Z (2009). Course: Corporate Governance (1232F) Roles and Responsibilities of Gatekeepers: External Auditors Week 8 Source: Rezaee. Corporate Governance and Ethics .

Internal Auditing and Corporate Governance .

to render an unqualified opinion on the financial statements. External Auditor Responsibility Current auditing standards require that independent auditors provide reasonable assurance that the financial statements are free from material misstatements. are more concerned with material misstatements in the audited financial statements. however. which affects the integrity of financial reports. External auditors. Users of audited financial statements generally expect external auditors to detect financial statement fraud and employees’ illegal acts and fraud. whether caused by error or fraud. External auditors are not and should not be expected to provide absolute assurance regarding reliability of financial statements. but the public expectations concerning external auditors performance are high. .

Auditor Competency 1. Professional competencies. Process competencies. laws and regulations. Bina Nusantara . and internal controls. corporate governance. Reporting competencies. Auditor’s ability to choose appropriate evidence-gathering procedures (tests of controls. Reporting competencies refer to auditors’ ability and willingness to discover and report material misstatements. 2. and understand their clients’ industry and business. rules. To audit public companies. substantive tests) and execute auditing procedures. 3. Technical competencies. 4. auditors should register with the PCAOB and meet all registration and inspection requirements. Auditors should be knowledgeable in professional standards. financial reporting process.

Mandatory rotation of the audit firm every seven to twelve years in the context of the quality of audit work performed by the firm and the audit efficacy. Lead audit partner’s signature on audit reports 5. Publication of auditor resignation statements 4. Publication of audit engagement letters 2. 7. 6. Mandatory shareholder vote on the ratification of the independent auditor each year. 1. Audit Failures and Audit Quality List of the initiatives that have been suggested to improve audit quality as well as the transparency. Shareholders’ rights to question auditors 3. Active audit committee participation in evaluating the scope and results of the integrated audit of both ICFR and financial statements. Bina Nusantara .

6. Audit Failures and Audit Quality List of the initiatives that have been suggested to improve audit quality as well as the transparency. Mandatory rotation of the audit firm every seven to twelve years in the context of the quality of audit work performed by the firm and the audit efficacy. Publication of audit engagement letters 2. Lead audit partner’s signature on audit reports 5. 7. 1. Bina Nusantara . Publication of auditor resignation statements 4. Active audit committee participation in evaluating the scope and results of the integrated audit of both ICFR and financial statements. Shareholders’ rights to question auditors 3. Mandatory shareholder vote on the ratification of the independent auditor each year.

Preapproval of audit services and permissible nonaudit services 3. Appointment. Review of the independent auditor’s plan for an integrated audit of both ICFR and annual financial statements 4. compensation. Monitoring the auditor’s independence 6. Review and discussion of financial statements audited or reviewed by the independent auditor 5. Auditor rotation requirement Bina Nusantara . Audit Committee Oversight of External Auditors The extended oversight responsibilities for the audit committee are: 1. and retention of registered public accounting firms 2.

Any accounting disagreements between the independent and integrity. Significant deficiencies and material weaknesses of ICFR 7. Appointment and retention approval of the independent 1. The audit report on annual financial statements 8. Independent Auditors Communications with Audit Committee Communications from the committee to the Communications from the independent auditor to independent auditor: the audit committee: 1. The audit report on management’s assessment of the effectiveness of ICFR 10. Any concerns or risks threatening management’s reputation 4. The critical accounting policies and practices used by 3. Formal approval of fees for both audit and nonaudit management in the preparation of financial statements services with a keen focus on improving the quality of audit 3. Financial risks associated with financial reports Bina Nusantara . All alternative treatments of financial information within and nonaudit services GAAP 4. Formal approval of audit and permissible nonaudit services 2. and etc. Allegations of financial statement fraud 5. The review report on quarterly financial statements 9. Any material written communications between the independent auditor and the company’s management throughout the course of the audit 6. The audit report on the effectiveness of ICFR 11. auditor and the company’s management 5. Seeking committee preapproval of all audit and nonaudit auditor services in a timely manner 2.

Auditor Independence Bina Nusantara .

Consolidation and Competition in Public Accounting Firm SEC rules require public companies that change their public accounting firms to disclose changes within four days. whereas auditors are required to provide standard letters within ten days stating whether they agree with the company’s disclosure without specifying any reasons Bina Nusantara .

Integrated Audit Approach Management assessment on the effectiveness of ICFR Effectiveness of both design and operation of ICFR based on control criteria fair presentation of financial statements in conformity with GAAP Bina Nusantara .

detection. Auditors should also perform substantive tests as a basis for expressing an opinion on the fair presentation of financial statements. and correction of controls at both the company level and the transaction level. Auditors should perform tests of controls as a basis for forming an opinion on the effectiveness of ICFR. 3. Auditors should focus on prevention. Bina Nusantara . No limited tests of controls. 2. No use of cycle rotation in tests of controls. regardless of the identified significant deficiencies and material weaknesses in internal controls. Dual testing of controls and substantive audit procedures. Audit Strategy Audit Strategy: 1.