How Internal and External Auditors Collaboration Can Increase Process Effectiveness - Literature review Example

How Internal and External Auditors’ Collaboration Can Increase Process Effectiveness Student’s Name Institutional Affiliation Course Name Date of Submission How Internal and External Auditors’ Collaboration Can Increase Process Effectiveness Introduction Auditing is one of the most important undertakings in an organization. Auditing refers to processes involving the examination of a company’s books of accounts, such as the income statement and the statement of financial position to see if they are kept in a proper manner. The need for auditing arises from the fact that a company needs to ensure that the books of accounts are properly kept (DiGabriele, and Ojo 2012, p. 11). It also ensures that the income statement and the statement of financial position of an enterprise have been prepared in a way that shows a true and fair position of an enterprise in a financial year. Additionally, auditing is an important undertaking in an enterprise as it ensures efficiency and accuracy of records, as well as facilitating the detection and prevention of errors and frauds in an enterprise (Institute of Internal Auditors (IIA) 2009, p. 4). Overall, auditing ensures that the interest of shareholders is safeguarded by promoting accountability on the part of the management. For this reason, all publicly-owned companies are required to have an audit staff to ensure control of audit functions in an organization (DiGabriele 2011, p. 3). The internal audit staff ensures the institution of a strong internal control function so as to ensure accuracy, and timely recording of business transactions. In addition, for purposes of safeguarding the interest of stakeholders of a company, public companies are required to hire external auditors to conduct periodic independent audit on an enterprise’s books of accounts to see that they are properly kept and portrays a true and fair position of a company’s state of affairs. Although internal and external auditors have different but related roles, collaboration between the two has been cited as being very important in increasing the effectiveness of the audit processes (Prawitt, Sharp and Wood 2011, . 39). This paper begins by discussing the differences between internal and external audit. The second part will discuss why the co-operations between the two are important in enhancing the effectiveness of audit functions. The third part discusses the tenets necessary in building effective co-operation between internal and external auditors. Lastly, the paper will highlight the opportunities for collaboration in practice. Benefits of Collaboration between Internal and External Auditors As illustrated above, it becomes clear that, although internal and external audit functions are distinct, they are related to a greater extent. Therefore, Abbott, Parker and Peters (2010, p. 6) advise that instead of the internal and external auditors being left to work differently, it is important for companies to promote the collaboration between the two to enhance the effectiveness of audit processes. Firstly, collaboration between the internal and external audit is an effective way of improving the effectiveness of audit process in the sense that collaboration helps minimize duplicative efforts by the audit committee (Pelland 2015, p. 13). Whenever there is no collaboration between the internal and external auditors, this normally results in a situation where the audit committee members perform work twice. However, this result in duplication of efforts, which is not only time consuming, but is also costly to the audit committee (Byrnes et al. 2012, p. 6). Therefore, collaboration between the internal and external auditors is necessary in an organization as it minimizes duplicative efforts as collaboration gives the audit committee a chance to oversee the discussion between external and internal auditors with regards to allocation of work between the auditors. Secondly, collaboration between the internal and external auditors is critical for an enterprise since it ensures a smooth and better coordinated audit activity between internal and external auditors (Garrett 2012, p. 8). This is because through collaboration, the internal and external auditors are able to plan all the audit activities jointly, thereby ensuring better coordination. At the same point, collaboration ensures better communication between the internal and external auditors. For instance, the internal auditor is responsible for providing an assurance with regards to the adequacy of an enterprise’s internal controls. The external auditor, however, normally uses such information in determining its audit procedures (Thornton 2010, p. 42). As such, for the external auditor to discharge it responsibilities effectively, it must be assured by the internal audit team that the risk assessments tools are in place so as to inform decisions regarding the coverage of the activities of the internal audit. In this respect, collaboration between internal and external auditors will enhance coordination and communication between the two, thereby increasing the effectiveness of the audit process. Collaboration between internal and external auditors is also critical because it ensures that there is a better informed discussion between internal and external auditors on the risks facing an enterprise, which leads to a more effective focusing of audit effort and more useful opinion to the management (Tysiac 2013, p. 11). One of the fundamental roles of internal and external auditors is to advice the management on the risks and how best to avoid the risks to ensure good performance. When such advice is not given, an organization is bound to fail. However, it has been noted that when the external and internal auditors work in collaboration, there is the benefit of the parties having a good discussion on the risks that an enterprise faces and the subsequent design and adoption of audit efforts geared at identifying all the risks, which culmination in the expression of a useful advice to an enterprise’s