Audit Assurance: Enhancing Internal Controls and Governance Processes

This report discusses the importance of internal audit functions within organizations, particularly in the context of enhancing internal controls, risk management, and governance processes. It references the guidance provided by the International Auditing and Assurance Standards Board (IAASB) and corporate governance principles, highlighting the benefits of internal audit in improving internal processes and supporting business expansion. The report analyzes the applicability of these principles to Oliver Trading, a company considering business expansion and potential listing on the stock exchange. It addresses concerns about the value and relevance of internal audit, emphasizing its role in providing independent reviews and recommendations for improvement. It also critiques the suggestion of using external auditors for internal audit functions, citing conflicts with regulatory provisions. The report concludes by recommending that Oliver Trading implement internal audit functions to benefit from enhanced internal controls and governance, especially during a period of growth and change. Desklib provides access to similar past papers and solved assignments.

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student:
Name of the University:
Authors Note:

1AUDITING AND ASSURANCE
Contents
Review of internal controls and suggestions to strengthen these controls:.....................................3
Identification and monitoring risks:.................................................................................................3
Independent appraisal of internal and governance processes:.........................................................4
Expansion of business:....................................................................................................................4
Applicability of principles and practices of internal audit to Oliver Trading:................................4
Recommendations:..........................................................................................................................7
References:......................................................................................................................................8

2AUDITING AND ASSURANCE
International Auditing and Assurance Standards Board (IAASB) provides guidance to the
organizations as to whether they should have internal audit functions or not. The quality of
internal audit and the internal audit functions often make huge difference to the overall functions
and operations of corporate entities and business organization. An internal audit function
provides independent reviews of internal controls and functions of organizations along with
suggestions to strengthen the internal controls and improve the operations of the organizations.
Internal audit is concerned with financial, non-financial control environment, internal processes
within the organizations for different operations within the organization and governance
processes.
Corporate governance principles and recommendations states that a listed entity should
have internal audit functions and in case any such entities does not have internal audit functions
they must explain the reasons for not having such internal audit functions. In addition such
entities must explain how the risks and internal control processes within the organization are
managed, evaluated and improved without internal audit functions.
It is important to understand that internal audit and external audit are completely different
from each other must be conducted by different auditors. External auditors are responsible to
conduct an audit on the financial statements to express their opinion on these statements as per
the International Auditing Standards. Internal auditors on the other hand provides an independent
review of the internal processes, controls and operations to suggest ways and method to improve
these and subsequently the financial performance of the companies. It is not compulsory for the
companies to have internal audit functions however, with the increase in size of entities it is

3AUDITING AND ASSURANCE
desirable to have internal audit functions to improve the quality of internal controls, processes
and operations of the organizations. In fact stock exchange has recommended the listed
companies to have internal audit functions to improve the internal controls and processes within
the organizations. In case listed entities do not employ internal auditors then the entities must
explain the reason for such decision of not having internal audit functions and how the internal
controls and processes are managed by these entities.
The reasons that entities should have internal audit functions can be understood from the
benefits that are expected to accrue from internal audit functions to an organization. An
organization will have number of benefits from internal audit functions; these are explained
below:
Constant review of internal processes and suggestions for improvement: Internal audit functions
constantly review the internal processes to assess whether these are in accordance with the
objectives of the organization. Internal processes help an organization to achieve its objectives
thus, these must be effective and efficient. Internal audit function will help an organization to
improve the quality of internal processes by providing suggestions on these processes based on
the findings from the review.
Review of internal controls and suggestions to strengthen these controls:
Internal auditor reviews the internal controls within the organization to assess whether
these are appropriate for the risk within the organizations. Based on the assessment of the
internal controls the auditor provides suggestions to improve these controls to make these more
effective.

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Identification and monitoring risks:
Internal audit function identifies risks within the organization and monitor these risks to
assess whether the internal controls instituted within the organization by the management are
capable of managing the threat of risks effectively from damaging the internal processes and
operations. Based on the review the internal auditor recommends the management necessary
steps to improve the quality of internal controls to manage the risks effectively. Thus, monitoring
and managing risks become far more effective subsequent to internal audit function.
Independent appraisal of internal and governance processes:
Internal audit function independently review the governance processes of an
organization. Based on the findings from such review internal auditors provide suggestions to the
management to improve the governance processes. This helps the management to govern and
manage and organization better in the future (Steinbart, Raschke, Gal & Dilla 2018).
Expansion of business:
In case the business is looking to expand its operations there bound to be number of
challenges that the organization will face. Internal audit function will help an organization by
improving the quality of internal processes, controls and governance processes to help in
successfully implementing the expansion strategy in the future.
Applicability of principles and practices of internal audit to Oliver Trading:
In this case the Oliver Trading is expected to have 100 employees within in next three
years where as at present the organization has merely 50 employees. The management is looking
to expand the business of the organization. Assuming that the scale of operations of the
organization will also be doubled by the end of year 2020. The following forecasting income

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statement can provide significant idea as to scale at which the organization will operate by the
end of year 2020.
Particulars Amount
($)
Amount
($)
Expected sales (180000 x 200%) 360,0
00.00
Expenses
Advertisement (Assuming fixed cost) 1,0
00.00
Cost of goods sold (65000 x 200%) 130,0
00.00
Rent (Assuming fixed costs) 4,2
00.00
Salaries and wages (55000 x 200%) 110,0
00.00
Other (17460 x 200%) 34,9
20.00
280,1
20.00

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Net income before taxes 79,8
80.00
Less: Taxes @30% (79880 x 30%) 23,9
64.00
Net income after tax 55,9
16.00
As is already clear from the facts of the case that David Oliver is looking to expand the
business of the company by diversifying into new markets and different industries. The company
would be able to extract number of benefits from internal audit function as mentioned earlier in
this document. Since David is also considering listing the company on to the stock exchange
thus, it will be liable to explain to the Corporate Governing body in the country about not having
an internal audit function in case the company decides to not have the internal audit function as
suggested by Emma Oliver to David in her email. The observation of Emma is completely out of
place where she suggests that internal audit function is a waste of money as the methods are old
fashioned. Institute of Internal Audit always looks to improve the quality of internal audit by
incorporating modern methods and processes to it. Internal audit function will independently
review the internal processes, governance processes and internal controls to improve these for
the benefit of the company. Thus, the company will be benefitted immensely from the
suggestions of the internal auditors especially at the time of expansion of business (Demirakos
2018).

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Also the bizarre claim of Emma to conduct internal audit of the company by the external
auditor Pure and Fair is completely against the provision of the Corporations Act. The act
mentions that external auditor shall only conduct external audit of a company and at no cost shall
be involved in the internal auditing and internal processes of the company.
Recommendations:
Thus, at a time of growth and change the company would be benefitted immensely from
internal audit functions and thus, should have internal auditors to conduct the internal audit of the
company. The observations made by Emma about internal audit are completely wrong and
without any basis.

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References:
Demirakos, E. (2018). Internal Auditing: Assurance and Advisory Services, UL Anderson, MJ
Head, S. Ramamoorti, C. Riddle, M. Salamasick, PJ Sobel, The Internal Audit Foundation
(2017), 627 pages, $199.99, ISBN: 978-0-89413-987-1.
Steinbart, P. J., Raschke, R. L., Gal, G., & Dilla, W. N. (2018). The influence of a good
relationship between the internal audit and information security functions on information
security outcomes. Accounting, Organizations and Society.