EXTERNAL AUDIT, DEVELOPMENT AND

CONTRIBUTION IN AN ORGANIZATIONS

Audit is a professional job that is considers the most prestigious in the

business world. Audit is the appraisal of a corporation, process,
system, product, project, and company. Auditors are the supervisory
body that observes the managerial activities of an organization.
Auditors are independent body, the independence segregate the
auditors from those bodies or persons who have interest in the audited
company. The duty of auditor is to scrutinize the accounts and final
statements of a company and give reasonable declaration that all
accounts of a company were maintained fair and free from any
ambiguous data. The auditor also gives declaration that all accounts
were maintained as per accounting standards. It is to determine the
strength and trustworthiness of the information given in financial
statement of an organization and also give an evaluation of a system
internal management. The objective of the audit is not fulfilled if the
users of the financial statements feel that the auditors were under the
influence of the organization. The audit has some practical constraints
and can also provide assurance that the financial facts are mentioned
in report as per given guidance.

Audit is an essential part of accounting. The approach of audit was up

to the collecting information regarding financial system and financial
data of an organization. Now the scope of the audit has been extended
to further categories as security risk, information system performance
and environmental performance.

The Auditing and Assurance Standard (AAS) 1 by ICAI has defined audit
as under:-

“Auditing is the independent examination of financial information of

any entity, whether profit oriented or not, and irrespective of its size or
legal form, when such an examination is conducted with a view to
expressing an opinion thereon” (www.wikipedia.com -----Audit)

A company gets analogous services from internal and external

auditors. The auditors give assurance to administration that all
necessities are met and business is running efficiently. The
independent opinion of the auditors satisfies and motivates the
investors to keep relation with business in future.
External auditors are those professionals who perform on behalf of
audit firms. The auditors are assigned responsibilities from their firm to
audit a company and give an independent opinion in respect of
following:-

 That the financial statements are free from any material error
whether due to fraud and any other negligence.
 That the accounts were maintained under given rules and
regulations.
 That the financial statements comply with the associated
accounting standards and disclosure.
 That the internal control management is performing activities as
per pertinent requirements and not varies with rules of the
council.
 The auditor must disclose that they have covered all the
associated risk and have been identified and addressed.

There is a difference between audit and financial audit. Financial audit

is restricted to review of financial statement of a corporate body in
order to make sure comprehensiveness and precision of the fixed
assets accounts. The financial auditor provides appropriate, precise,
genuine, reasonable and comprehensive financial information for
publication. The financial audit services are performed by specialist
accountants who have specific finance degree and having good
experience to compile the financial information in a company annual
report. The financial statement seems reliable after auditing from
external auditors.

Auditor independence is an important issue in development of fair

remarks about company financial position. In UK it is forced with
various regulations. The independence of an auditor is sheltered by
Company Act 1985 and 1989. They are also support by professional
accounting bodies e.g Accounting practice Board and International
Accounting Standards or International Financial reporting Standards.
The Company Act 1985 give the responsibility to shareholder that they
select the audit firm for external audit. The Company ACT 1989 secure
the independency of external auditor by make the audit firm
compulsory that it must have membership of recognized supervisory
body before initiating of business.
External Audit Development

The 1st charge for auditing of state expenses was given to “Auditor of
the Exchequer” in 1314 that are seems to be the pioneer in audit field.
Queen Elizabeth I further improved this profession and recognized the
auditors of the imprest with official duty to auditing the exchequer
payments. This system was not successful and gradually failed in 1780
and commissioner for auditing Public Accounts was appointed. The
authority for controlling and issue of funds to state was given to the
commissioner and controller of Exchequer in 1834.

In order to run the department successfully the Chancellor of the

Exchequer William Ewart Gladstone was appointed. He exceptional did
work and give a clear concept of public finance and parliamentary
accountability. William Ewart Gladstone made mandatory changes in
Exchequer and Audit Department Act in 1866 and made mandatory for
all the departments to produce his annual final appropriation accounts.
It was the first time when all departments were required for this report.
The trained professionals from government services were injected in
the Controller and Auditor General and an Exchequer and Audit
department to make this department more reliable. It was stated in the
given Act. The Controller and Auditor General was given two major
responsibilities, one to issue of the public fund to government from
Bank of England with in the budgetary limit approved by Parliament.
Second to audit the department like Central governments
departments, Government agencies and non departmental public
bodies, those are financed by parliament, for submission of final report
to parliament. Now in UK National Audit Office is given responsibility
for auditing the government expenditure.

It has always been challenging position for the accounting profession

when management of an organization and audit professional cross
their limit. Changes are made in the rules and regulation to run the
system successfully and to save the interest of the corporate users
from criminals and change of economic conditions. Enron was dealing
in energy sector. He had a largest market share in energy sector.
Arthur Anderson was a well reputed audit firm. He was serving to
Enron being an external and internal auditor. Enron scandal was the
biggest scandal of accounting of 21st century. Enron and Arthur
Anderson both violated the corporate rules and regulation. Enron did
not disclose some of liabilities in order to obtain more fiancé from bank
or any other financial institution on their own favorable terms. Finally
M/S Enron was declared bankrupt. Arthun Anderson is the fifth largest
audit firm worldwide was lost their reputation and banned to audit the
public companies due to this fraud.
The other big scandal is M/S Worldcom. The Chief Executive of the
company expended the business on large scale. It was the time of late
1990’s when entire communication sector was at the stage of declining
and reported loss in the financial statements. It was only Worldcom
which was in profit because they transfer the liability reserve to
operating income and in all 3.85 (B) expenses were not reported in the
accounts in order to show company high profitability. Consequently the
higher management was fired and external auditors including Arthur
Anderson were black listed.

