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Using the Work of Internal Audit - Example

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The paper "Using the Work of Internal Audit" is a perfect example of a report on finance and accounting. Businesses in this competitive world are looking towards finding every opportunity which will ensure better productivity. Auditing is a step in that direction as it helps the business to evaluate the manner in which the various departments have worked…
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Extract of sample "Using the Work of Internal Audit"

Businesses in this competitive world are looking towards finding every opportunity which will ensure better productivity. Auditing is a step in that direction as it helps the business to evaluate the manner in which the various departments have worked and helps to increase the relevane of the audit function as the role of the auditor multiples. Since, auditing follows a series of systematic steps and prescribes the different areas which the auditor needs to lay stress has increased the relevance of the audit function. Organizations need to ensure that they have an audit department because it helps to fill up the various loopholes that might remain in the system. Being able to develop the audit department helps to provide internal control which acts as a tool to measure the performance and at the same time reduce the chances of frauds and misappropriation of funds. The work of the audit department can be relied upon as auditors helps to audit the work and carry on the work according to the requirements of law. While making audit it is important that the auditors are used so that the audit procedure can be verified. ASA 610 also states that having an auditor who audits the work of the department helps to ensure relevancy and checks the performance so that all misappropriations can be found out (ASA, 2009). This makes it important that organizations have an auditor so that it helps to determine the manner in which the work of the department can be evaluated which will help to understand the working of the department and use the finding made by the department. This makes organization look towards having both an external and an internal auditor as it helps to increase the relevance of the role played by them Having an external auditor will help the organization according to ASA 610 as it will help the external auditor to determine whether the work of the internal auditor has importance and can be used for future performances (ASA, 2009). This will help to ensure that the performance of internal audit is checked and will help to evaluate the performance of the internal department by matching it with those of the criteria mentioned in the working of the various departments. The external auditor through this mechanism will be able to gauge the competence of the internal auditor and help in gauging the performance of the internal audit with reference to professional care (ASA, 2006). This will thereby make the internal auditors work as a professional body and will look towards ensuring that there is effective communication so that the actual performance gets reflected (ASA, 2006). This will thereby help to ensure better performance. Having an auditor will help to monitor the performance of internal control as it will make the internal department circumspect of the fact that their performance will be evaluated which will ensure that they work according to the set professional code of conduct and carry out their responsibility carefully (ASA, 2009). This will also help to ensure that the financial and operating performance is evaluated on a regular basis which will help organizations to find out the errors and get them fixed at the appropriate time (ASA, 2009). This will thereby enhance the performance of the audit department and will help to ensure better performance. The use of auditors in evaluating the account statement can be seen from the case of Enron. The management executives at Enron neglected the values and importance of the stakeholders. Enron management executives practiced different forms of behavioral and moral complexity which resulted in the neglecting the value of the stakeholders and not addressing the integrity required in management practices (Petrick & Scherer, 2004). This made the organization not look towards the wellbeing of the stakeholders instead made the management take steps which increased their source of income. This problem has got mitigated due to a set of narrow values and stakeholders concern which Enron looked towards addressing (Seeger & Ulmer, 2004). This resulted in the management narrowing down their concerns for the stakeholders which finally resulted in the failure of the enterprise as the communication aspect of management was neglected. This was something that could have been avoided if the auditors had fulfilled their roles as it would have helped to bring up the errors early on and based on it the management and the society could have taken steps to reduce the magnitude of the problem. Having a professional body like audit would ensure that the business works on different fundamentals and every issue are brought froward to the management so that better decisions can be taken. A study supports in this direction by stating that professional bodies looks towards regulations, conduct and ethics to ensure that the integrity of the professional body is not diluted. This gets magnified for professions like auditing and engineers as it has a mass involvement of human life and requires that people in this profession follows stewardship for both the society and