Interrelationship Between External Auditor, Internal Audit Department and Audit Committee

Discussion on Interrelationship between External Auditor, Internal Audit Department and Audit Committee

1. Introduction

The objective of this essay is to examine the interrelationship of external auditors, internal auditing department and audit committee as a whole. Corporate collapse and corporate frauds in the early 20th century have brought increasing focus of the importance of auditing function as well as audit quality. However, some recent research over examination of the interaction of the three auditing functions tends to simply involve two auditing functions rather than taking them as the tripartite. Thus, our study seeks to provide a more holistic reflection on based on prior researches.

The remainder of the essay is structured as follows. The next section explains the principal functions of external auditors, internal audit department, and audit committee. The interrelationships among these three auditing functions are addressed in the subsequent sections. Conclusion is presented in the final section.

2. Functions of external auditors, internal audit department and audit committee

2.1 External auditors

External auditor refers to a qualified professional who provide assurance services for clients, working on a fee for service basis. As the corporate watchdog of society, external auditors have the responsibility to review and monitor both external financial and non-financial accountability reports provided by the client and to enhance the degree of confidence of potential users. Despite a widening role due to the development of auditing standards, such as reporting on legal requirements or corporate responsibility reports, the main role of external auditors is to independently convey a true and fair view of financial statements of the entity.

2.2 Internal audit department

In contrast to external auditors, internal audit department consists of employees within the organization who are independent from the rest of the entity. As the internal corporate watchdogs, internal auditors monitor and perform audits on both financial and non-financial data, report directly to the board or audit committee and consequently assist with management. Similarly, the functions of internal auditors have also been broadened, including evaluation of controls over financial and operating information, review of corporation’s compliance of laws and regulations, and assessment of potential risks. Internal auditors are, particularly in relation to assessing risks, expected to go beyond merely interpreting past existing data to add sufficient value to entities’ risk management as a whole subsequent to series of corporate collapses and the introduction of the Sarbanes-Oxley Act of 2002.