External auditors play a critical role in validating your company's finances. Potential lenders and investors often require externally audited financial statements before extending credit or providing funds for your business. If it is discovered that an auditor failed to detect material misstatements, it reflects poorly on the firm and the profession in general. For that reason, various accounting bodies release auditing standards and expectations to define the role of external audit firms.
The organization of audit firms has been a subject of debate in recent years on account of liability issues. In the USA, the external auditor also performs reviews of financial statements and compilation.
In review auditors are generally required to tick and tie numbers to general ledger and make inquiries of management. In compilation auditors are required to take a look at financial statement to make sure they are free of obvious misstatements and errors. An external auditor may perform a full-scope financial statement audit, a balance-sheet-only audit, an attestation of internal controls over financial reporting, or other agreed-upon external audit procedures.
Under statute, an external auditor can be prohibited from providing certain services to the entity they audit. This is primarily to ensure that conflicts of interest do not arise.
These rules also prohibit the auditor from owning a stake in public clients and severely limits the types of non-audit services they can provide. Difference from internal auditor[ edit ] Internal auditors who are members of a professional organization would be subject to the same code of ethics and professional code of conduct as applicable to external auditors.
They differ, however, primarily in their relationship to the entities they audit.
Internal auditors, though generally independent of the activities they audit, are part of the organization they audit, and report to management. Typically, internal auditors are employees of the entity, though in some cases the function may be outsourced.
They must also investigate any material issues raised by inquiries from professional or regulatory authorities, such as the local taxing authority. An investor or creditor, for instance, can not generally sue an auditor for giving a favorable opinion, even if that opinion was knowingly given in error.
The extent of liability to 3rd parties is established in general by 3 accepted standards: Ultramares, restatement, and foreseeability. Under the Ultramares doctrine, auditors are only liable to 3rd parties who are specifically named.
The Restatement Standard opens up their liability to named "classes" of individuals. While the Ultramares doctrine is the majority rule, to the relief of many new and budding accountants pursuing an auditing career! The foreseeability standard will not likely be widely adopted anytime soon because the cost time and financial of litigation would be enormous.
CFOs, company accountants, and other employees are not provided the same luxuries of the doctrine of privity.
Their material actions and statements open them and their companies up to liability from third parties damaged by relying on these statements.RG Licensing: Internal and external dispute resolution. Issued 31 May This guide explains what AFS licensees, unlicensed product issuers.
Susan Schniepp, distinguished fellow at Regulatory Compliance Associates, discusses the value of internal audits and how the information gained can be applied.
External financial auditors perform their work on a sample basis and do not test every transaction, so they can’t be expected to catch all fraud or errors. Instead, your government’s management should design, implement, and maintain internal controls to limit unauthorized transactions in financial statements.
Internal auditors are responsible solely to the company’s senior management. A Closer Look. An internal audit is designed to look at the key risks facing the business and how the business is managing those risks effectively. It usually results in recommendations for improvement across departments.
PepsiCo uses an annual survey of about senior executives to demonstrate the condition of its control culture.
Conducted by the company’s internal auditors, the questionnaire probes hiring. The importance of the external auditors seems to be well-appreciated in Nigeria. Of the four corporate governance codes presently in force in Nigeria, three of them have provisions regarding external auditors.