environment (Loui, 2009). This would thereby magnify the role of the auditors and will ensure that they carry out their responsibilities in the most effective manner. Organizations through this mechanism will also be able to ensure that they comply with the laws and regulations that have been prescribed by the law and will ensure that the final documentation and presentation matches the one provided by law (ASA, 2006). This will thereby help the internal auditor because of the following Firstly, having an internal control to evaluate the internal audit department ensures that the department is able to promote orderly, economical and efficient process which will help to gain productivity in operations. Organizations that are able to evaluate the internal audit department thereby ensures a check which helps to evaluate the performance against set standards and take steps which will help to improve the overall efficiency so that the internal audit provides beneficial results. Secondly, having an internal control to evaluate the audit department ensures that the misuse of funds and chances of committing errors gets reduced. Organizations have an internal control so that the manner in which the audit department is working can be evaluated (Desai, Roberts & Srivastava, 2005). This will help to find the errors and fix it at the appropriate time so that the performance of the audit department can be measured and a check can be ensured that will prohibit the department from misusing their position and power. Thirdly, internal control for the audit department will help to check whether the audit department adheres according to the law and rules prescribed by the directives. This will help to check the method which will ensure that the organization is able to abide to the regulatory framework (Desai, Roberts & Srivastava, 2005). This will thereby act as a tool to ensure that the work is done according to the prescribed rules and any deviations can be brought to the notice so that steps can be taken at the right time Fourthly, this will ensure that the audit department is able to maintain and present the data in the most reliable form. This will help to ensure consistency in the performance of the audit department and will help to highlight the discrepancies and areas that they need to work on. This will thereby help to bring the required changes in the manner the auditors looks to present the things and having an appropriate mechanism will help to ensure maximum benefit for the organization. Lastly, by having an internal control which looks towards evaluating the internal audit department will be ale to indentify the manner in which the auditors are working and any discrepancies or frauds or mistakes can be brought to the notice of the management so that appropraite steps can be taken at the correct time which will limit the loss or chances of spoiling the name of the organization. Thus, by evaluating the performance of the internal audit department will be able to verify the performance and help the organization in developing a mechanism which will help them in achieving better results towards the growth of the organization. The risk identified for organizations makes it important that the organization is able to use different audit procedures so that the risk can be managed properly. The following are the two audit procedures that can be used by the auditors Firstly, is the risk based internal auditing where the internal audit and the process is used to ascertain the risk that the business faces and the mechanism that has been used to manage those. In this process the system of internal control looks towards checking the risk that the business faces and reduces to it an extent that is acceptable by the management thereby allowing them to pursue with the objective and work in the specified way (Griffiths, 2006). This is shows in the diagram below The above chart shows that organizations by using this process will be able to measure the amount of risk and take steps to ensure that the risk is controlled to the maximum possible extent. The above chart shows that a control is inserted through the internal control method which helps to check the risk and pass on the risk that the management feels that the business will be able to deal with thereby ensuring effective control of risk and ensuring that the business is able to achieve its objectives. This mechanism will also help organizations to ensure that risks which are over controlled are identified. This will help the organization to reduce control over those risks as it limits the performance and doesn’t allow the business to concentrate on other important aspects that will help the management in ensuring that they are able to perform efficiently (Griffiths, 2006). This the risk based internal auditing is a process which will help organizations to control the risk that the business is facing and will be able to perform efficiently in achieving their objectives. Secondly, organizations can look towards implementing both horizontal and vertical audit to identify the risk and take steps to control in. Through this mechanism organizations will be evaluate each function and department both length and breadth to identify the different risk. This will help to take the required steps to reduce those risks so that the business is able to perform in a better way and deal with the contingencies in a better way (RMS, 2006). This strategy will help to concentrate on areas and deal with the risk identified by them in a better coordinated manner. This will thereby look the following Since, this strategy looks towards evaluating every bit of the organization so