Differentiate between the Internal and External Audit and demonstrate how both roles can assist

management to achieve the objectives of the organisation.

An internal audit is designed to look at the key risks facing the business and how the business is
managing those risks effectively. It usually results in recommendations for improvement across
departments. Both financial and non-financial elements are usually included and the company’s
reputation may be a factor which is assessed.

An external audit focuses on finance and the key risks associated with the business’ financial
business. They are usually performed on at least an annual basis to provide the annual statutory
audit of the financial accounts. This audit is designed to show whether the accounts are a true
and fair reflection of where the company sits financially. External auditors will evaluate all the
internal controls put in place to manage financial risk to assess whether they’re working
effectively.

Discuss the benefits to Dawken of forming an audit committee and how this will improve
Corporate Governance for the company.

The primary purpose of a company’s audit committee is to provide oversight of the financial
reporting process, the audit process, the company’s system of internal controls and compliance
with laws and regulations.

Role of the committee

To improve the quality of financial reporting

To increase the confidence of the public in the financial statements.

Assist directors in meeting their responsibilities in respect of financial reporting.

Provide a channel to external auditors to report concerns or issues.
Review the company’s system of internal controls.
Strengthen the position of internal audit by providing greater independence from management.
Appointment of external auditor.
 Benefits of forming a Audit Commitee
 Independent Reporting
Provides internal audit with an independent reporting mechanism.  Without this management
may be tempted to hide unfavourable reports.

 Frees up Executive time

Leaves top executives free to manage by providing expertise on financial reporting

 Corporate Governance monitored

Ensures that corporate governance requirements are brought to attention of the board

 Appropriate Internal Controls

Should ensure that an appropriate system of internal control is maintained.

 Better Communication
Better communication between the directors, external audit and management is facilitated.

 Strengthens external audit independence

Strengthens independence of external audit as their appointment is now not made by the board.

Effective governance is underpinned by purpose, vision, values and ethics, that are reflected in
the behaviors and actions of the board and management team and cascaded throughout the
organization. The board in conjunction with management is responsible for setting the tone at the
top, shaping the culture of the organization, and setting strategic direction. Organizations need to
be proactive in driving improvements in their governance beyond adherence only to minimum
requirements.

QUESTION 2
(a) The external Auditors are conducting an audit of Mack’s Ltd. A meeting was held with
the directors of the company. In their discussion, the auditors requested confirmation of
the bank balances and they were provided with verbal confirmation of the bank balances.

(a) Describe the relevance and reliability of this oral representation as a source of evidence
to confirm the completeness of the bank balances.

A representation from management confirming that overdrafts are complete would be relevant
evidence. Overdrafts are liabilities and therefore the main focus for the auditor is completeness.

With regards to reliability, the evidence is oral rather than written and so this reduces its
reliability.
The directors could in the future deny having given this representation, and the auditors would
have no documentary evidence to prove what the directors had said.

This evidence is obtained from management rather than being auditor generated, and is therefore
less reliable. Management may wish to provide biased evidence in order to reduce the amount of
liabilities in the financial statements. The auditors are unbiased and so evidence generated
directly by them will be better.
External evidence obtained from the company’s banks could be used to confirm the bank
overdraft balances and this would be more independent than relying on management’s internal
confirmations.

An auditor may obtain audit evidence by one or more of the following procedures:
(1) Inspection
(2) Observation
(3) Recalculation
(4) Analytical Procedures
Required:
(i) Explain what each of these procedures involves. (4
marks)
(ii) For each procedure provide TWO (2) examples of its use during the course of an
audit, stating clearly in your example what is the purpose of carrying out the procedure.

