Internal and External Auditing. Essay


Since Lehman Brothers announced its prostration last September, the fiscal crisis has spread all over the universe. Almost all the capital markets have suffered from it. Even many companies, particularly finance related companies, bankrupted due to the economic depression. This essay aims to concentrate on the current economic state of affairs and the prostration of several finance related companies, and so measure the function and importance of internal and external auditing.

The current economic state of affairs and several belly-up fiscal companies

Most developed states, emerging states and low income states are still in a period of economic downswing, even though the planetary fiscal system has survived from the threshold of meltdown. This economic crisis began after a loss of assurance by investors refering the value of securitized mortgages in the USA ensuing in a liquidness crisis that prompted a significant injection of capital into the fiscal markets by the United States Federal Reserve, the Bank of England and the European Central Bank. Following this, in September 2008, the crisis deepened, and a great figure of Bankss, mortgage loaners and insurance companies suffered to a great extent. For case, Lehman Brothers, as the first belly-up company and the symbol of the crashed capital markets worldwide, was the direct victim of the extremely hazardous fiscal derived function, subprime mortgage. Besides, Fannie Mae and Freddie Mac which owed or guaranteed a great trade of the US ‘s mortgage market, were extremely susceptible to the subprime mortgage crisis, and eventually were taken over by the U.S. authorities. As the market assurance was dramatically destroyed, investors who were highly pessimistic preferred salvaging money to puting. This led to many finance related companies traveling insolvent.

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In general, the fiscal crisis was straight caused by high hazard mortgages and the pessimistic market. However, internal and external auditing still play polar functions in a fiscal crisis, which can be seen from the functions of internal and external auditing.

The function and importance of internal auditing

Internal auditing has been defined by the Institute of Internal hearers Inc. as follows:

‘internal auditing is an independent, nonsubjective confidence and consulting activity designed to add value and better an organisation ‘s operations. It helps an organisation carry through its aims by conveying a systematic, disciplined attack to measure and better the effectivity of hazard direction, control, and administration. ‘ ( Cascarino & A ; Esch, 2007:5 )

Harmonizing to the definition, functions of internal auditing could be classified in three types, hazard direction, control, and administration.

1. Role in control

An effectual control means holding mechanisms in topographic point to forestall, to observe and if possible mitigate menaces to accomplishment of the company ‘s aims ( Porter, Simon & A ; Hatherly, 2004:503 ) . One of the nucleus mechanisms of control is common restraint. This means that occupation design should be based on each occupation being restricted by another occupation, meanwhile overseen by supervisors. The method could avoid forces utilizing companies ‘ resources to do net income for themselves. In add-on, feedback mechanisms, as another polar mechanism of control, could guarantee that directors can obtain complete and true studies from their subsidiaries who may non describe a failure on their portion to directors because of the desire to do public presentation better. Therefore, the function of internal auditing in control is to reexamine the company ‘s control to do certain that: controls are effectual to forestall and observe the happening of potentially detrimental event ; and feedback mechanism is effectual so that relevant degrees of direction are informed wholly and genuinely. ‘

2. Function in hazard direction

Based on the COSO description, hazard direction relates to how an organisation sets ends, and so identifies, analyzes, and responds to those hazards that could potentially impact its ability to accomplish its ends. It has become increasing of import due to the high concern hazards caused by frequent alterations of environment and intensive competition. In finance related companies, particularly, most of their merchandises have built-in hazards because of the characters of fiscal merchandises. Risk direction could forestall those hazards from exercising a damaging influence on concern. While internal auditing requires supervising and measuring the effectivity of the organisation ‘s hazard direction, more specifically, an internal hearer can rede the direction and the board sing schemes, selling, operation, capital planning and other facets refering hazards through measuring the activities implemented by directors and forces.

3. Role in corporate administration

As for corporate administration, internal auditing is by and large about engagement in meetings and treatments with members of the board, which may include describing the control state of affairs, informing the board on the capablenesss of cardinal directors, proposing inquiries for hazard direction, measuring the public presentation of sections, guaranting the board receive effectual information.

The importance of internal auditing

Harmonizing to the functions above, it is apparent that internal auditing plays a important function in keeping a company ‘s healthy development. Without effectual internal auditing, hazard direction, control, and administration could non be implemented efficaciously. As a consequence, the company would likely meet menaces that may destruct the concern from both outside and inside.

The function and importance of external auditing

The external audit is an audit performed for parties external to the auditee. Experts, independent of the auditee and its forces, conduct these audits in conformity with demands which are defined by or on behalf of the parties for whose benefit the audit is conducted ( Porter, Simon & A ; Hatherly, 2004:7 ) . External auditing could be divided into two types based on governmental auditing and independent auditing. This essay chiefly discusses independent scrutinizing that the hearers are assigned by accounting or auditing houses because of the state of affairss described above.

1. Role of showing an sentiment

The chiefly function of external auditing is to show an sentiment on whether the auditee entity ‘s fiscal statements are free of stuff misstatements. This means that the external hearer should garner and measure grounds associating to averments about the information contained in these fiscal statements to determine the grade of correspondence between those averments and established standards, GAAP, and pass on the consequences to fiscal statement users outside the entit. External auditing ensures that the fiscal statements are genuinely and reasonably represented by the direction instead than observing fraud. If external hearers find any mistake or fraud relating to the information contained in the fiscal statements during the audit procedure, it is their duty of suggest direction to rectify, or they would describe to fiscal statements users.

2. Role of supervisor

External auditing, as an outside supervisor, oversee the companies, particularly listed companies, in order to forestalling them from stuff misstatement, because of the separation between the ownership and direction maps, the possible struggle of involvement between preparers and users of fiscal statements, and the cognition restriction of fiscal statement users to separate the information for themselves. Not merely does it add the quality of fiscal statements, but it besides gives the credibleness to the fiscal information provided by the direction of companies. This enhances the safety of investing for outside users.

The importance of external auditing

Actually, the importance of external auditing has emerged in the treatment of its functions. Differing from the internal auditing which is importance to companies themselves, the importance of external auditing is chiefly for external fiscal statement users. If these is non external auditing or the external auditing is non effectual, external fiscal statement users would be misled by the untrue and unjust fiscal statements and do an improper determination which may do them bankruptcy. Furthermore, it would take to confusion in the capital market. In another words, the fiscal crisis may be partially controlled, if the external auditing is highly effectual, because the crisis in many states is chiefly caused by stock sell-off due to the market pessimistic sentiment.


The above describes the current economic state of affairs and takes some collapsed finance related companies as illustrations. Though the fiscal crisis did non straight stem from the non-effective internal and external auditing, I believe them could avoid the impairment of the economic.

Mentions List

Cascarino, R. & A ; Esch, S.V. ( 2007 ) Internal Auditing: An Integrated Approach ( 2nd edition ) . South Africa, Juta and Co Ltd.

Porter B. , Simon, J. & A ; Hatherly, D. ( 2004 ) Principles of external auditing ( ( 2nd edition ) . England, John Wiley & A ; Sons Ltd.

Brink, V.Z. ( 1972 ) The Internal Auditor ‘s Review of Organizational Control, Florida, The Institute of Internal Auditors, Inc.

The Institute of Internal Auditors. ( 2004 ) The Role of Internal Auditing in Enterprise-wide Risk Management. London, Institute of Internal Auditors-UK and Ireland Ltd.