After these scandals the internal audit was given more importance and
necessary changes were made to strengthen the internal auditors and
also the management access to financial data was restricted.

ROLL OF EXTERNAL AUDITOR IN 2009

Many organizations are supporting their country Regulatory

Authorities, for external and internal audit, to enhance the
professionalism of audit firms, to develop anti fraud strategies and
funds management techniques. Support for improvement in
governance and management (SIGMA) & Committee of Sponsoring
Organization of the Treadway commission (COSO) are in action to help
the member countries to make stronger their Supreme Audit Institution
(SAIs). SIGMA helps to produce strategic development plan. SIGMA
center two major departments Public Internal Financial Control (PIFC)
Development of Anti Fraud Structure

Public Internal Financial Control (PIFC)

The internal audit is as important as external audit. Surbanes Oxlay Act

section authorizes external auditors to check reliability of internal
audit. Public accounting Oversight Board section 5 authorizes the
external auditors to perform duty to audit of internal control over
financial exposure. SIGMA also put vital contribution to strengthen the
Public Internal Finance Control, to amend the statuary regulation of
PIFC, cash administration and control system within budgetary limits,
recommend centralization to harmonized method on internal control
and internal audit, financial systematize action at central and local
level, budget control and accounting.
In USA Committee of Sponsoring Organization of the Treadway
commission (COSO) is a private company which provide cost less
services to management of an organization in respect of following:-

 Business ethics
 Internal Control
 Enterprise risk management
 Fraud
 Financial Reporting

Anti Fraud System & Structure

European Union budget is a sensitive activity. The information in

respect of utilization of budget is given by court of auditors every year.
The administration of budget is improved by lucidity and double entry
book keeping system.

European commission has established “European Anti Fraud Office”

(OLAF - Office Européen de Lutte Anti-Fraude) by EC, ECSC Decision
1999/352 of 28 April 1999 to stop the sources of fraud. The
department was given full responsibility to investigate the reasons of
fraud and prepare an anti fraud strategy.

SIGMA also played an important roll in development of anti fraud

strategy to meet the requirements of his partner countries and
European Audit regulatory authorities. The strategy was developed to
reinforce the Anti Fraud Coordinating Services (AFCOS).

Public Finance

Public Finance is also known as Government expenditure which is

categorized into three sectors.

1. Government Revenue Expenses

2. Government Capital Expenses
3. Transfer Payment.

Government activities are mostly designed to give maximum benefit to

society. They pay expenses from the income generated from taxes.
State budgeting is considerably more complex and often consequence
in incompetent performance. They target two areas reserves and
financial plan and funds allotment. SIGMA exclusively pays special
attention on budget preparation and analysis, budgetary structure for
half year, following points, strategy for budget preparation,
accomplishment of budget, and support of I.T for budget execution,
Public accounting structure, funds management and liability
administration.

PROBLEM AND POSSIBLE CHANGES IN FUTURE

The audit fee is the earning of an audit firm which is used to pay
expenses. The company pays for auditing that the audit firm or auditor
does not want to do any thing that put at risk the income. The auditor
relies on audit fee from company audited that can affect the
independence of an auditor. If the auditor gives preference to its fee he
will not take into account the interest of shareholders or other users of
financial information.

In order to maintain the independence of auditor he must be protected

from the board of directors. If auditor gets security of job and they
were able to challenge financial statement and other data, they will
work with more confidence and independence. It has been reminded
many times through proposals to change the recent procedure and
give high monetary benefits to auditors to act their responsibilities with
out having their business interest negotiated by client relationship.
 References

1. ^ Auditor blames politicians for EC waste and corruption

2. ^ Paul van Buitenen "Alleged irregularities in OLAF", 25
November 2008
3. ^ “The Audit Commission” by Couchman V. in Sherer & Turley:
Current Issues in Auditing, Paul Chapman Publishing (1997)

 ^ Cutting, Thomas (January 12, 2008). "How to Survive an

Audit". PM Hut. http://www.pmhut.com/how-to-survive-an-audit.
Retrieved December 13, 2009.
 Retrieved from "http://en.wikipedia.org/wiki/Financial_audit"
Categories: Auditing
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 International Standard on Auditing 315 Understanding the Entity

and its Environment and Assessing the Risks of Misstatement

 Typical organization standards for external auditors
 Baker, R., 2005. The Varying Concept of Auditor Independence: Shifting with the
Prevailing Environment. The CPA Journal Online.
 ^ Report
 "http://en.wikipedia.org/wiki/Auditor_independence"