Large Organizations the Existence and Effectiveness of Essay

  • Length: 8 pages
  • Sources: 10
  • Subject: Accounting
  • Type: Essay
  • Paper: #39526405

Excerpt from Essay :

large organizations, the existence and effectiveness of its internal audit function comes into question. Not only the internal audit department should exist but it shall work effectively. An effective internal audit department can serve as the backbone of an organization's success. The International Accounting Standards Board (IASB) keeps on revising its standards to make sure that external and internal auditors of an organization carry out their duties effectively. The board recently revised the Internal auditing standard that serves the purpose of assisting the external auditor's in using the work of the internal auditors. Though external auditors are mainly concerned with auditing company's financial statements but lack of time and in some cases lack of resources raises a question as to their audit quality. In order to ensure that external audit is carried out effectively, the IAASB realized the importance of internal audit and how can the internal audit be an important tool in serving the purposes of the external audit. The edge that an internal audit function always has over external audit function is that its scope regarding each of the organization's function is wide enough to allow it to have a detailed scrutiny of a particular organizational function. The importance of internal audit function is increasing day by day in every organization because of the realization of management that they can not only assist in reducing the extent of the work of the external auditor, but it also reduces the organization from the hassle of providing large chunks of data to carry out their audit work effectively.

There is no doubt in the fact that internal audit function is one of the major components of corporate governance. The management is allowed to have a deeper insight into business issues by just having a quick review of the internal audit reports which summarize issue. This also saves an organization from the fear of major frauds, as the control testing done by internal auditors does not allow the organization to have weak control in any area or department. The internal audit function ensures that controls exist and the existing controls are enough to counter any financial and non- financial risks. The internal audit assists by making recommendations to the organizations on how and where to alter their controls to have a better control environment in the entity.

Major issues raised in IAASB's ED

The IAASB conducted the ED with the purpose of clarifying the ambiguity that exists with regard to ISA 610 "Using the work of Internal Auditor." The IAASB's concern was due to the fact that the standard created confusion with respect to the external auditor's use of the work of internal auditor. The first issue addressed was the fact that in many parts of the world, internal auditors assist the external auditors with respect to the areas concerned under their direct supervision. Whereas the standard states that it does not deal with such instances. The ambiguity existed regarding whether the ISA supports the use of the internal audit function by external auditor or not. The IAASB was concerned about this fact as the direct interaction of internal and external auditors to the extent of working of internal auditor's in the supervision of the external auditor could impair the independence of the external auditor due to the fact that internal audit function is a part of the entity's management and is not independent of the entity. Thus IAASB discussed on how relevant controls can be implemented by the external auditors to ensure their independence with respect to the audit of the organization's financial statements. The IAASB intends to establish the need for the external auditor to seek assistance from the internal audit function only in concerned areas. On the other hand, in some jurisdictions the local law restricts the external audit function from using the work of the internal auditor, so the IAASB clarifies in its Exposure Draft that complying with such local laws by the external audit function still makes the auditor compliant with the requirements of ISA 610. The IAASB further explains that external auditors shall not be forced in any way to use the work of the internal audit function. Its solely the decision of the external auditor as to whether the use of internal auditor's work would be useful in enhancing the audit effectiveness.

The IAASB further discusses that the external auditor is responsible to discuss the scope and timing of the use of the work of internal audit function with those charged with governance, where it decides that the use of the work of internal auditor is essential or is required. The IAASB's major objective is to revise the ISA 610, to such an extent that it can give a clear view to the external auditor as to in what conditions, using the work of the internal audit function would be effective.

Changes proposed in the ED to ISA 610

The IAASB intends to alter the standard such that requires the external auditor to have a boundary view of whether to use the work of the internal audit function to use or not. As there is ambiguity on the part of external auditors as to whether or not the internal auditor can assist them directly in their supervision, therefore the IAASB proposed changes which intends to prevent confusion. The IAASB progresses by recommending that an external auditor shall be required to look into the level of objectivity that the internal audit function exercises in any organization along with the skills that the internal auditors of an organization have. If the external auditor feels that the objectivity of an organization's internal audit function is impaired in any aspect than it shall not use the work of such internal auditor as this can hamper the quality of the external audit of the entity. Further, the IAASB requires the external auditors to take account at of the judgment and estimation used by the internal auditors while planning their audit procedures along with consideration of the scope of the internal audit. The IAASB further clarifies that the external auditor does not need to depend on the internal auditor's work in areas that require significant judgments as the external auditor is responsible for the opinion given on the financial statements so the internal auditor cannot be held responsible in any case regarding the opinion given by the external auditor on the basis of the work of the internal auditor. The external auditor is also allowed to inquire and query the internal auditor about his understanding of the entity and its environment. This would enable the external auditor to have a better view of the entities controls and what areas pose significant risks and consequently require further audit procedures.

The IAASB also requires that the link between ISA 315 and ISA 610 be made clear in order for the external auditor to know the appropriate requirements that the auditor needs to fulfill with respect to the understanding of the internal audit function which could considerably reduce the time and cost of the external audit (International Accounting Standards 2010).

Conditions Under which an Internal Audit Function is Considered Effective

The internal audit function is Objective

The internal auditors are competent

Application of a systematic and disciplined approach.

The objectivity of the internal auditor is intact if such auditor is not in any way financially or personally related to the organization. The IAASB sets up the requirement that the external auditor uses his professional judgment in assessing the fact that the internal audit function is fair in giving carrying out its work. Secondly, the existence and working of the internal auditor is not only enough for the use of its work by the external auditor. The work shall be carried out by persons having relevant knowledge of the field of expertise and appropriate skill. Thirdly, the efficient functioning and policies followed by the internal audit department of an entity are of importance to the external auditor in assessing the quality of work carried out by the internal auditors.

Difficulties of the Internal Auditor

The major difficulty that the internal auditor may face in conducting their duty regarding co-ordination with the external auditor is the difference in the scope of the internal and external audit function. The internal audit is considered to be a part of management and it sees every business area from an opposite perspective in relation to the external auditor so when it comes to co-ordination with the external auditor, the internal auditor might face difficulties in clarifying to such auditors, the areas that can pose significant risks. Such inquiry also means that internal auditors will have to put a greater amount of effort (Bell & Mars 1997). When the external auditor plans to use a particular work of the internal auditor, the internal auditor will need to explain all such work to the external auditor and the estimations made in carrying out such work, this will require an increased amount of effort to be put in.

Another difficulty…

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