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Act 1
Act 1
CHAPTER 1 – ACTIVITY
Developing and Implementing Strategic HRM Plans
When many people hear the word audit, they first think of a painful and
grueling interrogation to uncover real or imagined misdeeds. But that misleading
impression overlooks the foundational role that internal and external auditors play in
the world of business.
Both internal and external auditors help companies ensure that their financial reporting
agrees with accounting principles, that internal controls are working correctly, and that the
company is in compliance with relevant laws and regulations. For both types of auditors, risk
assessment is a vital consideration, and a keen understanding of the industry and the company is
required.
Their focus is both forward and backward: they verify that financial transactions are
recorded correctly in a company’s information systems while also looking ahead to ensure the
company’s long-term strength.
Like external auditors, internal auditors must comply with auditing
standards. Certified Internal Auditors (CIA) must comply with the IIA’s standards.
But since no professional designation is required for internal audit, it may be up to
the company to spell out and enforce those standards.
The External auditors work for an independent body to assess the financal
records and practices of a company. To ensure the company’s balance sheet and other
statements give an accurate representation of financial position and are free of material
misstatements, they follow a series of proceedures to test the accuracy of the
company’s numbers and evaluate its internal controls.
External audit activities not only check for errors and misstatements, they also
evaluate if those errors likely came from the intentional actions of the employees of the
organization.
The purpose of external audit is to provide assurance to investors, lenders, and other
stakeholders that a company’s issued financial statements present the organization’s results in a
materially correct and fair manner.
Unlike internal auditors, external auditors perform the bulk of their work at
the end of the year, looking backwards to verify that an organization’s financial
records correctly reflect the events of the past. However, that exclusive year-end
focus is changing. Some audit firms are switching to a continuous focus, with several
mini-audits performed throughout the year.
This chart summarizes the main differences between internal and external audit.