- 1. Chapter 8: Internal Auditors Roles and
ResponsibilitiesChapter 9: External Auditors Roles and
ResponsibilitiesL. Murphy Smith Texas A&M University
2. Chapter 8: Internal Auditors Roles and
ResponsibilitiesChapter Objectives Review the qualities of an
effective internal audit department. Discuss the role of internal
auditors as assurance providers and consultants. Review the trends
of the internal auditing profession. Discuss the relationship of
internal audits and the audit committee. Analyze the determinants
of an effective internal audit. Discuss the professional practices
framework (PPF) adopted by The Institute of Internal Auditors
(IIA). Promote the best practices and internal audit framework. 3.
Chapter 8: Internal Auditors Roles and ResponsibilitiesComparison
of Internal Audit (Pre- and Post-corporate Governance Reforms) 4.
Chapter 8: Internal Auditors Roles and Responsibilities
- Internal Auditors Consulting Services:
- Consulting services to the board of directors and audit
committee.
- Consulting services to management.
- Internal auditor training services.
- Trend and Relevance of Internal Auditors:
- The Foreign Corrupt Practices Act (FCPA) 1977
- COSO Report of the National Commission on Fraudulent Financial
Reporting (1987)
- The IIA redefined internal auditing in 1999
- SOX Sections 302 and 404 (keep in mind that SOX does not
directly address internal auditor responsibilities or internal
audit function.)
- The PCAOB in its AS No. 2
5. Chapter 8: Internal Auditors Roles and Responsibilities
- Authorities and Responsibilities:
- The internal audit function should have (1) full and free
access to the companys audit committee; (2) unrestricted access to
the companys records, documents, property, and personnel; and (3)
authority to discuss initiatives, policies, and procedures
regarding risk assessment, internal controls, compliance, financial
reporting, and governance processes with management and other
corporate governance participants.
6. Chapter 8: Internal Auditors Roles and Responsibilities
- Internal Audit Outsourcing:
- The decision of whether to establish and maintain an internal
audit function or outsource the function should be made by the
companys board of directors and its representatives.
- The SEC rulepermits internal audit outsourcingto the clients
independent auditor in the following areas:
- 1. Operational internal audits that are not related to internal
accounting controls, financial systems, or financial
statements.
- 2. Nonrecurring assessment of discrete items or other programs
unrelated to outsourcing of the internal audit function.
- Teamwork: DQ6: What are the benefits and negative results of
outsourcing the internal audit function?
7. Chapter 8: Internal Auditors Roles and ResponsibilitiesIIAs
Performance Standards 8. Chapter 8: Internal Auditors Roles and
ResponsibilitiesIIAs Ethics Code 9. Chapter 8: Internal Auditors
Roles and Responsibilities
- Internal Audit Education:
- The Institute of Internal Auditors Research Foundation (IIARF)
is in the process of establishingthe Common Body of Knowledge
(CBOK) for internal auditors.
- The IIA has establishedthe Internal Auditing Education
Partnership (IAEP)program to promote internal auditing in colleges
and universities in educating the next generation of auditors.
- Teamwork: DQ8: Explain how internal auditors expertise in
internal control can help ensure effectiveness of the corporate
governance process.
10. Chapter 8: Internal Auditors Roles and Responsibilities
- The internal audit function of corporate governance provides
objective and independent assurance and consulting services
designed to add value and improve the companys sustainable
performance in the areas of operations, risk management, internal
controls, financial reporting, and government processes.
- Internal auditors are well trained and positioned to provide
numerous assurance services to their organization. The emerging
trend toward more emphasis on MBL of governance, economic, ethical,
social, and environmental performance requires organizations to
provide assurance on a variety of their performance measures and
achievements.
- SOX does not directly address internal auditor responsibilities
or internal audit function.
- The internal audit function should have (1) full and free
access to the companys audit committee; (2) unrestricted access to
the companys records, documents, property, and personnel; and (3)
authority to discuss initiatives, policies, and procedures
regarding risk assessment, internal controls, compliance, financial
reporting, and governance processes with management and other
corporate governance participants.
11. Chapter 9: External Auditors Roles and Responsibilities
- Recognize the role independent auditors play in achieving
effective corporate governance and reliable financial reports.
- Understand the history of auditing, the traditional roles of
auditors, and regulations recently placed on them.
- Address the expectation gap regarding what auditors can provide
in the way of reasonable assurance and the expectations of
investors for a higher level of assurance.
- Identify the roles and responsibilities of the PCAOB, and
discuss the auditing standards published by the PCAOB.
- Demonstrate the importance of auditor independence both in fact
and in appearance.
- Discuss an integrated audit of both financial statements and
ICFR.
- Address the issue of a liability cap for independent auditors
and understand the rationale on both sides of the issue.
12. Chapter 9: External Auditors Roles and Responsibilities 13.
Chapter 9: External Auditors Roles and Responsibilities
- Professional competencies.To audit public companies, auditors
should register with the PCAOB and meet all registration and
inspection requirements.
- Technical competencies.Auditors should be knowledgeable
inprofessional standards, rules, laws and regulations, and
understand their clients industry and business, corporate
governance, financial reporting process, and internal
controls.
- Process competencies.Auditors ability to choose appropriate
evidence-gathering procedures (tests of controls, substantive
tests) and execute auditing procedures.
