ACCA F8 - Internal Auditor vs external auditors |

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This is the 6th video in the series of six including: 1. “The concept of audit and other assurance engagements.” kzbin.info/www/bejne/nmXId4d7dtKtatE 2. “External audits.” kzbin.info/www/bejne/ZqHcoGB7ebR8opI 3. “Corporate governance.” kzbin.info/www/bejne/r5CupqenpbWYesk 4. Ethics - “Professional ethics and ACCA’s Code of Ethics and Conduct” kzbin.info/www/bejne/hWSYm2mFo9J_m6c 5. Ethical risks - “Professional ethics and ACCA’s Code of Ethics and Conduct” kzbin.info/www/bejne/nHq8o3yQbbiKbNU 6. “Internal auditors” Watch full playlist here: kzbin.info/aero/PLFB5lGhYzZPf3JTop21vLSX7-58-ordag ____________________________________________________________________________________________________________________________________________ Transcript: This video will cover internal auditors and how they impact on an external audit to fully understand this we are going to cover the internal auditor's role the key differences between an internal and external auditor how the external auditor can rely on the work of an internal auditor who requires an internal auditor and outsourcing the internal audit function to an audit firm the internal auditor's role can vary depending on the requirements of the entity they can cover a broad range of activities their main aim is to advise management the internal audit team usually work within and report to the management of the entity the expected role of an internal auditor includes the review of control activities this would be a review of the control systems within the entity and would highlight any control deficiencies that may need to be addressed this will assist in reducing the risk of fraud and error to examine the timeliness of control information this will enable management to react appropriately to information received from their systems the internal auditor will regularly review systems and ensure issues are reported value for money audits this is to identify whether a decision is appropriate for the organization this could include a new product service or even whether to go ahead with a new supplier they will review the 3 E's the economy the best price the efficiency the best use of resources and effectiveness the best result to help decide whether to go ahead with the plan identifying business risks internal auditors are best placed when reviewing the entity and its control systems to identify potential risks to the company they will then report these to management and recommend how the entity can reduce that risk they will examine compliance again they have the expertise to identify non-compliance of laws and regulations they can report these to management and assess how they can be avoided in the future they work with and support the audit committee the audit committee is a group of non-executive directors who manage external and internal auditors if internal auditors report to this committee they improve independence from the board and also very often improve the effectiveness of decisions made of their work finally they complete special investigations requested by the entity management this can include fraud investigations mystery shopper reviews inventory counts and asset inspections each of these investigations will assist the management in improving the organization it is worth noting that internal and external auditors have some key differences these are independence scope of work objectives reporting appointment and removal and whether they are a legal requirement external auditors must be independent in order for them to form an opinion that will be trusted by the users of the financial statements internal auditors however work within the organization and often report directly to the directors they therefore are not independent from the entity and may lack objectivity when performing their work the scope of detail of what these auditors do is also different the external auditor plans and performs audit procedures on the control systems and the transactions and balances within the financial statements this identifies whether the financial statements are true and fair internal auditors as we have already seen cover many areas looking at the systems and controls used by the entity the amount of work will depend on the requirements of management the objective of the external auditor is to form an independent opinion on whether the financial statements are true and fair this is provided in a written report at the end of the audit process the objective of an internal auditor is to advise management and improve the control systems external auditors report to the shareholders of the entity internal auditors report to the directors or the audit committee if available external auditors are appointed and removed by the shareholders this is done by vote usually at the AGM internal auditors are appointed and removed by the board of directors or the audit committee if available an external audit is required by law there may be exemptions for example in the UK there is a small company exemption which allows smaller companies to not carry out an audit but all medium to large size companies will need one internal audits are not required by law they are recommended by corporate governance to ensure sound control systems external auditors may be able to use some of the work that an internal auditor produces for example the review of control systems to highlight deficiencies and testing of control systems is something that the external auditor carries out as part of their audit work it may be possible to use some of this work with permission so that they can then concentrate on other more complex areas of the audit before they decide whether they can use the work of the internal auditor they must consider how reliable it is considerations would be the scope of work they would address how much detail has gone into the work as external auditors must provide reasonable assurance on the work they carry out the technical competence they would need to review the experience and qualifications of the internal audit team the report quality they would need to identify whether there is enough written evidence to ensure it forms sufficient appropriate evidence for the audit independence if the internal auditors report to the audit committee this would improve independence and also how reliable they would be for the external auditor based on what we've just mentioned the external auditor would then decide whether they can use some of the internal auditors work as evidence not all companies require an internal auditor for example if the company has simple systems is small in size and only one location there is very little need to have the internal auditor support the organization there are some indicators of requiring an internal audit function including if the company is large if it has complex systems and regulations that must be followed if it is listed on the stock exchange if it has been known to have problems for example fraud or internal control deficiencies that led to fraud and error each organization must decide whether an internal audit function would benefit them and fit in the plans for their future if an entity would benefit from an internal audit department but it is not prepared to have a full-time employed internal audit function they may outsource audit firms have the expertise to take on the role of an internal auditor for the organization many have internal audit departments with dedicated staff who work on assignments for these clients and assist the management with the role of the internal auditor this setup has many advantages and disadvantages the advantages are it can be cost effective as using an external audit firm to take on a short-term assignment would be cheaper than having an employed internal auditor or internal audit team this option also removes employment costs such as recruitment and tax audit firms may have more specialized skills from the experience they gain with other clients this means the company may benefit more from the work completed by an outsourced function this option increases independence for the internal auditor if the internal auditor is not employed by the management and working full time then their work may be seen as more reliable it reduces the burden of having a department to manage it will allow them to focus on more important areas the disadvantages of an outsourced internal audit function are they may lack the knowledge of the business to fully understand the whole operation this may lead to them misinterpreting something incorrectly they can be expensive thanks to the generous charge-out rates issued by the audit firm therefore long-term use may become less cost-effective they may not be available immediately due to other responsibilities they may not be ready for the client when they need them leading to delays in decisions there is a possible conflict of interest if the audit firm carries out the external audit many countries will not allow this for example in the uk ethical standards stop external auditors being the internal auditors if they are to place much reliance on the work during the external audit we have covered lots of areas relating to our internal auditor you should now understand the varied role of an internal auditor how they differ from an external auditor how the external auditor can often place reliance on the work of the internal auditor as evidence and what they must consider before they do this when an internal auditor is beneficial for an organization and how outsourcing the internal audit function to an audit firm works and what are the key advantages and disadvantages i hope you found this video useful thank you for watching.

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