Auditing Theory and Practice 1: Internal Controls and Share Prices

This report examines auditing theory and practice, focusing on internal controls and financial reporting. It analyzes the differences between internal control and internal control over financial reporting, discussing the benefits of effective internal controls for stakeholders, including accurate financial reporting and compliance with regulations, particularly in the context of Australian companies. The report explores the impact of internal control weaknesses on share prices, market volatility, and information risk, providing insights into the negative effects of deficiencies in internal controls. The report discusses the primary beneficiaries of internal control reporting, including shareholders and investors, and the importance of financial reporting for investment decisions. The conclusion emphasizes the critical role of internal control in achieving operational efficiencies, reliable financial reporting, and maintaining balance within a company. The report also suggests that Australia should implement similar requirements to address gaps in accounting systems.

Running Head: Auditing Theory and Practice
Auditing Theory and Practice
Name of the Student
Name of the University
Author’s note

1Auditing Theory and Practice
Table of Contents
Introduction.................................................................................................................................................1
Discussion...................................................................................................................................................2
Solution to question A.............................................................................................................................2
Solution to answer B...............................................................................................................................5
Solution to question C.............................................................................................................................7
Conclusion...................................................................................................................................................9
Reference list.............................................................................................................................................10

2Auditing Theory and Practice
Introduction
Auditing Theory is a systematic and independent evaluation relating to books, accounts, statutory
records of a company. Stakeholders effectively examiner and improve the performance of risk
management and governance of the concerned matter. The report is focused on analyzing differences
between internal control and the internal control in financial reporting prospect. The significant difference
has been discussed with a focus of determining the variable in implementing the factors within the firm
on maintaining the format effectively. The primary beneficiaries aligned in concern to public reporting on
the purpose of internal control. The primary benefit has been discussed upon financial reporting,
installation of requirement highlighted on the report whether firms in Australia shall apply the similar
technique. Negative assurances in report focusing on the internal controls discussed on how the share
prices are going to affect the market. Analyzing the nature of deficiency attributed to potential effect
causing on share market price of the country. The types of defects associated with the negative impact of
share prices in the market discussed efficiently.
Discussion
Solution to question A
Internal control
The auditing standard is applied to entities who are associated primarily performs auditing of the
entity. Internal control in this aspect helps to review the performance of employees who are assigned to
this task. Determining the best criteria applicable in context of analyzing the common threats associated
in the market (Tidd and Bessant. 2018). Involving matters about engagement included within the content.
Associating with particular length of services concerning on participation in considering within the
company. Internal controls take care of safeguards which assigned as common threats by maintaining the
control over the quality of the reporting.
Auditing sectors involved in considering the framework which thrives on maintaining the
measures where internal controls required in analyzing how much the auditors are independent while
performing in public areas. There are possible threats regarding the independence which is associated in
the market; internal controls are allotted to measure the risk and to control it correctly. Complexity is
generalized in the factor which issues significant in regards to the size concerning the full range of
shareholders (Hyndman and Athanasopoulos. 2018). Focusing on expanding the quality regarding
procedures and rules imparted for fixing up the problem. The legislation is established in concern to the

3Auditing Theory and Practice
appointments made in focusing on maintaining a positive platform to curb miscommunication between
the employees and shareholder of the company. Internal control is useful in context to aid the entity
regarding the engagement, which is obtained through rotation in dealing with requirements emphasizing
on listing objects.
Internal control over financial reporting
The process which involved for designing to ensure the compliances in referring to policies
practiced within the organization. Referencing to the framework, it was developed during the 1990s
performed by the Committee of Sponsoring Organizations. Internal controls conclude mainly three types
of financial reporting.
1. Controls, which affect the operations within company, consist of an adequate number of activities
attributed within the segment of framework maintained by the entity.
2. Internal controls are affected by laws and regulations of the company
3. There are specific controls which affect the financial reporting of the company.
The controls which are functioned upon addressing the financial report of the company, focus upon
internal controls involved within certain levels attributed upon implementing the components in it. It is
managed on a day-to-day basis. The top-level environment is focusing on controlling ethical elements
such as "tone at the top", effectiveness inscribed of the auditing committee of the boards
(afgonline.com.au. 2019). They are mainly focused on higher-level oversight of financial reporting. It is
the component which is defined as Control environment. Risk assessment concentrates on different types
of process and data points in the financial reports of the company. There are certain areas which are
considered as higher suspect able areas because it is quite vulnerable to fraud.
Significant instances between internal control and internal control over financial reporting
Internal control of auditing is focused on auditing sectors of the company, which is a function that
is performed at précised times. It is an attribute performed in the company, which has a better
understanding of the risk faced by them particularly (Weng et al. 2018). Controls, which are available in
the system for solving the risk those, are effective. However, the job of internal auditors is not entitled to
the position in identification of hazards, and they are not allowed to determine the controls which are
useful in the organizations.

