The term audit derived from audire, the Latin word which means to hear. The objective for auditing has changed overtime according to the needs and expectation of society. ISA 200 defines that the aim of audit is to provide a true and fair view in accordance with the applicable financial reporting framework. Auditing plays a significant role in detecting and preventing fraud or other financial crime. There was lots of breathtaking news relating to absence of effective auditing. For instance, the collapse of Enron and Parmalat, both of them are discovered to manipulate data displaying a fake promising financial performance to public, which resulting huge loss. According to Porter’s audit trinity, she considered audit committee, internal audit and external audit as the key components for performing auditing (Porter, 2009). In this essay, we would analyze functions of each other and interrelation among them.
2.1 Audit Committee
An audit committee is a standing committee of the board of directors that is overseeing the integrity of the company’s financial reporting process (Burke, Guy, & Tatum, 2008). The responsibilities basically include giving advices and recommendation to the board in order to help them fulfill their corporate governance and monitoring internal and external audit processes (Tysiac, 2015).
There are five main functions of audit committee. Firstly, it is responsible for oversight of entity’s financial reporting process. Audit committees usually regularly review financial information and communicated with senior financial management. Secondly, audit committee supervises the regulatory compliance. Usually, audit committee are going to check whether activities are compliance with requirement of related law and accounting standard. Thirdly, it could appoint and remove auditors. Make sure that auditors are independent, support for auditors to provide fair and true opinions on entity’s performance. Fourthly, it plays a significant role in oversight of risk management. Identify any potential risks arising from daily operations resulting in failure of achievement of entity’s objectives. Finally, it oversees the internal audit and external audit. Both external and internal auditors are required to report to committee their opinion on entity’s performance. Audit committee oversee and review the auditing and ensure the quality and integrity of financial reporting.
2.2 Internal Audit
The International Professional Practice Framework (IPPF) defined internal auditing as “a department, division, team of consultants, or other practitioners that provides independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. The internal audit activity helps an organization accomplish its objectives by bringing a systematic, disciplined approach for evaluation”.
It covered both finance and non-finance information. Its major functions are to evaluate and improve the effectiveness and efficiency relating to three main areas. Firstly, it is risk management. Under the COSO enterprise risk management (ERM) Framework, entity’s risk generally arose from its operations, financial reporting, and compliance. Internal auditor is trying to evaluate the whole ERM activities and help to address those risks. Secondly, it is internal control. Internal auditors evaluate the effectiveness and efficiency from the control environment, risk assessment, control activities, information and communication and monitoring activities. Finally, it is corporate governance. This internal auditing is to discuss with the directors of board via attending to meetings.
2.3 External Audit
Eternal auditor is responsible for evaluating whether management has provided true and fair information in financial reports by collecting evidence for proper amounts and disclosures (Chartered Accountants, 2008). It is an external independent party just focus on the financial accounts or risks