- Reporting competencies.Reporting competencies refer to auditors
ability and willingness to discover and report material
misstatements.
- Teamwork: DQ3: Confidence and public trust in auditors have
been reduced due to concern that auditors serve the interests of
management who write their checks rather than the shareholders who
eventually pay their fees. Do you agree or disagree? Why?
14. Chapter 9: External Auditors Roles and Responsibilities
- List of the initiatives that have been suggested to
improveaudit quality as well as the transparency .
- Publication of audit engagement letters
- Shareholders rights to question auditors
- Publication of auditor resignation statements
- Lead audit partners signature on audit reports
- Active audit committee participation in evaluating the scope
and results of the integrated audit of both ICFR and financial
statements.
- Mandatory rotation of the audit firm every seven to twelve
years in the context of the quality of audit work performed by the
firm and the audit efficacy.
- Mandatory shareholder vote on the ratification of the
independent auditor each year.
- Teamwork: DQ13: How do external auditors lend credibility to
public financial information and the effectiveness of the corporate
governance structure?
15. Chapter 9: External Auditors Roles and Responsibilities
- The PCAOB: created by SOX to regulate the auditing
profession.
- The PCAOBs primary functions are to:
- 1. Register public accounting firms that audit public
companies.
- 2. Inspect the registered public accounting firms on a regular
basis.
- 3. Establish auditing, attestation, ethics, quality control,
and independence standards.
- 4. Conduct investigations and disciplinary proceedings.
16. Chapter 9: External Auditors Roles and Responsibilities
- The PCAOB has issued five auditingstandards as of September
2007
- 1. PCAOB Auditing Standard No. 1 ( audit is conducted in
accordance with auditing standards of PCAOBUS, the city and state
has to be disclosed)
- 2. PCAOB Auditing Standards No. 2 and 5 ( New PCAOB AS No. 5
superseded AS No. 2 and requires the independent audit to opine
only on the effectiveness of ICFR, not the management processes and
assessments concerning ICFR) .
- 3. PCAOB Auditing Standard No. 3( auditors are required to
maintain the audit documentation is sufficient manner and keep the
records for at least seven years).
- 4. PCAOB Auditing Standard No. 4 (voluntarily engagementfor the
auditors report on the companys elimination of previously reported
material weaknesses in its ICFR).
17. Chapter 9: External Auditors Roles and ResponsibilitiesThe
new rules restrict public accounting firms in performing a variety
of tax services to their audit clientsthe new rules are intended to
prevent the selling of abusive tax shelters. 18. Chapter 9:
External Auditors Roles and ResponsibilitiesTheextended oversight
responsibilities for the audit committeeare: 1. Appointment,
compensation, and retention of registered public accounting firms
2. Preapproval of audit services and permissible nonaudit services
3. Review of the independent auditors plan for an integrated audit
of both ICFR and annual financial statements 4. Review and
discussion of financial statements audited or reviewed by the
independent auditor 5. Monitoring the auditors independence 6.
Auditor rotation requirement 19. Chapter 9: External Auditors Roles
and ResponsibilitiesDisclosing Auditor Changes SEC rules require
public companies that change their public accounting firms to file
a Form 8-K, Item 4.01, to disclose changes within four days,
whereas auditors are required to provide standard letters within
ten days stating whether they agree with the companys disclosure
without specifying any reasons. 20. Chapter 9: External Auditors
Roles and ResponsibilitiesIntegrated Audit Approach 21. Chapter 9:
External Auditors Roles and Responsibilities
- The audit function should be regarded as an external corporate
governance mechanism that serves to protect investors from
receiving incomplete, inaccurate, or misleading financial
information and thus adds value to the effectiveness of corporate
governance.
- SOX drastically changed the characteristics of the accounting
profession by connecting the audit function to the corporate
governance structure by requiring that the audit committee be
directly responsible for not only hiring, compensating, and firing
external auditors, but also overseeing their work, monitoring their
independence, and avoiding potential conflicts of interest.
- In the auditing profession, the so-called expectation gap is
referred to as the difference between (1) what the investing public
and other users of audited financial statements believe the
responsibilities of auditors are, and (2) what auditors are willing
to assume as responsibilities according to their professional
standards.
- New PCAOB AS No. 5 superseded AS No. 2 and requires the
independent audit to opine only on the effectiveness of ICFR, not
the management processes and assessments concerning ICFR.
22. Chapter 9: External Auditors Roles and Responsibilities
- Sections 201 and 202 of SOX require that all audit and
permissible nonaudit services to be performed by the companys
independent auditor be approved by the audit committee.
- Auditor independence is the backbone of the auditing
profession, affecting the auditors planning, evidence-gathering
procedures, findings, judgment, and credibility, and public trust
in the auditors opinion.
- Auditor independence is derived and guided by the three
principles of (1) independent auditors may not audit their own
work, (2) independent auditors may not function in the role of
their clients management, and (3) independent auditors may not
serve in an advocacy role for their audit clients.
- Tests of controls must be broadened to include understanding of
ICFR, and provide reasonable assurance about the effectiveness of
both the design and operation of internal controls.
- Any contractual provisions that limit the external auditors
liability or require waiving the right to a jury trial may have
detrimental effects on auditor impartiality, objectivity, and
quality.
23. Chapter 9: External Auditors Roles and Responsibilities