Types of audits

Types of audits

Aug 11, 2020 Bookkeeping 101 by ann

First, when the riskiness of the audit tests is low, the effect of focus of the PCAOB inspection process is not significant on the auditors’ reliance on the IAF when engagement risk is low. However, when engagement risk is high, the auditors placed significantly greater reliance on the IAF when a balanced focus is used for the PCAOB inspection process compared to an effectiveness focus. Second, when the riskiness of the tests to be performed is high, the auditors relied more on the IAF in the balanced focus of the PCAOB inspection process condition regardless of the level of engagement risk. Lastly, we find that under the new regulatory regime external auditors rely more on the IAF to perform tests of controls than substantive procedures. External auditors often rely on other professionals for the audit of the financial statements of their clients.

Although these other components are not significantly related to the effectiveness of IAF, the in-depth interviews provided more explanations on their importance in internal audit. The findings also indicate that the level of ACs’ involvement in the reviews of each stage of the internal audit process contributes to the overall effectiveness of IAF. Due to issues in staffing and the changing business environment, collaborations particularly in risk management, information technology audits and quality audits, are increasingly being used as a strategy in internal audit to provide value add services.

internal vs external audit

What is the meaning of external audit?

The most important is that you have the skills on that certain field. Internal audit is to provide the objective assurance designed to add and improve the internal controls and whole organization. While external audit is an independent examination of the financial statements prepared by the organization.

Which one has a better future internal audit or external audit?

While external audits mostly focus on financial risk, internal auditors have a wider range of responsibilities and different reporting requirements. The literature suggests an increasing need for interactions among board of directors, management, internal audit and external audit as the four components of corporate governance and presents internal audit as a resource for the other components.

Also, the type of audit procedure influences the willingness of auditors to rely on the IAF, and the inherent risk of the examined transaction strengthens the negative impact of client business risk on the reliance decision. Moreover, past experiences of external auditors with an IAF have a significant impact on their reliance decision.

What does the auditor need?

Internal audit, a component of corporate governance, continues to evolve due to changes in business strategies and requirements placed on it by legislators. The roles of internal auditors and audit committees (ACs), the key personnel in IAFs, are changing to a more value-added approach as business strategies move towards corporate sustainability and organisational excellence. However, none has linked the impact of internal audit performance to corporate governance. This study provides an agency of value view, explaining the effectiveness of IAF and its impact on corporate governance. The factors investigated are the structure of the IAF, activities of best practices in internal auditing, ACs’ involvement as stated by the Malaysian public listing guidelines (Bursa Malaysia, 2000, 2009b) and the World Bank’s corporate governance framework (World Bank, 1991).

The results indicate main effects for each factor and a two-way interaction between the effectiveness of the internal control system and the quality of corporate governance. Specifically, a strong internal control system can compensate for weaknesses in corporate governance with respect to the confidence of external auditors in the IAF.

This independence and objectivity are achieved through the organizational placement and reporting lines of the internal audit department. Internal auditors of publicly traded companies in the United States are required to report functionally to the board of directors directly, or a sub-committee of the board of directors (typically the audit committee), and not to management except for administrative purposes. Interaction and co-ordination between internal and external auditors can enhance auditor efficiency and effectiveness, increase fraud detection and generally have a significant, positive impact on achieving organizational goals. Further, external auditors can rely on the work of internal auditors to reduce the amount of their audit tests, thereby reducing audit fees. This study examines the nature and extent of interaction and the relationship between internal and external auditors from the perspective of the internal auditors in a developing country, Zimbabwe.

The objective of this study is to determine which of the criteria as mentioned by AI 610 will be used by the external auditors to evaluate the work of the internal auditors. Respondents of the study consist of those from the big four and non-big four firms located in Kedah and Penang. A one-quarter replicate of 28 Kempthorne’s design was used to determine the experimental task.

External auditing standards that originated in the Western world, which are also being applied in developing countries, recommend external auditor’s reliance on internal audit to achieve audit efficiency. Nevertheless, whether this efficiency motive explains such reliance in corporate governance settings that differ from the West has not been sufficiently explored as yet. This study examines external auditor reliance on internal audit work using questionnaire survey of 119 external auditors in Ethiopia. Mann-Whitney U test results suggest that external auditors’ reliance on internal audit work is not significantly associated with the competitiveness of external audit sub-markets in Ethiopia.

