Auditing and Assurance: Internal Controls, Auditors, and Risk

This report delves into the critical aspects of auditing and assurance, exploring the significance of internal controls and the role of external auditors. It examines how internal controls are vital for identifying and mitigating control risks within a company, ensuring the accuracy of financial statements, and preventing fraud. The report highlights the responsibilities of external auditors in assessing financial reports, providing assurance to stakeholders, and detecting potential misstatements or fraudulent activities, referencing the Freddie Mac scandal as a case study. It also discusses the information system's role in understanding internal controls and operational risks. The report emphasizes the importance of both internal and external auditors in maintaining financial integrity and compliance with accounting standards.

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. There are many young accountants have
entered into their careers without knowing the importance of internal controllers. Before being an
accountant they should know the main feature of Internal audit that it use to control the internal risks
by analyzing the reports and detecting the issues that it may create in the near future.
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 can be described the assertion of financial statement and the controlling activity by its
nature.
The internal controllers use to cope with the difficult problems. The good internal control are
responsible for the following factors in resolving the risks of the company:
 They are responsible for the disclosure of the accounts transactions whether they are disclosed
properly at the end of the financial year or even keep the check at every month on the financial
statements which use to help the company in their disclosures
 They use to check the control on the transactions, i.e., only the authorized and valid
transactions are being processed due to which they don’t get any issues in future, when the
accounts are being checked by the external auditors.
 They should make sure that are liabilities should be very less than the assets of the
organization or assets are the rights of an organization and liabilities are the obligations of it as
per the date mentioned they should be received.

AUDITING AND ASSURANCE 2
 The transactions should be completely processed so that there is no issue for the provision of
the debtor or creditors to the large extent
 Transactions should be valued accurately by using the specified rules mentioned in the
scientific rules of finance and accountancy.
Activities of the internal controllers may include:
 Separation of the authorization, recording the roles to prevent fraud by any of the people.
 Some transactions are being reviewed by an appropriate person
 Maintaining the transactions that will surely suit to an organization (Schroeder, J. H.,2015)
Internal controllers play and important role in the prevention of the frauds and for any
misappropriation. They are required to perform a fraud risk assessment and use to access the
related controls. Their objective is to provide the reliable reports, compliance with the law, and
to follow the policies and procedure as per the accounting standards in recording the
transactions. This is the important aspect through which the resources are monitored, directed
and measured. (Peltier, T. R.,2016)
The unit of information system develops an understanding of internal as well as the
operational control and most importantly the knowledge of the organization which is basically
relates to the IS (information system) audit and assurance. Individuals can examine the risks
associated using the frameworks that provides guidelines, standards, tools and techniques for
the IS audit and control. This tools is developed for the better understanding of inherent risk,
controlling the risks and for the detection of risk. This IS also includes the critical analysis
skills in information management, problem solving skills in the identification of the relevant
information, interpreting the output in the multidisciplinary environment or in the skills of
negotiation.
They use to detect the fraud and try to protect the firm both assets (tangible assets) as well as
the intangible assets like reputation and the intellectual property rights like trademarks.

AUDITING AND ASSURANCE 3
The internal controllers play a role of management as well as the board of directors. Since they
are responsible for the overall responsibility of the firm for the implementation of the effective
internal control. Moreover, they are only responsible for the procedures as BOD are very
capable of handling all the issues by themselves.
So the internal managers are responsible for the internal controls and the risk assessment of the
company by identifying before it creates an issue.(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
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)

AUDITING AND ASSURANCE 4
External auditors are appointed by the format as defined by the statue which varies according to the
jurisdiction, but they should be a member of one of the recognized professional accounting body.
As per the case, FREDDIE MAC SCANDAL they have taken some steps for the identification of risk
They have addressed their reports to the shareholders of the company. The external auditors usually
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.
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

AUDITING AND ASSURANCE 5
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.

AUDITING AND ASSURANCE 6
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.