management (Vasarhelyi 2012, p. 34). Additionally, collaboration between the internal and external auditors is important as it ensures that there is more effective audit procedure that are based on a clear understanding of the different roles and responsibilities of each party. Moreover, Håkansson and Johansson (2014, p. 9) noted that cooperation between the internal and external auditors is necessary because it helps in minimizing audit burden that emanates from disruption. Most organizations face the burden of having to disrupt the operations of an organization when a company is being audited by external auditors. However, such disruptions can be minimized when the internal and external auditors work as a team. Moreover, the cooperation between the internal and external auditors is beneficial in the sense that it enables the external auditor to gain more knowledge about the enterprise activities and the operations of the client by working with the internal audit. This is attributed to the fact that internal auditors are very much knowledgeable about the operations and the activities of the business (Arnold et al. 2013, p. 301). Therefore, by working in partnership with the external auditors, this gives the external auditors a great opportunity to learn about the operations of the client and its business activities, thereby resulting in effective and efficient audit activities. According to Endaya (2014, p.77) collaboration between internal and external auditors is vital in detecting fraud within the organization. Researchers suggest that knowledge of internal auditors in regard to control systems and environment within the organization is higher as compared to external auditors. Hence, internal auditors are in a better position to reveal the anomalies quicker than their external auditors. Apparently, research has been confirmed that internal auditors are organization’s major protection from fraud. On the other hand, external auditors are mostly not in a position to discover and report the happening of fraud among staff. As a result, collaboration between external and internal auditors will level of fraud detection leading to lowered risks of frauds (Endaya 2014, p.78) . Challenges Encountered in Collaboration between Internal and External Auditors Most organizations currently recognize the importance of promoting a working relationship between the internal and external auditors. As illustrated above, collaboration between internal and external auditors help improve effectiveness of audit activities, which result in good advice to the management. Nevertheless, building a working relation between the two parties has often been a challenging endeavor in many organizations. The challenges in building an effective working relationship between internal and external auditors emanates from many sources. Firstly, the challenge in building a working relationship between internal and external auditors has been largely linked to the unwillingness of the external auditors to use internal auditor’s work (Bachmann and Inkpen, 2011, p. 280). Audit gurus argues that, to build an effective collaboration between internal and external auditors, both parties must be willing to work together and use each other’s work in making decisions and forming opinion. Nevertheless, there has been a decreasing willingness among external auditors to use internal auditors’ work. As such, this makes it difficult for the two parties to work collaboratively. In particular, external auditors have shown unwillingness to use external auditor’s reports in high risk areas (Arya and Glover 2014, p. 188). Therefore, it becomes very difficult for internal and external auditors to work in partnership when external auditor’s doubt the work of internal auditors in high risk areas. Secondly, although collaboration between internal and external auditors has many benefits to an organization, external and internal auditors often face a big challenge in working in partnership because of the audit committee’s interferences. For the internal and external auditors to work effectively in collaboration, the consent and the support of the audit committee are necessary. However, in some instances, audit committees have been shown to be very reluctant and unwilling to allow the internal audit to work as an extension to the external auditors (Bachmann and Inkpen, 2011, p. 281). Such situations do arise particularly when the audit committee feels that the internal audit has plenty of other tasks to perform. As such, whenever the audit committee refuses to allow the internal audit to work in partnership with the external auditors, it becomes difficult for the two parties to cooperate in performing their audit activities. Additionally, the cooperation between the internal and external auditors has been rejected by management in some instances on the premise that it does not result in cost saving. Most organizations are only willing to accept the cooperation between the internal and external auditors if such partnership is capable of saving audit cost (Carrington 2010, p. 670). However, this is not always that case as the management and the audit committee does find it difficult even quantifying the cost sassing of both the internal and external and internal auditors, thus the reluctance in accepting their cooperation. Another challenge that faces collaboration between internal and external auditor is the risk associated with high reliance of internal auditor by external auditor to detect fraud. It is hard for external auditors to notice fraud and as a result new regulations encourage high dependence on internal auditors risk assessments (Norman Rose and Rose 2010, p. 547). This implies effectiveness of external auditors in detecting fraud is highly pegged on internal auditors. It will be difficult for internal auditors to reveal fraud being committed by top level management since they control promotions and evaluations of internal auditors. Research has shown that internal auditors can feel intimidated resulting to compromising their reliance in order to please top management. For internal and external