Internal & External Audit Process

This Free Online Accounting Lecture on Internal & External Auditing Procedure will help you to learn:

  • Auditing Procedure
  • Internal Audit Process
  • External Audit Procedure
  • Functions of Auditing

Sometimes management is responsible for providing the assurance of the internal control system with its proper functionalism. Internal auditors provide an evaluation regarding the process of internal control which refers that the controls are working accurately. The inter control is also required by the external auditors, because they revise the internal control system to observe whether they can use it to perform their audits. After evaluating the process of the internal control system, if the result is satisfactory, it provide an assurance that financial statement is fairly presented. The external auditors also sometimes depend on the assessment provided by the internal controls which is prepared by the internal auditors. Both the auditors achieve assertion about the quality of the reporting process by using several different processes .These processes are: interviews, observation, sampling, confirmation, and analytical procedures. Most of these audit processes are used by both internal and external auditors, but some Auditing Procedures primarily used only by external auditors. The processes are described in details:

Interviews: Auditors take regular interview with the employees to make sure that all procedures are clear to them, appropriate documentation is being prepared by the employees, and right consent is acquired appropriately. By taking interviews, auditors also can specify the limitation in the control system, and these limitations will be examined and evaluated with testing procedures.

Observation: generally observation is made by the auditors to make sure that all employees are obeying with proper procedures and rules of the company, to validate the agreements with procedures and to provide assurance that the financial accounting records agree with physical records. For example, an auditor of a bank will calculate the amount of cash in a vault to ensure that recorded amounts must agree with the actual cash on hand. The availability of any inventory could be inspected by the auditors with a physical calculation of any product. Moreover, proper observation process is always useful to validate the existence of assets of any company.

Sampling it is not possible for the auditors to examine every transaction of the company. They only can provide the assurance that the financial reports are fairly recorded .The auditors will collect a sample of transactions to evaluate the transaction. They become ensure about the proper internal control procedures and reliable financial accounting based on the results of their analysis and evaluation of the sample. If the results are not satisfactory then the auditors examine the internal control system with testing procedure.

Confirmation: this process also requires external auditors. Confirmations are used to verify the balances in accounts which resulted from accounting transactions with outsiders. For example, most of the customers are often contacted and required to verify account balances. Banks are required to authenticate the amounts of loan, lines of credit, and other account balances. Confirmation procedure provides the guarantee about existence or availability of the financial statements.

Analytical Procedures: Analytical procedures work as a guidance to external auditors as they take effort to recognize those areas that may require concentration. Analytical procedures consist of the exercise of such techniques as comparative ratio analysis. Auditors may specify those areas where further analysis may be suitable by comparing the results of ratio analysis from one accounting period to the next accounting period. To complete the audit process the auditors make a report which support the financial statements and illustrate it to the users of accounting system in general terms. This report is prepared by the audit firm with an assurance that accounting rules were properly followed and the financial statements are fairly recorded and presented