Synergizing the Works of Internal and External Auditors - Assignment Example

Research Proposal: Synergizing the works of internal auditors and external auditors in listed companies Background Corporate governance sets conditions that listed companies transparently disclose their practices. In this regard investors have considered transparent company disclosure part of their criteria for selecting the company to invest in. From the investors’ viewpoint, distinct techniques matching globally accepted techniques acts as enabling influences for their rational investment choices. Within the United States there are securities markets, accounting and corporate legislation that direct the management and disclosure practices of listed companies. These regulations include comprehensive guidelines on how disclosures are to be made. Auditing has been designate as an important part of the disclosure process. The proposed research will identify the functions of internal and external audits, and determine how these functions can be synergized to ensure fairer and true audit reporting. Research Objectives and Questions The proposed research study intends to meet the following objectives: determine the significance of internal and external audits; determine the relationship between internal and external audit functions; and develop strategies to better audit functions in listed companies. In meeting the identified research objectives this research study will answer following research question: how to synergize the work of internal and external auditors in listed companies? Literature Review Investment decisions are made based on financial information available at the time the decision is made. If theinvestor’s intentions are to be matched then the financial information provided must be fair and true. The concept of fairness involves impartial accounting of financial efforts. One such method of ensuring that the financial information is fair and true involves audit(Alzurqan&Al_Sufy 2011, p. 56). Audit is afinancial control toolapplied incorporate governance to acts as a safety measure against financial fraud and/or negligenceby company managers. It certifies that the stated financial information candidlyrepresentsreality, and that expenses have been sustained with regard to consistency and correctness. The principal function of audit is to:authenticatefinancial informationcorrectness and comprehensiveness;ensurefinancial information is tabulated correctly; and ensure that all expenses are approved and assured. Audit confirms that financial guidelines and instructionssatisfylegal provisions (Yuniarti 2011, pp. 84-85). Auditors are responsible for financial reporting, observance of code of ethics, risk management and compliance with pertinent regulations. The internal and external auditors work independently but on duplicated functions with the internal audit team responsible for preparing financial statements while the external audit team is responsible for certifying them (Arena &Azone 2010). Overall, the range of an internal auditor is broader and open ended while that of the external auditor is narrower and closed ended. The external auditors attend to distinct parameters of the financial statements and determine if they are in order and accurate. In contrast, the internal auditors attend to the enduring task of assess company performance to determine possible faults at any given time. As well the dissimilar sets of skills and duties, external auditors do not have the same level of access and relationships as internal auditors. Given the nature of their work, the internal auditors have the capacity to interact with all levels of the company. The implication is that the interactions could be stronger thereby allowing them faster access to information. On the other hand, external auditors are only brought in for limited periods of time thereby precluding them from forming strong associations. Auditors’ code of ethics, also, does not allow the external auditors to be strongly associated with their clients. The implication is that the internal auditor have the capacity to identify problems faster and recommends resources reallocations to areas that need them the most (Cohen &Sayag 2010, p. 296; NYSE 2013). While internal and external audit functions are intended to be synergistic in facilitating financial controls and disclosure for listed companies, this has not always been the case. More listed companies are reporting errors in their disclosures with the errors perceived so late that the overall company performance is harmed in the long run. The reasons advanced for this differences include; dependence based on the fact that the two teams are overseen by the company financial services office; ethics code that preclude stronger interactions with the clients; and limited access to information (Karagiorgos, Drogala, Eleftheriadis& Christodoulou 2010, p. 2-3; Thornton 2010, pp. 3, 8). Desai, Roberts and Srivastava (2010, p. 567) conducted an analysis of audit functions and determined that it was possible to develop an analytical model to evaluate their functions. Applying factors identified by prior research and professional guidance provides a theoretical