Report on Auditing: Internal Controls and Financial Reporting Analysis

This report delves into the critical aspects of auditing and internal controls, particularly focusing on their role in financial reporting. It begins by differentiating between internal control and internal control over financial reporting, highlighting their major distinctions. The report then identifies the primary beneficiaries of public reporting on assurance related to internal controls, assessing the benefits of such reporting, and considers whether Australia should adopt similar requirements to those in the US under the Sarbanes-Oxley Act. Furthermore, the analysis explores the potential impact of a negative assurance report on internal controls over financial reporting on share prices, examining how the nature of control deficiencies can influence market effects. Finally, it identifies specific types of deficiencies that are most likely to negatively impact share market prices, providing a comprehensive understanding of the financial implications of effective internal controls.

Running head: AUDITING
Auditing
Name of the Student
Name of the University
Author’s Note

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Executive Summary
This current report has focused on the internal control of the entity which provides the internal control
and internal control over the financial reporting in the entity. The primary beneficiaries of the public
reporting includes the public reporting which are associated with the similar requirement. It also includes
the assurance that consist of negative assurance report for gaining control over the process of financial
reporting. It also includes the deficiencies that would like to impact on the share market price.

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Table of Contents
Introduction.................................................................................................................................................3
Explaining the difference between the internal control and internal control over financial reporting along
with major distinctions................................................................................................................................3
Internal control........................................................................................................................................4
Internal control over financial reporting..................................................................................................4
Primary beneficiaries of the public reporting on assurance and internal control..........................................5
Negative assurance report on internal controls over financial reporting affects share price.........................6
Nature of deficiency in the internal control along with difference in potential effect of market price.........7
Types of deficiencies that would have negative effect on share market price..............................................8
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10

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Introduction
Auditing is vital for an organisation as auditing help in evaluating the effectiveness of the internal
control of an organisation. This particular effective system is to be maintained for the process of internal
control for meeting the targets and objectives of a business. In this study, the internal control over the
financial reporting have been highlighted which also points out the primary beneficiaries on assurance of
public benefits. Moreover, the negative assurance report on the internal control affects the price of the
share which might face certain loss by the company. It also creates a difference in the potential effect of
market price which affects the overall profitability of the business.
Explaining the difference between the internal control and internal control over financial reporting
along with major distinctions
Internal control is the process of assuring the set of activities which are separated into normal
procedure of operation and have the intention of safeguarding the assets. Minimising the errors and
maintaining the operation in an approved manner is also associated with the overall procedure of internal
control (Khlif and Samaha 2014). There are different types of internal control that are to be initiated with
control activities of the business and maintaining the natural flow of business activities. The system of
internal control consist of managing the balance risk along with the efficiency of the business. On the
other hand, internal control over financial reporting highlights the procedure which are mainly designed
to ensure the overall compliance of business policy. The factors that affect the compliance of the
company is associated with laws and regulation which mainly affects the financial reporting of the
business organisation (Feng et al. 2014). The difference between the internal control and internal control
over financial reporting have been mentioned as follows.
Internal control
Internal controls are the set of rules and regulation that are mainly implemented by the company
for ensuring the integrity of accounting information. The mentioned rules and regulation in internal
control also help in promoting accountability and preventing the frauds along with preventing the
employees from committing any kind of frauds and stealing of assets (Lin et al. 2014). Internal control
also help in improving the operational efficiency by enhancing the overall accuracy and control of
financial reporting. The working of internal control is pointed by the key business functions which have
been implemented by the most of the companies. In the early 2000s, several scandals were evidenced in
United States for which the companies of United States have enacted Sarbanes – Oxley Act and that have
been implemented in the year 2002. It mainly help in protecting the investors for any kind of fraud
activities along with improving the accuracy as well as reliability of disclosures by the corporates. The

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responsible managers for financial reporting creates a trails of audit and put certain impact on corporate
governance. In Australia, the companies are not required to report on it as the implemented laws are
performing their jobs in an effective manner (Schroeder and Shepardson 2015). On contrary, only the
reasonable assurance might be provided by the internal control along with correct financial information of
the company.
Internal control over financial reporting
Internal control over financial reporting mainly highlights the procedures that are designed for
ensuring the compliance within the policy of the company. It affects the overall operation of the company
along with affecting the system of the compliance with laws and regulation. It also affect the financial
reporting of the company along with maintaining the objectives and targets that are set by the company
(Brown, Pott and Wömpener 2014). The control that is associated in the business might focus on more
than one objectives by considering the Sarbanes – Oxley Act and that have been implemented in the year
2002. Certain components of effective internal control have been derived for managing the top level
environment of the company which includes the effectiveness of boards of audit committee. The high
level of oversight on financial reporting includes the components that cause control environment and
assessing the risk of different procedure of financial reporting. The data that are included in the financial
report of the company might be at risk as different procedure have been applied by the management of the
company. The controls that are designed actually is to be implemented by the company which would help
in identification of risks and this is known as control activities (Donelson, Ege and McInnis 2014). The
management of the company have the effectiveness on the control which includes the gathering of
information for financial reporting. Therefore, these are the major distinction which have been identified
in the overall process of internal control.
Primary beneficiaries of the public reporting on assurance and internal control
The public reporting on assurance is mainly referred to the management tools which consist of
the plan of the company along with its methods and procedures. Internal control mainly serves the line
with the frauds along with violation of laws that includes the contracts and agreements. The primary
beneficiaries of the public reporting are the stakeholders of the company which assesses the risk along
with control assessment (Chang et al. 2014). Providing the observations and performing test procedures
includes the control that are to be designed for trouble spots in control assessment. The internal control
also consist of certain beneficiaries such as the shareholders of the company and the stakeholders are also
associated with in it. The assessment of risk might have the adverse effect on the company for the activity
that are performed under the auditing process. The participation of internal audit includes in the
management entity of the assessment that are associated with overall risk of the business (Nickell and