  • Internal audit, a component of corporate governance, continues to evolve due to changes in business strategies and requirements placed on it by legislators.
  • The roles of internal auditors and audit committees (ACs), the key personnel in IAFs, are changing to a more value-added approach as business strategies move towards corporate sustainability and organisational excellence.

Further, as suggested by Sarens , the level of internal audit performance could now be identified to its impact on corporate governance, for example such as in areas of expenditure management, revenue management, analysis of data and conflict resolution. The results have implications on the policy regarding internal control for public listed companies, favouring an in-house internal audit function as opposed to outsourcing the function, to address the recommendations on the effectiveness of ACs and its relationship with IAFs. The practice of internal audit in future should be more collaborative to harness the expertise and experience of other departmental personnel in producing effective internal audit, ultimately creating a greater impact on corporate governance.

Overall, the findings suggest that organizations can foster internal–external auditor coordination by enhancing corporate governance effectiveness and strengthening the internal control system. As predicted, we find a significant interaction between these three factors that shows the following.

The findings of the study indicate that technical competence and scope of function are the two most important criteria that external auditors consider in their reliance on internal auditors. Malaysian Institute of Accountants (MIA), being the standard setter of the auditing standards in Malaysia, will have to develop precise and operational criteria for these factors in planning the audits. Internal auditors are considered a valuable source of information since they are more familiar with the company and its environment. This study aimed to identify the relationship between internal and external audits affecting the quality of firms’ reports. To achieve the objectives of the study, a 30-item questionnaire was developed and sent to 312 external auditors and managed to collect 276 (88.5%) properly filled questionnaires.

An exploration on the extent of collaborations and combined assurances in internal audit is also carried out. The primary analysis on the probability of an effective IAF and profiling of the internal audit activities, level of AC involvement and areas of corporate governance is made using the Rasch model.

Descriptive statistics and multiple regression were used to test the hypotheses of the study. The results show that Jordanian auditors perceived favorably the cooperation between internal and external auditors to enhance the quality of financial reporting. For instance, the results revealed positive and significant effect of objectivity in enhancing the level of cooperation between internal and external auditors in a way that increased the level of financial reporting quality. Moreover, the quality of financial reporting has been affected positively resulting in the positive effect of the technical competence of the internal audit’s work and professional care. Finally, the cooperation between the two auditing teams was noticeable through the nature and scope dimension that, in turn, increased the quality of financial reporting.

Based on these results, external auditors are highly recommended to rely on internal audit works which could lead to enhance financial reporting quality. An internal audit helps a company ensure it has the proper controls, governance and risk management processes in place. By nature, it’s an independent activity by a person or team that can present objective findings and make recommendations for corrective measures. A robust internal audit function can find and correct deficiencies quickly and limit costs to your company.

Non-parametric tests are also used to determine the statistical significance of the relationships of the components investigated. The findings support the establishment of an in-house IAF with a definitive team size and professional expertise for an effective IAF. Other IAF components are member experience, combined audit activities and collaborations of audit activities.

Guide to Financial Management

With the revised version of ISA 610 (revised 2013), external auditors now face both requirements and guidance addressing their responsibilities when relying on the internal audit function (IAF). The reliance decision of an external auditor has important economic consequences and implications for the efficiency and effectiveness of the annual audit. Furthermore, the experiences of external auditors in collaborating with an IAF are taken into consideration.

internal vs external audit

Internal vs External Audit Comparative Table

Results of multiple discriminant analysis indicate internal audit work performance is the most important factor that determines the extent of external auditors’ reliance on internal audit work. Overall, findings suggest that organizations can enhance corporate governance effectiveness by strengthening internal audit and fostering internal-external auditor coordination. While internal auditors are hired directly by their company, they can achieve independence through their reporting relationships. Independence and objectivity are a cornerstone of the IIA professional standards; and are discussed at length in the standards and the supporting practice guides and practice advisories. Professional internal auditors are mandated by the IIA standards to be independent of the business activities they audit.

Which is better internal or external audit?

Internal auditors will examine issues related to company business practices and risks, while external auditors examine the financial records and issue an opinion regarding the financial statements of the company. Internal audits are conducted throughout the year, while external auditors conduct a single annual audit.

byann