they will be in a better position to ensure that they are able to ensure that risk is controlled. This strategy will help to ensure that the actual point of the risk that has been identified is looked into which will thereby help to develop a mechanism that will ensure reduction of risk. Thus, organizations by using the above two strategy will be able to reduce the identified risk and be able to deal with the changes and contingencies in a better way. This will also help to increase the role of the auditors and ensure that they are able to follow a systematic policy which looks towards identifying the different areas where the auditors have a role to play and by ensuring effective monitoring process will be able to deliver quality performance. Having auditors which works on behalf of the organization helps to reduce the chances of fraud and using an external body which looks towards managing the financials will ensure better results. To use the perspective developed by Agency theory where organizations use agents who work on behalf of the shareholders to ensure that the right of the shareholders are protected (Nicholson, 1998). The benefit of this method can be identified when the role of the board of directors and management is differentiated. This will benefit organizations as past study have shown that using agents enable them to handle problems in a different way as they have a different attitude and looks towards the wellbeing of the stakeholders (Eisenhardt, 1989). Having an agent who is external to the organizations will ensure that there is no asymmetry of information and clarity on the part of the manager and the management as to the work for the interest of the stakeholder (Fama, Eugene & Jensen, 1983). Using an agent would have helped the investors as they could have provided correct information to the public regarding the various decisions. This would have helped the investor to understand the actual position in hand and would have reduced the impact of failures on other organizations. This would be an area where auditors could have contributed immensley and could have shaped the manner in which organizations perform. Auditors follow the accounting principles laid by the governing body. The International Accounting Standard Board (IASB) and Financial Accounting Standard Board work in tandem to develop and bring changes in the accounting principles and policies so that the presentation of financial statements becomes more consistent and recognized internationally. The growing importance of fair value accounting and using it for business purpose arises due to several reasons. Since, fair value involves a “logical pattern which reflects globalisation and international economic integration” (Barlev & Haddad, 2003) the results and decision taken on the basis of this are better and correct. Even investors prefer fair value as the results reflect the actual scenario prevalent in the organisation. This will ensure that the financial statements reflect the correct value and the chances of loss of consumer confidence and failure reduces. This is true in case of Lehman Brothers as disclosing the actual condition of asset backed securities would have helped to receive consumer support and the fall in the financial market would not have been so strong which would have helped economy. Auditors are is a state where they are able to understand the manner the different tools can be used for the development of business and will thereby enable to ensure that the business is able to move forward. Auditors thereby have a role to play in the performance of the organization as auditors have the requisite knowledge which will help business to take decisions which are correct. Since, auditors look to follow a systematic process so having auditors performing the function will increase the efficiency and ensure that the business is able to get better results. References ASA. 2006. ASA 610 Considering the Work of Internal Audit. Auditing & Assurance Standards Board. Austrialian Government, Australia ASA. 2009. ASA 610 Using the Work of Internal Audit. Auditing & Assurance Standards Board. Austrialian Government, Australia Barlev, Y. & Haddad, T. 2003. Fair value accounting and the management of firm. Critical perspective on accounting, Australia Taxation Board, Australia Desai, V., Roberts, R. & Srivastava, R. 2005. A Conceptual Model for External Ausditor Evaluation of the Internal Audit Function Using Belief Function, Deakin University, Australia Eisenhardt, M. 1989. “Agency Theory: An Assessment & Review”. Academy of Management Review, Volume 14, Issue 1, page 57 Fama, Eugene, & Jensen, M. 1983. “Agency Problems & Residual Claims”. Journal of Law & Economics, Volume 26, page 327-349 Griffiths, D. 2006. Risk Based Internal Auditing: Three Views on Implementation. Standards Australia. Loui, M. 2009. Ethics & Social Responsibility for Auditors. University of Illinois. The New York Times Company Moroney, C. 2011. Auditing A Practical Approach: .Wiley Publication Nicholson, M. 1998. “Applying Agency Theory and the concept of corporate governance”. retrieved on March 25, 2012 from http://www.lotsofessays.com/viewpaper/1706098.html Petrick, J. & Scherer, R. 2004. The Enron Scandal & the Neglect of Management Integrity Capacity. Mid American Journal of Business, 18 (1), 37 – 49 RMS. (2006). Internal Quality Audits: What they are and how to carry them out. Institite of Chartred Accountants in Australia, Australia Seeger, M. & Ulmer, R. 2004. Explaining Enron: Communication & Responsible Leadership. Management Communication Quarterly, 17 (1), 58 – 84 Read More
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