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Roberts 2014). The scope of internal control plays the role in assisting the management who are
responsible for fulfilling the responsibility as well as the functions of the business.
On the other hand, Australia should introduce the similar requirement as the companies that are
present in Australia would be benefitted by the internal controls. Certain role are being played by the
internal control which assist in fulfilling the overall duties and responsibilities of the management
(DeFond and Lennox 2017). Improvement of control environment of the organisation makes the process
more dependant for identifying the redundancies of operational procedures as well as control procedures.
It also help in providing the recommendations for improving the efficiencies along with effectiveness of
the procedures. The deficiencies is to be identified on a timely basis for regulatory compliances of audit.
The functions of internal control involves the management of the company which provides the
responsibility for maintaining the overall system.
Negative assurance report on internal controls over financial reporting affects share price
The negative assurance report is mainly represented by the auditors which are believed to have
accurate for contrary evidences in the business. It is also applicable for the situations where the possibility
of the possible accuracy of financial report is to be included (Ege 2014). The appointed auditor has done
sufficient amount of work which have been stated in the financial statement of the company for providing
accurate picture for financial condition of the firm. Negative assurance is mainly issued at the time of
reviewing certified financial statement which are generally prepared by another accounting of the
company. Material misstatement is the risk that are to be mitigated by negative assurance of the company
along with reviewing the statement which are associated with issuance of securities. The negative
assurance report on internal controls over the financial reporting affects the price of the shares by
affecting the financial statement that are prepared for the company (Newton et al. 2015). The significant
information in the financial statement adjusts the earnings along with the share price that includes the
overall profitability of the company. It might also have the positive impact on the price of the share as it
have higher quality of earnings.
Nature of deficiency in the internal control along with difference in potential effect of market price
The quality of audit might not influence the market prices of the share which are quoted by the
companies along with the differences of potential effect. The developed economies points out the nature
of deficiencies in the internal control which mainly affect the market price (Mihret 2014). The empirical
value of the internal control provides the implications that mainly impact the overall quality of audit on
the market price that provides transition on developing economies. Establishing a less distinct relationship
between the internal controls that makes the difference in the potential effect of the market price of the

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companies. The quality of audit is mainly affected by the quality of earnings that would extent the income
of the business and influencing the investors of the company. The factors that affect the compliance of the
company is associated with laws and regulation which mainly affects the financial reporting of the
business organisation (Regoliosi and d’Eri 2014). Moreover, the concept and measurement of the quality
of audit points out the share price at which the shares of the company would be sold to the public.
The potential effect on share market price points out the nature of deficiency that are associated
with internal control over financial reporting. A reasonable assurance consist of the material weakness
that includes the assessment of the management for the effectiveness of internal control (Burt 2016).
Communication with the management is to be changed with the governance which are required as per the
section and those are to be aimed for certain specific controls. It is maintained by internal control as it
help in improving the operational efficiency by enhancing the overall accuracy and control of financial
reporting. The control have the objectives which are to be measured and valued by correcting the errors
and frauds that have already been identified in the financial statement of the company. Pertaining to
maintenance of records includes the reasonable details which are required to be accurate and reflect the
transactions of the business (Heise, Strecker and Frank 2014). The reasonable assurance of the
transactions that are associated with the business points out the necessity for permitting the financial
transactions that have already been recorded in the financial statement of the company.
Types of deficiencies that would have negative effect on share market price
Different types of deficiencies that have negative impact on the share market price includes the
significant reportable control measures on the share market price. Some of the deficiencies are mentioned
as follows.
Control deficiencies – The operation of internal control might not allow the management for
performing the assigned functions. The materiality of the control deficiencies is to be determined by the
actual misstatement along with lack of timeliness of the cash deposits and the reconciliation of accounts
(Bentley-Goode, Newton and Thompson 2017). It includes the lack of review which includes
departmental expenditures with monitoring of funds.
Significant deficiencies – It generally includes the combination and affects the reporting criteria
of financial data (Heise, Strecker and Frank 2014). Misstatement of financial statement of the company
includes the authorizing the accounting standards.
Material weakness – It is a type of significant deficiencies which results in material misstatement
that would be detected in future years. Moreover, the lack of physical inventories are to be monitored by
the funds that includes the nature of the entity along with their operations.

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Conclusion
From the above study, it can be concluded that the process of auditing is the techniques which
help the company in mitigating risk which are included with the financial statement. It also assist in
preventing the loss of funds by prevent the process of fraud along with misappropriation of assets that are
present in the company. The data that are included in the financial report of the company might be at risk
as different procedure have been applied by the management of the company. Material misstatement is
the risk that are to be mitigated by negative assurance of the company along with reviewing the statement
which are associated with issuance of securities. Therefore, companies of Australia required to report on
the internal control that would effect on the internal control of the business.

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References
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Brown, N.C., Pott, C. and Wömpener, A., 2014. The effect of internal control and risk management
regulation on earnings quality: Evidence from Germany. Journal of Accounting and Public Policy, 33(1),
pp.1-31.
Burt, I., 2016. An understanding of the differences between internal and external auditors in obtaining
information about internal control weaknesses. Journal of management accounting research, 28(3),
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audits?. Journal of Accounting Research, 55(3), pp.591-627.
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