EXTERNAL AUDITING

Audit and Assurance 1

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The Role of External Auditing in Corporate Governance

The Role of External Auditing in Corporate Governance

Introduction

The global financial crisis has shaken the economies of all parts of the world. The international financial collapse started in the mid of 2007 and proceeded until 2008. The stock markets have fallen immediately in different parts of the world. Not only this, the survival of financial institutions was in danger. The uncertainty and risks in the business transactions exceeded beyond imagination and one after another, many businesses failed. Therefore, the governments of all nations had huge pressures to come up with a strategy to reduce the hazardous impact of the financial crises. One of the initiatives in this regard is an improved system and policies of corporate governance.

The code of good governance or corporate governance should not be seen simply as a regulatory process that is intended to interfere with or regulate processes, but rather as the firm intention to demonstrate to stakeholders and investors that companies are transparent, effective, efficient and above all with a high sense of commitment to be better every day. Good corporate governance should not be considered as an issue than is fashionable, but as the real solution to the crisis of confidence and lack of credibility. One of the major results of the financial crisis is the increasing popularity of external auditors. Investors, creditor and general public rely more on companies that conducts external audit on regular basis.

Auditing

In order to analyse the rising demand and trend of external auditors, it is important to review the basis concept of auditing along with a comparison of internal and external auditors. Auditing is a systematic review of the financial statements, records and operations in order to determine whether they are in accordance with generally accepted accounting principles, with the policies established by management and any other legal requirements of the country. The audit aims to determine the accuracy, completeness and authenticity of the financial statements, records and other administrative and accounting documents presented by management, as well as suggest administrative and accounting improvements. The financial audit is a review of the financial statements similar to external audit. Its purpose is to express an opinion on whether the balance sheet figures and the income fairly present the current state of the company in accordance with generally accepted accounting principles (Jensen, 1993, p. 831-80).

Comparison of Internal and External Audit

The process of auditing can be classified into two main categories: internal audit and external audit. Internal audit can be defined as a separate activity that takes place within the company and is aimed at the review of accounting operations, in order to provide a service to the management. The main objective of internal audit is to assist management in fulfilling their roles and responsibilities, providing an objective analysis, assessments and recommendations on the operations and departments of the organisation. Moreover, the work of internal audit department facilitates and simplifies the work of the external audit. This is accomplished through ...