The relationship between management accountants and auditors Objectives of the Independent Auditor and the Conduct of an Audit in. relationships between the various key players involved the CFO, the chairs of the audit and risk committees, the external auditor, the internal . It is not designed to replace legal advice or a detailed review of the subject matter. The material. The PwC Audit Committee Guide is designed to help members of the . Matters to consider in relation to the external auditor include the following. What to ask.
Both need to be independent, objective, properly resourced and work according to their respective international standards. Regulators must take these differences into account when creating policy related to governance and internal audit.
What do we want? The role and value of internal audit should be better recognised within the UK Code of Corporate Governance and guidance issued under it by the Financial Reporting Council FRCwith regard to publicly listed private sector organisations.
Regulators rightly recognise that the role of internal audit in supporting the work of external audit needs to be strictly controlled in order to ensure quality and objectivity. But they also need to recognise that internal audit work has a much broader remit, covering risk and governance as well as internal financial control, and that this wider work can also require internal audit to make judgements about the work of external audit.
Working with Auditors: Tips and Traps - Strategic Finance
Additional points Audit committees have a vital role to play in supporting internal audit quality. The International Standards for internal audit [ 1 ] require internal audit functions to develop and maintain a quality assurance and improvement program that covers all aspects of the internal audit activity. The quality assurance and improvement program must include both internal and external assessments. External assessments must be conducted at least once every five years by a qualified, independent assessor or assessment team from outside the organisation.
Working with internal audit also creates an environment in which the external auditor can be informed of significant matters that may affect its work. But where this occurs it is vital that internal audit does not simply become a tick in the external audit box, or that internal audit is distracted from its core roles.
External audit must also assure itself on the objectivity and quality of the internal audit function. We believe this practice is detrimental to the work of both auditors and reduces the assurance that the audit committee obtains from either source. It is also a false economy. Internal auditors are likely to be fully qualified whereas the staff they would replace on the external audit can often be student accountants.
The potential breadth and scope of the internal audit function should mean that it has a significant role to play in supporting improvements in corporate governance and overseeing the management of risk. Audit Committees need to recognise that the value of internal audit goes beyond financial control. Similarly regulators should give greater recognition to the assurance that they can take from the work of a professional internal audit function.
It is vital to the quality of their work that they focus on this customer group. Internal auditors, in contrast, provide assurance within the governance boundary, to the audit committee, the board in general and to senior management.
Purpose of the assurance The external audit opinion, and the work that the external auditor performs in order to provide it, exist to add verification, credibility and reliability to reports from the company to its shareholders.
Internal auditors provide members of the board and senior management with assurance that they can use to fulfil their own duties to the company and its shareholders. Coverage or nature of work External audit provides an opinion on financial statements and the related disclosures, on other forms of reporting from the company to shareholders as well as on financial reporting risks and their management.
But the auditor must maintain professional skepticism despite believing that those charged with governance are honest and have integrity.
Also, the auditor must not be satisfied with less-than-persuasive audit evidence when obtaining the reasonable assurance necessary to form an opinion on the financial statements.
See ISA paragraphs at http: It takes basic human nature into account. If an auditor finds that management has been honest in the past, that builds a level of trust and the expectation that management will be honest in the foreseeable future.
Professional skepticism mandates that the auditor resist this very human reaction because corporate or personal pressures on management might tempt the most honest managers to bend the rules in certain circumstances.
The auditor is the last line of defense to keep management honest. The cult of personality is a threat because CEOs are often charismatic figures, especially the entrepreneurial ones who have built their own companies.
The auditor, being human, can easily fall under the spell of a charismatic CEO. For two examples of major U. The latest PCAOB and IAASB standards are designed to ensure that auditors will maintain professional skepticism and not develop a personal relationship with management that is too close.
At the same time, the standards mandate that the auditor develop a close but professional relationship with management to promote transparency and communication. But the relationship of the CFO and controller with their auditor will change in certain ways.
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That will create a greater understanding of the risks and specific judgments involved. These kinds of executive actions may signal risks.
CFOs and controllers should view this closer auditor monitoring of their actions from the perspective that they have nothing to hide.
The only executives who should feel threatened by this requirement are those who have something to hide.
While this limit may not seem onerous, it changes the dynamic between the auditor and management by making the relationship impermanent.
The auditor will begin to feel that his or her work may be subject to oversight review by a competing firm, which will make the auditor more careful in exercising professional skepticism.
In addition, the company will begin to view its relationship with the auditor as more transient. Once every 10 years, the company will have to build trust and a working relationship with a new audit firm.
The company will be motivated to establish procedures and protocols for this predictable event. Right now, auditor change is often a rare and chaotic event. To understand what auditors want, bear in mind that the auditor has three key roles.
First, the auditor must expedite efficient and fair access to financial markets.6 The Audit Process
If all companies competing for resources in financial markets are on an even playing field, financial resources can be allocated efficiently among competing firms. In an efficient market, this maximizes overall returns.
Position paper: Internal audit's relationship with external audit
In part, this serves to prevent management from reporting biased results to shareholders. Keeping that in mind will help expedite the audit and establish a trustful relationship with the auditor. By professional standards, the auditor is neither a friend nor an enemy to the company.