Part A
The internal auditing department works for the overall financial fairness of an organization (Carson, Fargher, Lennox, Raghunandan and Willekens 2012, p. 360). The internal auditors report their findings to the management of the organization while independent examiners perform their action for the common good of the society. They are usually accountable to the public.
An internal auditor is tasked with ensuring the organization is doing everything it can to achieve their strategic objective while the independent auditors all work for the increased credibility of the accounting statements in an entity (Willoughby, Carmona and Momparler 2012, p. 420). Furthermore, the internal assessors promote compliance of ethical functions of the management while their external counterparts promote transparency of financial statements (Soleimani 2014, p. 70)
Moreover, the external experts work to maintain the legality of the business operation, unlike the internal audit process that covers the entire scope of operations within the firm. They also bear risks about liability for unwanted instances of fraud and bad practices. Also, these external auditors maintain correspondence to the management of the organization through a management letter, highlighting their findings concisely. The internal assessors are ever-present, thus providing good reasons for audit follow-ups, regarding their recommendations. Once the external auditors are through, they are not required to follow up, therefore, must wait until the next financial year. The in-house auditing department is not required to publicize their reports, maintaining confidentiality with sensitive organizational information. However, the external counterparts are not bound by this tenet, therefore, must always publish their findings.
Part B
Board of Directors
The main reason the internal auditor is from reporting to the board of directors is because they must adhere to hierarchy. Board members are only consulted by the audit committee, making it difficult to bypass the established levels of interaction. Also, the directors may coerce the internal auditor, particularly if their observations paint these esteemed members in a bad light (Goh and Li 2011, p. 980). Furthermore, the reporting function cannot be made to the governing body since they should liaise before the commencement of the audit procedure. It means they can be advised on good practices only, whether they implement the desired actions is another matter (Hoos, Messier, Smith and Tandy 2014, p.2). On the other hand, reportage to these members eliminates checks since they are tasked with identification of management practices in the five components of control used to guarantee proper controls and monitoring of organizational information.
The Chief Accountant
The auditing function works to correct the accounting procedures implemented by those responsible for the same. If an internal auditor reports to the chief accountant, the two might collaborate and work to the detriment of acceptable accounting standards, which will eventually lead to grand scams of corruption (Lin, Pizzini, Vargus and Bardhan 2011, p. 300). Also, reporting to another member of the organization allows for a conflict of interest, since these individuals would be campaigning for their promotions to higher levels of management, thus, must appear devoid of blemish (Scott 2014, p. 2). The internal auditor sets mechanisms to display out rightly the state and performance of the organization, therefore, is answerable to the stakeholders who do not have the direct relationship with the organization (Soh and Martinov 2011, p.617).
Part C
The independent auditors have good reason to trust the work of their internal counterparts because most audit procedures follow the same steps (Nobes 2014, p.1). As long as the internal auditor demonstrates the grasp of the audit know-how. They could be consulted to understand better the micro- aspects while undertaking their systematic and disciplined approach (Abbott, Parker, and Peters 2012, p. 7). Also, since the internal auditor follows the true and fair view doctrine of accountancy, the presence of a qualified auditor within a firm highlights the importance of this activity, making it worthwhile to invest for a continuous system check in all activities essential for the attainment of the entity’s goals.
- Abbott, L.J., Parker, S. and Peters, G.F., 2012, ‘Internal audit assistance and external audit timeliness,’ Auditing: A Journal of Practice & Theory, 31(4), pp.3-20.
- Carson, E., Fargher, N.L., Geiger, M.A., Lennox, C.S., Raghunandan, K. and Willekens, M., 2012, ‘Audit reporting for going-concern uncertainty: A research synthesis,’ Auditing: A Journal of Practice & Theory, 32(sp1), pp.353-384.
- Goh, B.W., and Li, D., 2011, ‘Internal controls and conditional conservatism,’ The Accounting Review, 86(3), pp.975-1005.
- Hoos, F., Messier, W.F., Smith, J.L. and Tandy, P., 2014, The Effects of Serving Two Masters and Using the Internal Audit Function as a Management Training Ground on Internal Auditors’ Objectivity. Available at SSRN 2358149.
- Lin, S., Pizzini, M., Vargus, M. and Bardhan, I.R., 2011, ‘The role of the internal audit function in the disclosure of material weaknesses,’ The Accounting Review, 86(1), pp.287-323.
- Nobes, C., 2014, International Classification of Financial Reporting, 3rd Edition, Routledge, New York.
- Scott, W.R., 2014, Financial accounting theory, Pearson Education, Canada.
- Soh, D.S., and Martinov-Bennie, N., 2011, ‘The internal audit function: Perceptions of internal audit roles, effectiveness, and evaluation,’ Managerial Auditing Journal, 26(7), pp.605 -622.
- Soleimani, G., 2014, ‘The Role of Internal Controls, Internal Audit and Audit Committee in Optimization of Corporate Governance,’ Journal of Accounting Research, 3(4), pp.63- 77.
- Willoughby, M., Carmona, P. and Momparler, A., 2012, ‘The effects of the provision of consulting services on audit reporting quality,’ The Service Industries Journal, 32(3), pp.411-429.