Auditing and Assurance 1: Identifying Risks and the Auditor's Role

This report delves into the critical aspects of auditing and assurance, focusing on the usefulness of internal controls and information systems in identifying control risks within a company. It emphasizes the importance of accountability, data integrity, and the consequences of inadequate controls, referencing best practices for system access, data security, and employee training. Furthermore, the report explores the role of an external auditor as an assurance provider, detailing the auditor's responsibilities in analyzing financial statements, detecting fraud, and providing opinions on the fairness of financial reports. The report references the Freddie Mac scandal as a case study, illustrating how external auditors assess risks, address misstatements, and ensure the accuracy of financial information for stakeholders. It also covers the legal liabilities of external auditors and the importance of independence and objectivity, with emphasis on the steps auditors take in identifying and addressing potential risks, including discussing issues with audit team members and investigating unusual relationships identified during audit procedures.

Running head: AUDITING AND ASSURANCE
AUDITING AND ASSURANCE

AUDITING AND ASSURANCE 1
Question
(i).Usefulness of internal controls and information systems in identifying the control risks of the
company.
Internal control plays a major role in a company's success. The internal audit is needed for the
expansion and for controlling the risks of the company, for studying the importance we need to
understand the need to analyze the extent of an internal control system which will be best suited for
our business.
We need to analyze the environment for controlling and for the assessment of risk, information and
the communication, monitoring and controlling the activities review.
Internal control and information system is useful in identification of controlling risks through the
internal control practices and handling the electronic information and the technology appropriately.
When the proper accountability exists you have to access to the electrical and the personal
information for their privacy.
Best practices to follow these are:
 Limit the system of business and the data access to the appropriate users
 Put some privacy policies or security on the emails, Web browsing and on the electronic
communication
 Determining the approval hierarchies and appointing a departmental security administrator
(DSA)
 Implementation of the security measures for protecting the access to electronic resources and
the private information according to standards of IS-3 and PPM 135-3
 Accessing and securing by communicating and coordinating with the IT services.
 Training the employees in accessing the computer, by securing the data and using the
appropriate use of information.
 Addressing the suspected access and the security violation according to CIRT process.

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Consequences that can occur if accountability does not exist:
 Misusing of the information
 Identifying the threat
 Improper use of university assets
 Damaging the image of the public
 Legal actions can be taken
Reconciliation confirms that the transaction are being correctly recorded. The best practices used for
reconciliation by ensuring the data integrity by the validation of data with a data warehouse or the
financial link tools or the reporting models.
Follow the retention schedule and the data retention requirements
Periodically reviewing the information that is being stored in the electronic or paper format.
If the review and reconciliation is not performed the consequences occurred are the errors,
discrepancies or the irregularities are undetected
Inaccurate and incomplete official records
Improper accessing to the business system and data.(Knechel, W. R.,2016)
(ii.) Role of an external Auditor as an Assurance Provider
An external auditor performs an audit as per the specified laws made by in the company’s Act
1981 and as per the amendment act of 2013 they use to analyze the financial statements of the
companies, firms, government entities, other entities, organizations.The example of the actual
company charged with accounting fraud is FREDDIE MAC SCANDAL(2003) in which the earning 5
million dollars was misstated.For settling down their case they have paid 50 million dollars to settle
their misstatement fraud of earnings. The role of the external auditors was to identify the annual
accounts that has been audited by the internal auditors and the financial report framework is to be

AUDITING AND ASSURANCE 3
analyzed that has been used for the preparation of the financial report and describing the scope of the
audit and the standards of auditing that has been used in conducting the audit.
The external auditors have to make the fair and true balance sheet as per the accounting standards
about the affairs of the company.
They also have to provide the profit & loss and the other income statements which is containing the
operating income of the company.
The individuals who have made the reports such as the government agencies, the general public and
the investors have to answer the external auditor for the incorrect or unrelated information present in
the reports. (Bédard, J., &Compernolle, T, 2014)
As per the case, FREDDIE MAC SCANDAL they have taken some steps for the identification of risk
and which th external auditors had took for the case mentioned above
They have addressed their reports to the shareholders of the company. The external auditors give the
reviews on the financial statements and aspect the frauds that the company is doing and show the clear
position of the companies to its shareholders. They use to perform the auditing of the financial
statements, balance sheet auditing, statement that the internal controllers made or use to check it
according to their procedures.
By the auditing, they find the company to be good in respect to their financial position they use to
assure the company.
Since it is the responsibility of the external auditor to detect the fraud and bring in front of the
shareholders as they can be investing in the company which is not good for them to invest but before
showing their position to the shareholders they give the first warning to the management if they are
not able to cope up with their issue and try to ignore their suggestions they can directly take any step
for it.

AUDITING AND ASSURANCE 4
Their external auditors are liable to the third party as according to their audited reports the
shareholders invest in that particular company. In short, the risk of the unclear reports of auditors is
limited by the doctrine of privity according to this doctrine a creditor or an investor can not directly
sue the auditor by saying that they have only relied on their opinions. If this doctrine was not made
that it will be very difficult for the external auditors to survive. This doctrine is made by the three
accepted standards:
 Restatement
 Doctrine of ultramarines
 Foreseeability
External auditors also use to undertake the assignment of the consulting managements, but under
the statue, they are not allowed to provide the services to those entities in which they use to audit.
This is to ensure so that the conflicts don't arise. The main role of the external auditors is to
provide the opinion for the financial statement if it is real or not. So by analyzing the reports if
they feel everything is real then they use to provide a clear chit to the company which is the
assurance for the company. That is why it is said that the external auditor acts as an assurance
provider.(Ojo, M,2014)
When the risk is identified in the company the external auditor must discuss the issue regarding the
misstatement or any other with the other audit team members.
Inquiring the other members of the organization about their views how the fraud being addressed
Consider any unusual or unexpected relationship that have been identified in analytical procedure in
planning a audit.
Investigation of the unexpected period end adjustments or in the period end closing process.

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References
Knechel, W. R., &Salterio, S. E. (2016). Auditing: Assurance and risk.Taylor & Francis.
Peltier, T. R. (2016). Information Security Policies, Procedures, and Standards: guidelines for
effective information security management. CRC Press.
Schroeder, J. H., &Shepardson, M. L. (2015). Do SOX 404 Control Audits and Management
Assessments Improve Overall Internal Control System Quality?. The Accounting Review, 91(5), 1513-
1541.
Soh, D. S., &Martinov-Bennie, N. (2015).Internal auditors’ perceptions of their role in environmental,
social and governance assurance and consulting. Managerial Auditing Journal, 30(1), 80-111.
Bédard, J., &Compernolle, T. (2014).The external auditor and the audit committee.
Ojo, M. (2014). Role of External Auditors in Corporate Governance and Financial Reporting: Capital
and Liquidity Requirements, and the Finance Theory.