ASSIGNMENT

Unit 5 : Internal audit

1. Write down the difference between internal and external auditor ?

INTERNAL AUDITOR EXTERNAL AUDITOR

Internal auditor is appointed by the External auditor is appointed by the

management of the company shareholders of the company

Legally internal audit is not compulsory External audit is compulsory by law

Internal audit work is a continues throughout of It is done annually at the end of the fiscal
the year year

Internal auditor is employee of the company External auditor is a independent person

Internal auditor has not to submit any report to External auditor submit report to the
shareholders shareholders

Internal auditor checks all the transaction External auditor may apply test check

Internal auditor gives suggestions to the External auditor has no need to give
management for the betterment of the business suggestions unless he is asked

Internal auditor primary duty is to find the fraud External auditor has to report about final
and errors accounts whether these are true or false

2. Explain the requirement of Audit?

The requirement of an audit is driven by several factors and serves various purposes in
both the private and public sectors. Below are the key requirements and reasons for
conducting an audit:
1. Statutory and Regulatory Compliance:
 Many legal and regulatory frameworks require organizations to undergo regular
financial audits. For example, in many countries, companies are mandated by
law to have their financial statements audited annually to ensure compliance
with accounting and financial reporting standards.
2. Financial Accountability:
 Audits are essential for verifying the financial accountability of an organization.
They provide assurance to shareholders, investors, creditors, and other
stakeholders that the financial statements accurately represent the financial
position and performance of the entity.
3. Protection of Shareholders and Investors:
 Audits help protect the interests of shareholders and investors by providing an
independent assessment of the company's financial health. This helps in
preventing fraud, mismanagement, and the dissemination of false or misleading
financial information.
4. Management Oversight:
 Audits play a critical role in overseeing the management of an organization. By
independently evaluating financial records and internal controls, audits ensure
that management acts in the best interests of the company and its stakeholders.
5. Risk Assessment and Management:
 Auditors assess an organization's financial and operational risks, helping to
identify potential weaknesses in internal controls. This enables management to
take appropriate action to mitigate these risks.
6. Access to Capital Markets:
 Many companies, especially publicly traded ones, require audited financial
statements to access capital markets, raise funds, or fulfill regulatory
requirements for initial public offerings (IPOs).
7. Credibility and Transparency:
 Audited financial statements enhance the credibility and transparency of an
organization. They provide assurance that the information presented in financial
reports is reliable and unbiased.
8. Taxation and Regulatory Reporting:
 Audited financial statements are often required for tax purposes, including
 income tax and value-added tax (VAT) filings. They assist in ensuring accurate
tax reporting and compliance.
9. Internal Control Evaluation:
 Audits also evaluate the effectiveness of an organization's internal controls. This
assessment helps identify weaknesses or inefficiencies in the control
environment, which can then be rectified to improve operations and minimize
the risk of financial errors or fraud.
10. Audit Committee Oversight:

 Many organizations have audit committees that oversee the audit process and
provide an additional layer of corporate governance. These committees are
responsible for ensuring the independence and effectiveness of the audit
function.
11. Fiduciary Duty:

 Directors and officers of companies owe a fiduciary duty to the organization and
its shareholders. Audits help fulfill this duty by ensuring that financial and
operational decisions are made in the best interests of the company.
12. Public Trust:

 In the public sector, audits are essential for maintaining public trust.
Government agencies and non-profit organizations are often required to
undergo audits to demonstrate responsible stewardship of public funds.

In summary, audits are a fundamental requirement for ensuring financial transparency,

accountability, and compliance with legal and regulatory standards. They provide assurance to
stakeholders, protect investors, and support sound financial management and governance
within organizations.

3. Explain objective of an audit and role of an Auditor.

Objective of an Audit:
The primary objective of an audit is to provide an independent and objective assessment of an
organization's financial statements, internal controls, and operations. The overarching goals of
an audit are as follows:

1. To Express an Opinion on Financial Statements: The fundamental purpose of an audit is

to express an opinion on the fairness, accuracy, and reliability of an organization's
financial statements. The auditor examines the financial statements to determine
 whether they present a true and fair view of the company's financial position and
performance.

2. To Ensure Compliance: Auditors assess whether the financial statements are prepared
in compliance with relevant accounting standards, regulations, and legal requirements.
This helps ensure that the organization is adhering to accepted accounting principles
and statutory guidelines.

3. To Detect Errors and Fraud: Auditors are responsible for identifying errors,
irregularities, or fraud in financial records. They perform procedures to detect material
misstatements or fraudulent activities that could impact the integrity of the financial
statements.

4. To Evaluate Internal Controls: Auditors evaluate the adequacy and effectiveness of an

organization's internal controls. This assessment helps in identifying weaknesses or
deficiencies in the control environment and provides recommendations for
improvements to safeguard assets and ensure reliable financial reporting.

5. To Provide Assurance: The audit process aims to provide assurance to stakeholders,

such as shareholders, investors, creditors, and regulators, that the financial information
is trustworthy. This assurance is crucial for making informed financial decisions.

6. To Enhance Transparency: Auditors contribute to greater transparency and

accountability in financial reporting, which, in turn, fosters public trust and confidence in
the organization and its management.

Role of an Auditor:

The role of an auditor is critical in fulfilling the objectives of an audit. Auditors perform various
tasks and responsibilities to achieve the objectives, including:

1. Independence: Auditors must maintain independence from the organization they are
auditing to ensure an unbiased assessment.

2. Planning: Auditors plan the audit engagement, including the scope, objectives, and audit
approach. They develop an audit plan to guide the examination process.

3. Risk Assessment: Auditors identify and assess risks associated with financial reporting,
including the risk of material misstatement due to fraud or errors.

4. Examination and Testing: Auditors examine financial records, transactions, and

documents to verify the accuracy of financial statements. They also test internal controls
for effectiveness.

5. Audit Procedures: Auditors conduct substantive procedures, including tests of details

and analytical procedures, to gather sufficient and appropriate audit evidence.
 6. Documentation: Auditors maintain comprehensive documentation of the audit
procedures, findings, and conclusions to support their opinion.

7. Reporting: Auditors issue an audit report that includes their opinion on the financial
statements. This report is provided to shareholders and other stakeholders, along with
any recommendations for improvements in internal controls or financial reporting.

8. Communication: Auditors communicate with management and the audit committee to

discuss their findings, recommendations, and any significant issues that arose during the
audit.

9. Ethical Conduct: Auditors are expected to adhere to a strict code of ethics and
professional standards, including honesty, integrity, and confidentiality.

10.Continuous Learning: Auditors must stay current with changing accounting standards
and auditing practices to maintain their professional competence.

The auditor's role is not only to verify the financial statements but also to provide valuable
insights and recommendations to help the organization improve its financial reporting and
internal controls. Auditors act as independent gatekeepers, ensuring the integrity and reliability
of financial information.