Inspection
Inspection refers to verification or vouching documents. This is one of the most important and it
can be 60% of audit work involve with the inspection of documents.
For example, the auditor examines the sales invoices that record in financial reports.
The auditor might examine whether the invoice issued by the client is really based on the
goods that receive. And the goods that received is actually the one the company makes an
order.
The auditor might also examine the payment voucher against the authority that approves
the payment vouchers. Auditors usually request ask everyone related to the auditto sign in
order to verify signatures
The auditor might also inspect the supporting documents recording the inventory’s
movement during the year. This is including the documents related to purchasing raw
material.
Observation
Observation is one of the audit procedures that auditors use to obtain an understanding and
gather audit evidence mainly to the real process or the ways how clients have done some specific
business process. This kind of audit procedure is mainly to confirm the process that the client
told, physical confirmation, or some time used to obtain audit evidence in order to make their
own projection which will be used for comparison with the client figure.
Example: The auditor might want to observe the cash handling process when the cashier is
clearing the vault for the cash to send to the bank.
For example, auditor are usually apart of the client year end stock taking stock taking. At
my company we have to do a schedule of all inventories and send to them. This observation
is necessary to access whether the way that the counts done correctly.
Recalculation
Recalculation is the type of audit procedure that normally done by re-performing the works
performed by the client in the purpose of assessing if there any difference between the audit’s
work and the client’s work.
For example, the auditor might re-perform depreciation calculation and assess if there any
difference between auditor calculation and its client’s calculation.
The auditor might also perform the recalculation on monthly salaries especially if persons
have USD base salaries and an exchange rate is used to calculate the JMD monthly.
Recalculation is the procedure that used to confirm the accuracy of transaction that involves
calculation.
Analytical Procedures
Analytical Procedures is not the procedure that uses to obtain audit evidence, but it is the
procedure used to assess the unusual transactions or events as the principle or basic to perform
other procedures.
For example, obtaining audit evidence regarding the valuation assertion for accounts
receivable/payables balances by sending out confirmation letters.
For example, obtaining audit evidence for bank balance by requesting bank statements
from the bank.
For example, we can use the analytical procedure to assess the reasonableness of
depreciation that records in the financial statements. The main reason is that depreciation
expenses are calculated systematically and occur regularly.
Question 3
Explain the term 'audit risk' and the three (3) elements of risk that contribute to total
audit risk.
Audit Risk is an auditor expresses an inappropriate opinion on the financial statements
1. Inherent Risk is the risk of a material misstatement in the financial statements arising due to
error or omission as a result of factors other than the failure of controls (factors that may cause a
misstatement due to absence or lapse of controls are considered separately in the assessment of
control
2.Control Risk is the risk of a material misstatement in the financial statements arising due to
absence or failure in the operation of relevant controls of the entity.
3. Detection Risk is the risk that the auditors fail to detect a material misstatement in the
financial statements

Describe the reasons why it is important that auditors plan their audit work.

Importance of audit planning

 It helps the auditor to devote appropriate attention to important areas of the audit.

 It helps the auditor to identify and resolve potential problems on a timely basis.

 It helps the auditor to properly organise and manage the audit engagement so that it is
performed in an effective and
efficient manner.
 It assists in the selection of engagement team members with appropriate levels of
capabilities and competence to
respond to anticipated risks and the proper assignment of work to them.

 It facilitates the direction and supervision of engagement team members and the review
of their work.

Identify areas of inherent risk in the Tyson charity and explain the effect of each of these risks on
the audit approach.

area of inherent risk effect on audit approach

Income is from voluntary donations only. there is a it is difficult to estimate that income in
risk the future will be sufficient to meet the

that donations will fall, especially where donors’
ownincome is limited by the ‘credit crunch’ etc.
completeness of income – where there are no
controls to ensure income is complete for example
sales invoices are ot raised to obtain donations and
donations could bestolen by staff.
funds can only be spent in accordance with the aims
of the charity. there is a risk that funds are spent
outside theaims of the charity
taxation rules relevant to charities. there is a risk that the auditor will need to ensure that staff
the rules will be broken due to lack of correct
analysis ofincome/expenditure requirement to report
expenditure in accordance with the constitution
administration expenditure can be no more than 10% the trustees may attempt to hide
of total income. risks here include income
beingoverstated to allow expenditure to be
overstated.
than 10% of total income. risks here include income
beingoverstated to allow expenditure to be
overstated.
expenditure of the charity
Audit of the going concern concept (as in
ensuring that the charity can still operate)
will be very difficult
Audit tests are unlikely to be effective to
meet the assertionof completeness. the
audit report may need to be modifiedand
qualified to explain the lack of evidence
stating thatcompleteness of income
cannot be confirmed.
income cannot be confirmed.
careful review of expenditure will be
necessary to ensure that expenditure is
not ‘ultra vires’ the objectives of the
charity
the auditor will need to review the
constitution of the taxation rules affecting
the charity are on the audit team.
familiar with the
taxation rules affecting the charity are on
the audit team.
‘excessive’ expenditure on administration
under other expense headings.
as the auditor has to report on the
accuracy of income and expenditure then
audit procedures must focus on

donations to charity for specific activities for
example provision of sports equipment. there is a
risk that donations are not spent in accordance with
donors’instructions.
theaccuracy of recording of expenditure
documentation for any donation will need
to be obtained nd then expenditure agreed
to the terms of the
documentation. any discrepancies will
have to
and then expenditure agreed to the terms
of the be reportedto management.