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Internal control is usually an ongoing system which mainly involves with the procedure. Policy
measurement is designed to signify objectives which are focused by the entity to achieve the target
(Chalmers, Hay and Khlif. 2019). Different companies enable operational management functions for
acquiring the responsibility prescribed by internal controls. Usually a checklist is involved during several
times in terms of analyzing the system. However, internal control is the process which is inherited by
them to verify all on-going structures correctly.
Solution to question B
The primary beneficiaries who are involved in the process of preparing a report on assurance over
internal control associated in respective companies. They are benefited with generating effectiveness and
maintaining the efficiency of the business. Reasonable assurance designed in this method and achieving
objectives in a company. Rules and regulations applied into compliance towards internal control of the
company.
The prime benefits of reporting are applicable by which organization is effected by rendering the
degree of responsibility to everyone. It helps employees regarding the department-level, who is primarily
responsible in the context of internal controls within the company (Verschuere et al. 2018). It helps in
achieving accurate financial reporting, which allows the company to identify its financial position
effectively. The primary benefits are pinpoint origins of internal checking and appropriate distention of
duties that are related to positive verification goals in company. Auditors are responsible for checking the
degree of adequacy concerning the internal accounting control technique for designing the auditing work.
Managerial responsibility on maintaining internal control is helpful in the context of following the law or
legislation in auditing practice (Borgstedt et al. 2019).
The concept is identified in defining the communication of published financial statements in the
company. The concept undergoes with associated information which is transferred to the third parties.
The third parties refer to the shareholders, creditors, customers and governmental authorities include the
ordinary people. Financial reporting also applies to total communication technique which involves the
organization as the issuer (Bushee, Gerakos and Lee. 2018). However, in this scenario, investors and
creditors are referred to as primary users constituting other external users. The concept also helps in
regards to the investment decision-making techniques and management accountability technique.
Investment decision making is the technique which helps provide useful information to the
investors, creditors and regular applicants. The investment procedure is discussed in financial reports
which allow the external users to understand about the financial scenario.

5Auditing Theory and Practice
Management accountability is considered as the basic concept, which mainly provides
information by utilizing the data and resources available in the company. Sale keeping of enterprises is
the concepts in constituting the efficiency and enabling proper usage of the technique.
Australia must be utilizing this concept which will help them in controlling the internal factor. This
segment generally helps them to analyze internal control which is usually an ongoing system. However,
structure mainly involving the procedure polices measurement designed to signify objectives which are
focused by the entity to achieve the target (Becker et al. 2018). Different companies enable operational
management functions for acquiring the responsibility prescribed by internal controls. The feature is
usually a checklist that is being involved during several times in terms of analyzing the system. It helps in
understanding various policies and procedures needed for companies to adopt so that it ensures the
adequate effect of controlling the organization by the managers. The technique also helps in assigning
strategies to companies, which will prevent in terms of detecting frauds, errors.
On the other hand, they will aid to develop the accuracy and completeness of the accounting
standards. It will be useful for the organization in terms of making on-time preparation of secure financial
information. Director's responsibility statement is helpful in the context of establishing a proper degree on
adequate and operating solutions effectively.
These are the standards by which Australian companies will find it helpful to bride the needs and
requirement in the market-place.
Solution to question C
Negative affect of share prices
To achieve corporate objectives, the company is required to maintain internal controls effectively
so that the results will disclose the performance measured in the field of accounting. However, if there is
a specific weakness in controlling, then it will directly hurt objectives of the company (Huang and
Mazouz. 2018). Stock prices can affect due to improper directions towards internal control. Internal
control is the specification which is a fundamental and dynamic process that maintain to adopt the
continuous changes occurring in the organization. It also involved during process inheriting situations
which are mainly engaged in the cause of controlling the effectiveness of profitability in the organization
(Bernanke et al. 2018). Cash risk for improving the efficiency of firms is disclosed as internal control
weakness where itself firms in Australia are primarily associated with adequate internal controls. The
stock price cash is falling downwards, where the disclosure gets quite lower. The initial exposure is the

6Auditing Theory and Practice
associate effect of incurring more degree of stock price cash concerning internal control weakness within
the company (Hu et al. 2019).
In comparison to the cross-sectionals segregation involved in stock markets which is volatile in
nature returns do not come as much it is expected by investors. It constitutes higher market reactions.
Internal control deficiency will increase market penalty quite higher. If internal control problems are
curbed effectively, then it will help to reduce market volatility quite effectively (Colonnello, Efing and
Zucchi. 2019). This type of relation is easily dependent in aligning to the kinds of segments. Companies,
when revealing their problems regarding the internal control deficiencies, unknown return to stock is
aligned negatively to the particular changes in market uncertainty. However, changes in the negative
impact of the changes stay intact by getting returns on the abnormal stock. An alternative solution in this
context for removing uncertainty in the market is done by using earning forecast dispersion. According to
the financial accounting standard, firms can improve their concept of reporting and enhance more data
where shareholders and investors are mainly interested in the standard. Information risk arises from poor
communication from the cost of capital of the firm. Cost of capital can reduce by dropping the risk
premium of a company.
Stock prices in the market reduce due to specific trends which participate in the market. The
number of agents who are interested in purchasing and selling securities in two ways, either they go for
direct selling in the market place. Another option is considered when they involve indirect buying or
selling from the market. Market volatility is another reason which relates to lowering the value of stocks.
When investors decide to pull out shares from the market due to inflation, stock prices go down until they
again invest in the market.

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Conclusion
It can be concluded from the above discussions that internal control is crucial in any firm, which
helps them to balance the system. Internal control helps to achieve the objectives in operational
efficiencies and effectiveness. The attribute helps to perform reliable financial reporting by maintaining
proper laws and procedure. The similar requirement must be implementing in Australia, which will aid
their fundamental gaps within the accounting system of numerous companies. The reaction in the stock
market due to an improper way of utilizing internal control is discussed. The degree of potential effect on
share prices based on this situation is identified in this report appropriately.

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Reference list
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Environmental Reporting: A Longitudinal Analysis of German DAX Companies’ Disclosed
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of Accounting and Economics, 65(2-3), pp.358-379.
Chalmers, K., Hay, D. and Khlif, H., 2019. Internal control in accounting research: A review. Journal of
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Verschuere, B., van Ghesel Grothe, S., Waldorp, L., Watts, A.L., Lilienfeld, S.O., Edens, J.F., Skeem,
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