(a)  Objectives
The main objective of internal audit is to improve a company’s operations, primarily in terms of validating the efficiency and effectiveness of the system of internal control of a company.
The main objective of the external auditor is to express an opinion on the truth and fairness of the financial statements, and other jurisdiction-specific requirements such as confirming that the financial statements comply with the reporting requirements included in legislation.

Reporting
Internal auditor’s reports are normally addressed to the board of directors, or other people charged with governance such as the audit committee. Those reports are not publicly available, being confidential between the internal auditor and the recipient.
External auditor’s reports are provided to the shareholders of a company. The report is attached to the annual financial statements of the company and is therefore publicly available to the shareholders and any reader of the financial statements.

Scope of work
The work of the internal auditor normally relates to the operations of the organisation, including the transaction processing systems and the systems to produce the annual financial statements. The internal auditor may also provide other reports to management, such as value for money audits which external auditors rarely become involved with.
The work of the external auditor relates only to the financial statements of the organisation. However, the system of internal control of the organisation will be tested as these provide evidence on the completeness and accuracy of the financial statements.

Relationship with company
In most organisations, the internal auditor is an employee of the organisation, which may have an impact on the auditor’s independence. However, in some organisations the internal audit function is outsourced.
The external auditor is appointed by the shareholders of an organisation, providing some degree of independence from the company and management.

(b)  Assistance with financial reporting (no finance expertise)
The executive directors of Apex Ltd do not appear to have any specific financial skills – as the financial director has recently left the company and has not yet been replaced. This may mean that financial reporting in Apex Ltd is limited or that the other non-financial directors spend a significant amount of time keeping up to date on financial reporting issues.
An audit committee will assist Apex Ltd by providing specialist knowledge of financial reporting on a temporary basis – at least one of the new appointees should have relevant and recent financial reporting experience under codes of corporate governance. This will allow the executive directors to focus on running Apex Ltd.

Enhance systems of internal control
The board of Apex Ltd do not necessarily understand the work of the internal auditor, or the need for a system of internal control. This means that internal control within Apex Ltd may be inadequate or that employees may not recognise the importance of a system of internal control within an organisation.
The audit committee can raise awareness of the need for a good system of internal control simply by being present in Apex Ltd and by educating the board on the need for sound controls. Improving the internal control ‘climate’ will ensure the need for internal controls is understood and reduce control errors.

Reliance on external auditors
Apex Ltd’s internal auditors currently report to the board of Apex Ltd. As previously noted, the lack of financial and control expertise on the board will mean that external auditor reports and advice will not necessarily be understood – and the board may rely too much on external auditors.
If Apex Ltd report to an audit committee this will decrease the dependence of the board on the external auditors. The audit committee can take time to understand the external auditor’s comments, and then via the non-executive director, ensure that the board take action on those comments.

Appointment of external auditors
At present, the board of Apex Ltd appoint the external auditors. This raises issues of independence as the board may become too familiar with the external auditors and so appoint on this friendship rather than merit.
If an audit committee is established, then this committee can recommend the appointment of the external auditors. The committee will have the time and expertise to review the quality of service provided by the external auditors, removing the independence issue.

Corporate governance requirements – best practice
Apex Ltd do not need to follow corporate governance requirements (the company is not listed). However, not following those requirements may start to have adverse effects on Apex Ltd. For example, Apex Ltd’s bank is already concerned about the lack of transparency in reporting.
Establishing an audit committee will show that the board of Apex Ltd are committed to maintaining appropriate internal systems and providing the standard of reporting expected by large companies. Obtaining a new bank loan should also be easier as the bank will be satisfied with the reporting standards.

Given no non-executives – independent advice to board
Currently Apex Ltd does not have any non-executive directors. This means the decisions of the executive directors are not being challenged by directors independent of the company and with little or no financial interest in the company.
The appointment of an audit committee with one non-executive director on the board of Apex Ltd will start to provide some non-executive input to board meetings. While not sufficient in terms of corporate governance requirements (about equal numbers of executive and non-executive directors are expected), it does show the board of Apex Ltd are attempting to establish appropriate governance systems.

Advice on risk management
Finally, there are other general areas where Apex Ltd would benefit from an audit committee. For example, lack of corporate governance structures and process means Apex Ltd does not have a risk management committee. The audit committee can also provide advice on risk management, helping to decrease the risk exposure of the company.