model of how decisions are made in internal audit. They determined that objectivity was directly proportional to competence in all audit functions such that opinions about objectivity and performance feed directly into opinions about audit functions performances (Desai, Roberts & Srivastava 2010, p. 567-568). Methodology In a bid to answer the research questions, the research study will conduct secondary data analysis. The data will be collected from publicly available data sources that include online sources, libraries, published and non-published materials. Relevant previous literature regarding the research questions will also be analyzed to gain insights into the challenges faced by both internal and external auditors. Of particular interest will be the measures instituted to address the challenges. The information search will be based on key word and phrases information searches in financial reports and publicly available data pertinent to corporate governance and performance of selected listed companies. The key word searches in libraries and online databases will be based on words like: synergizing external and internal auditors; functions of internal and external auditors; and problems of external and internal auditing. The final research report will include both statistical analysis of financial information and interpretation by identifying the complex interactions of factors. This research study will apply a qualitative research approach based on the principles of positivist paradigm. The principles hold that observation and reason are the best way to analyze social realities. They also hold that valid and real knowledge can only be obtained through observation and experimentation. This research will, therefore, use reason and observation to understand the relationship between internal and external auditors in listed companies. This will allow the research to acquire an unambiguous understanding of relationships. This technique is also expected to underscore the acquisition of evidence based observable empirical data to be acquainted with the truth and provide consistency in the research. The financial information and literature collected using the selected tools will be analyzed and presented based on the need to pool and translate the collected raw information. Thompsons ONE Banker has been deemed appropriate for collecting financial data that includes balance sheets, income statements and cash flow statements. It provides integrated access to different financial databases that offer a variety of information like international stock exchange indices, private equity, mergers and acquisitions, initial public offers (IPOs), equity deals, and loan deals. It also provides an Excel Add-In that can be used to transfer data directly from its databases into Excel spread sheets thereby making it easier to analyze target data. The financial information will then be subjected to ratio analysis to compare the performance of selected listed companies against their audit reports. Expected Outcome and Limitations The proposed research expects to develop a strategy that synergizes internal and external auditing functions in listed companies. It will focus on specific aspects of auditing as applied to listed companies ignoring the other aspects of corporate governance. The proposed research will involve a small number of listed companies as such the results may not be generalizable. The accessed information may also be outdated as the latest accessible financial information will be for 2013 financial year. Prior knowledge may influence the present research process. It is anticipated that the present research will develop a protocol for synergizing internal and external audit functions, as such any results that do not conform to the model may be disregarded. References Alzurqan, S &Al_Sufy, F 2011, ‘The effect of corporate governance on the performance if Jordanian industrial companies: An empirical study on Amman Stock Exchange,’ International Journal of Humanities and Social, vol. 1. no. 4, pp. 55-69, viewed 15 June 2014, . Arena, M &Azzone, G 2010, Internal audit effectiveness: relevant drivers of auditees satisfaction, viewed 15 June 2014,. Cohen, A &Sayag, G 2010, ‘The Effectiveness of Internal Auditing: An EmpiricalExamination of its Determinants in Israeli Organizations,’ Australian Accounting Review, vol. 20. no. 3, pp. 296-307, viewed 15 June 2014, . Desai, V, Roberts R & Srivastava, R 2010, ‘An Analytical Model for External Auditor Evaluationof the Internal Audit Function Using Belief Functions,’ Contemporary Accounting Research, vol. 27. no. 2, pp. 537-575. Karagiorgos, T, Drogala, G, Eleftheriadis, I & Christodoulou, P 2010, ‘Internal Audit contribution to Efficient Risk Management,’ Journal of Business Management, vol. 2. no. 1, pp. 1-14, viewed 15 June 2014,. NYSE 2013, 303A.07 Audit Committee Requirements, viewed 12 June 2014, . Thornton, G 2010, Evaluating the internal and external audit function: The audit committee guide series, Hoboken, New Jersey: John Wiley & Sons. Yuniarti, R 2011, ‘Audit form size, audit fee and audit quality,’ Journal of Global Management, vol. 2. no. 1, pp. 84-97, viewed 15 June 2014, . Read More