auditors to work harmoniously there must exist well outlined regulations within auditing realms. However, in the recent past there have been a huge number of newly created requirements that continue to make both external and internal auditors face control, compliance and operational challenges. As a result, organizations are usually using huge amount of cash on compliance programs and operational changes within the organization in order to meet ambitious reporting deadline and compliance. Due to the reliance of external auditors to internal auditors, the regulation challenges that face internal auditors will eventually have effect on external auditor. The Tenets Necessary In Building Effective Co-Operation Between Internal And External Auditors Building cooperation between the internal and external auditors is not an easy undertaking. Rather, there are certain tenets that are necessary in order to build an effective working relationship between the internal and external auditors. Commitment is cited as being one of the most important ingredients necessary in building an effective working relationship between the internal and external auditor (Mihret and Admassu 2011, p. 68). In this respect, it has been observed that, to achieve an effective collaboration between the two, both parties must be commitment to working together in a coordinated audit service. Although the external and internal auditor has responsibilities, roles and accountabilities, the roles are related and overlap in most cases (Munro and Stewart 2011, p. 465). Therefore, effective collaboration requires a willingness from both the internal and external auditors to work together as a team to ensure that audit services are properly and effectively coordinated in all the areas. In fact, collaboration is most successful in circumstances, where both the internal and external auditors participate actively in promoting collaboration and are ready to undertaken changes. Effective collaboration between the external and internal auditors is realized where the two parties are willing and ready to consult with each other (Stewart and Subramaniam 2010, p. 327). In other words, consultation is key in having a successful cooperation between the internal and external auditors because it ensures effective coordination of audit activities. Even in situations where external and internal auditors are not working together in certain areas, the two parties may still need to consult each other on certain issues or findings. It is also important to note that, while auditors would consult each other from time to time, the management of an enterprise also has a key role to play in promoting consultation. In most cases, this is made possible through audit committee that has been useful in promoting collaboration between internal and external auditors (Suwaidan and Qasim, A 2010, p. 510). Effective cooperation between the internal and external auditors requires effective communication (Stewart and Subramaniam 2010, p. 329). Without effective communication, the two parties would not be able to coordinate their work effectively and deliver results as a team. Therefore, both parties must ensure that there is a regular and open dialogue between the two parties to ensure successful collaboration. Both the internal and external auditors must have a good understanding with regards to the nature and timing of such communication. In this respect, the parties can promote good communication by holding regular meetings to plan and coordinate their work, agree of techniques for sharing audit findings, minimize duplication of efforts, and discuss other important information (Soh and Martinov-Bennie 2011, p. 606). Other than formal communication, both parties should also demonstrate a willingness to communicate informally when there is a need to ensure effective partnership and coordination of work. However, the internal and external auditors must ensure that they agree on the procedures to promote effective teamwork and the agreements must be documented and approved by the Audit Committee. Additionally, effective cooperation practice requires that the internal and external auditors maintain mutual confidence. Maintenance of mutual confidence is necessary based on the premise that both the internal and external audit works are performed within relevant professional standards (Pilcher 2013, p. 331). For instance, whereas the work of internal auditors are prepared for use by external auditors, external auditors might be required to obtain an assurance regarding the standards applicable on a certain work so as to ensure compliance with the professional standards. Additionally, both parties must maintain confidence by ensuring that any information that the two parties exchange are treated with integrity and professionally. Conclusion Auditing is an important undertaking in an organization. Auditing is important because it ensures everything in an organization is put on check to safeguard the interest of stakeholders. Auditing is conducted by internal and external auditors whose roles though are distinct; the duties are related and overlapped in many ways. Internal auditors are particularly important in an organization because they ensure the establishment of a strong internal control system to prevent misuse of company resources and that books of accounts are properly kept. External auditors, on the other hand, play a critical role of examining a firm’s financial statements to see whether or not they are properly kept and portray the true and fair state of affairs in a company. Auditing is also important as it helps in identifying errors and fraud that might have been committed by company staff or management that might impact negatively on company performance. However, as much as the roles of internal and external auditors are distinct, the fact that these roles overlap requires that both parties collaborate when discharging their mandates as cooperation helps them achieve their goals and while also helping them offer better services to the entities that they work with. 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