- 20 Marks
Question
(a). During the audit of Tanko Company LTD, a manufacturer of plywood, it came to the External Auditor’s attention that the company was under investigation by the Environmental Protection Agency for breaches of environmental regulations. The company also recently came under adverse media reportage for doing little to restore the forest that is depleted as a result of their operations.
Required:
(i). Explain FOUR procedures that may be performed by the auditor to gather evidence about the possible impact of these developments.
(ii). What does the auditor do if there are no actual or suspected non-compliance matters? Justify your response.
(b).
Internal and external auditors often carry out their work using similar procedures. However, there are a number of fundamental differences between the two audit roles.
Required:
Distinguish between internal audit and external audit.
Answer
(ai)
- Understand the company’s applicable legal and regulatory framework through the audit firm’s knowledge of working with similar clients in the past.
- Understand and inquire of management concerning compliance with laws and regulations.
- Inspect correspondence with relevant licensing or regulatory bodies.
- Obtain an understanding of how management is made aware of actual or suspected noncompliance.
- Obtain reports from complaints or other similar processes, including hotlines, if applicable.
- Obtain audit evidence when compliance with laws and regulations has a direct and material impact. Read minutes of management and those charged with governance.
- Ascertain whether non-compliance with laws and regulations, including illegal acts, has occurred. Inquiring of the entity’s management and in-house legal counsel or external legal counsel concerning litigation, claims and assessments.
- Obtain written representations regarding instances of actual or suspected non-compliance with laws and regulations.
(Any four points well explained @ 3 marks each = 12 marks)
(ii). In the absence of any actual or suspected non-compliance matters, no further procedures are necessary beyond those performed to understand the entity and its environment, to identify actual or suspected non-compliance, and requesting written representations from management regarding the entity’s compliance with laws and regulations.
(b).
| Internal audit | External audit | |
|---|---|---|
| Duties and responsibilities | To examine systems and controls and assess risks in order to make recommendations to management for improvement. The internal auditor’s work program will therefore to a large extent be dictated by management. | To express an opinion on the truth and fairness of the annual financial statements. The external auditor will therefore carry out whatever work he deems necessary to reach that opinion. |
| Qualification to act | No statutory requirements management select a suitably competent person to act as internal auditor. It is therefore possible that the internal auditor may not be as competent as the external auditor, depending on management’s recruitment criteria. | Set out by statute. This ensures that the external auditor is independent of the entity and suitably qualified |
| Appointed by | Management. In order to give as much independence as possible the internal auditor should therefore report to the highest level of management. | The shareholders. This ensures independence. |
| Reporting | Typically reports to the audit committee or board of directors. Internal audit reports are usually internal documents meant for the organization’s management. | Reports to the shareholders or the public, depending on the organization’s structure. The external auditor’s report is part of the annual financial statements. |
| Frequency | Ongoing and continuous throughout the year. Internal audits are conducted periodically or as needed based on the organization’s risk assessment and audit plan. | Typically annual, aligned with the organization’s financial reporting cycle. The external audit is usually conducted at the end of the fiscal year to review the financial statements |
| Methodology | Uses a risk-based approach to determine audit priorities and procedures. Internal auditors may use various methods including interviews, document reviews, and testing controls. | Follows generally accepted auditing standards (GAAS) or international standards on auditing (ISA). Focuses on the accuracy of financial statements and compliance with accounting standards. |
(1 mark each for any 5 well explain points = 5 marks)
- Tags: Audit Differences, Auditor Roles, External audit, Internal Audit
- Level: Level 2
- Topic: Internal Audit and External Audit Relationship
- Series: MAR 2025
- Uploader: Samuel Duah