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Control Structure within the Organization

A company’s board of directors is responsible for operating the company in the interests
of shareholders and other stakeholders. To do this it needs to ensure that all the
mechanisms for good corporate governance are in place.
Financial Reporting
Management is responsible for preparing financial statements which give a true and fair
view of the company’s results for the period under review and its financial position at the
year end.
In order to do this the directors are required to:
 select suitable accounting policies and apply them consistently
 make udgments and estimates that are reasonable and prudent
 design and implement internal controls relevant to the preparation of financial
statements and to prevent and detect fraud or error.
Responsibilities of the External Auditors
The Audit Opinion
The auditor’s main responsibility is to form an opinion on whether the company’s
financial statements give a true and fair view. In some urisdiction the e!ternal auditors
have further reporting responsibilities" e.g.
 The auditors of listed companies in the #$ report on certain aspects of the
disclosures of directors’ remuneration
 Auditors in the %epublic of Ireland report on certain aspects of the adequacy of a
company’s capital
What the Auditors are not Responsible for
They are not responsible for:
 preparing the financial statements
 choosing accounting policies
 implementing systems and controls
 establishing the mechanisms for ensuring that good standards of corporate
governance are maintained.
Other Responsibilities and Consequences
The e!ternal auditors are responsible for:
 planning their work
 gathering sufficient appropriate audit evidence
so that the risk that they may come to the wrong conclusion is reduced to an
appropriately low level
As a consequence they are interested in
 the quality of accounting systems from which the financial statements are
 the internal controls operated by the company to ensure that its financial
information is as complete and accurate as possible
 the standards of corporate governance including the effectiveness of the internal
audit function
because all of these factors will reduce the risk of misstatement in the financial
Counicating with those Charged with !o"ernance
The I&As and in particular I&A '() *ommunication of audit matters with those charged
with governance" places some further responsibilities on the e!ternal auditors.
The main forms of formal communication are:
 the letter of engagement
 the management letter + sent at the end of the audit
There may also be ad hoc needs to communicate particular matters at other times.
Also" communication generally should be two,way and ongoing" with either party
keeping the other informed about relevant matters throughout the year.
-Audit matters of governance’ include:
 effects of significant accounting policies
 potential financial effect of risks.uncertainties
 material audit adustments
 disagreements with management concerning the financial statements
 e!pected modifications to the audit report
 internal control weaknesses including fraud.
Responsibilities of #nternal Auditors
Internal auditors are either:
 employees of the organi/ation they are auditing or
 contracted to provide internal audit services through an outsourcing arrangement
I&A (0) *onsidering the work of Internal Audit gives the main activities of the internal
audit function as:
 monitoring of internal control
 e!amination of financial and operating information
 review of the economy" efficiency and effectiveness of operations including non,
financial controls of an entity
 review of compliance with laws" regulations and other e!ternal requirements and
management policies and directives and other internal requirements
 special investigations into particular areas" for e!ample" suspected fraud.
As assurance professionals" internal auditors are responsible for conducting their work
bearing in mind the requirements for:
 independence
 obectivity
 compliance with the ethics rules of any professional body to which they belong
S$stes and Controls
%irectors need to establish suitable systems and controls to:
 safeguard the company’s assets
 enable financial statements which give a true and fair view to be produced
 prevent and detect fraud
External auditors need to re"iew systems and controls to:
 assess whether the systems are such that the risk of material misstatement in
the financial statements is reduced.
 if they are to rely on the operations of controls in a system so that the e!tent of
the procedures which they carry out will be reduced" they will need to test those
controls and document their findings.
 If the e!ternal auditors discover weaknesses in systems and controls" they will
report their findings to those charged with governance in their management
#nternal Auditors
 May be given an assignment to review systems and controls and to report to
management about their effectiveness
 The nature of the work carried by internal audit in these circumstances will be
very similar to that performed by the e!ternal auditor.