An internal audit forms an opinion on the adequacy and effectiveness of systems of risk management and internal control. Internal auditors are mainly concerned with overall risk management and external auditors are concerned with the “final” accounts and how data is presented in those accounts.
One other difference between internal and external auditors is that unlike external auditors, internal auditors should have full and free access to the company’s audit committee, unrestricted access to the company’s records, documents, property and personnel and authority to discuss initiatives, policies and procedures regarding risk assessment, internal controls, compliance, financial reporting and governance. External auditors can have the same privileges of access as internal auditors except that external auditors need to have proper authority to do so.
What are the main similarities between internal and external auditors?
There are many similarities between internal and external auditors. Some of the main similarities are that both internal and external auditors carry out testing routines which may involve examining many transactions. Some of these testing routines are testing the internal controls of the company and a test of reasonableness for bad debts. Another similarity between the two is that they both will be worried if procedures were very poor and there was a basic ignorance of the importance of following them. A company creates controls for a reason and they should not be ignored.
Both internal and external auditors are based in a professional discipline and operate to professional standards, seek active co-operation between the two functions and are tied up during an audit with a company’s internal control system. The most important thing that internal and external auditors both do is produce formal audit reports on their activities and are both concerned with the occurrence and effect that errors have on misstating the final accounts.
What are some career opportunities for internal and external auditors?
Internal and external auditors have similar career opportunities meaning that they both “audit” companies. An internal auditor is an employee of a company and makes sure that the internal controls are running properly, however, they cannot issue an external audit report. An internal auditor’s position could potentially turn into a CFO, CEO or controller type of position.
An external auditor on the other hand works for an outside firm and audits many companies in one year. Their career opportunities could extend far beyond just working for an accounting firm. They could end up getting an offer from a client to become a full time CFO for one particular company or become their personal internal auditor.
There are many paths that can be taken with the auditing profession. It really depends what a person chooses to do once they graduate from school. The roles and responsibilities of internal and external auditors are similar in some aspects but also very different. It is clear that they are two distinct professions and each has their own unique characteristics.
