Role of Internal & External Auditors in Accounting

Following Free Online Accounting Training Class will help you to understand:

  • Role of Internal & External Auditors in Accounting
  • What is Internal Auditing System
  • What is External Auditing System
  • Meaning of Internal & External Auditors
  • Task & Responsibilities of Internal & External Auditor in Accounting

Accounting is an information system which needs to evaluate and examine on regular basis. The evaluation process and the inspection are done by the auditors who check and provide assurance that the accounting system is continuing properly as planned which resulting the financial statements of any company for recording and presenting an accurate and genuine financial performance of the company. Auditors provide guarantee to the management and stockholders about proper functionalism and systematic process of the internal control system. Auditors also provide assurance that financial statements of that company consists of fair and authentic financial performance of the firm. There are basically two types of auditors who are appointed in any economic entity by the management. They are

  • Internal auditors
  • External auditors.

Internal Auditors:

Almost every large organization is enriched with internal auditors. Internal auditors are independent group of experts who are involved in controlling process, accounting system, and operational activities. The basic purpose for appointing the internal auditors is to observe the operating outcome and financial records, estimate internal controls, assist with increasing the efficiency and effectiveness of operations. Sometimes the internal auditors also can identify the fraud of that company who could be proving as huge risk factor. The audit manager basically reports to the top level management and to the audit committee of the board of directors. By presenting independent evaluations of an organization’s internal controls and evaluating the reports, the internal auditors work as safeguard in the reporting process of financial statements. There could be dishonest or fraud employees in the company but if they are aware that internal auditors evaluate and review operational activities and reports then they less likely to manipulate records as their dishonest act or actions could be exposed by the evaluation of the internal auditors.

The responsibilities and tasks of internal auditor’s may vary based on the nature or size of the organization. For example some organizations may have one or two internal auditors who only review and examine the financial records or internal controls. Reversely, other organizations may have a large number of auditors whose responsibilities are huge. Such as they search and investigate for fraud; provide their effort to improve operational efficiency and effectiveness and give assurance that their organization is following various laws and regulations. If any has a skilled group of internal auditors then that company may face fewer financial reporting problems comparing to the other companies who do not occupied with internal auditors. In 80s many savings and loan industry went bankrupt because of lack of internal auditors. In many companies, if managers are cooperative with fraud they less likely to appoint internal auditors, because internal auditors become barrier for management to manipulate financial statements.

External Auditors:

External auditors have proved as the best safeguard in the financial reporting system. Generally external auditors evaluate or inspect the financial statements of any organization in order to identify whether these financial reports are accordance with the principles of generally accepted accounting principles and there is no any material misstatement. External audits are performed by certified public accounting (CPA) firms and CPA audits are required by the Securities and Exchange Commission and the major stock exchanges for those companies whose stock is publicly traded. Some private companies also appointed CPAs to perform audits of their financial statements. The financial reports of some financial institutions like banks, leasing companies need to audit regularly which also encourage the users of financial statements. To perform audits the external auditors are basically required by generally accepted auditing standards (GAAS) to give logical guarantee about the absence of fraud or any misstatement in the financial statements as they are risk factor for any company. But it is not possible for external auditors to examine each and every financial transaction of any organization and to detect the collusive management deception, thus the external auditors are unable to provide assurance that all financial statements are correct. The auditors can only give the assurance about a fair and genuine financial statement. Now a day’s CPA audits of financial statements have become very significant part in the large companies’. As the audit process could be different and vast in the large companies comparing to the small companies. CPA audits ensure the smooth operation of any organization and help to provide fairly recorded financial statements.