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Internal Audit Quality And Financial Report Quality

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Question:

Discuss about the Internal audit quality and financial report quality.

 

Answer:

Purpose of external audit and difference between external and internal audit:

An external audit offers complete assurance to the investors and participants in the financial market that the accounting records of an organisation are complete and transparent in accordance with IFRS, regulatory needs and industrial norms. Complete assurance denotes the confidence of the investors that the external auditors reviewed the processes and controls of the organisation in detail. However, external audit differs from internal audit in a variety of ways.

The internal audit has the objective of reviewing the routine activities along with providing recommendations for improvement. On the other hand, external audit is conducted to evaluate and authenticate the financial statements of an organisation (Abbott, et al., 2016). Internal audit is conducted by the employees, while external audit is conducted by an external party. The management appoints the internal auditor, while the members appoint the external auditor. The only user of internal audit is the management, while the stakeholders use external audit.

 

Examination of the audit report of Rolls Royce:

After critical examination of the audit report of Rolls Royce in 2017, it follows the audit structure, as proposed by ISA (UK) 700. In the initial section of the audit report, opinion paragraph is inherent, in which it is stated that Rolls Royce has prepared its financial statements according to IFRS and it provides a true and fair view of the business state. After opinion paragraph, unqualified audit report is present stating that there is no relationship between the organisation and the auditor in compliance with the pertinent ethical requirements related to audit. In the third section, the auditor reports by exception in relation to going concern (Contessotto & Moroney, 2014).

In the fourth section, the auditor has reported key audit matters in accordance with ISA 701. The external auditor has made separate sections to explain the accountabilities of the individuals involved in preparing the financial statements, assess going concern and accountabilities of the auditor. Finally, the auditor has presented separate statements to report responsibilities relating to financial and non-financial information incorporated in the financial statements. The external auditor of Rolls Royce is identified as PwC from the latest annual report and the audit statement is written in a clear and precise language for better understanding of the users of the financial statements (Rolls-royce.com, 2018).

Examination of corporate governance of Rolls Royce:

According to the statement from the audit committee, the main issues include the evaluation of financial reporting, principal risks along with risk and control environment. The purpose of the audit committee of Rolls Royce is to review the financial announcements concentrating on accounting policies, projections and judgements, adding relevant disclosures and complying with the needed regulations (Lisic et al., 2016). In addition, it needs to look after internal control system along with business continuity and IT vulnerability. Rolls Royce has five members in its audit committee and they are identified as follows:

Lewis Booth has finished Bachelor in Mechanical Engineering having finance expertise and experience of above 42 years in the global automobile industry. Irene Dorner is an MA in Jurisprudence having background in risk management with a 30-year professional career in HSBC. Beverly Goulet is a Bachelor of Corporate and Securities Law and she has been an important executive member of the American Airlines from 1993 to 2017. Lee Hsien Yang is a Bachelor of Engineering having worked as executive for 12 years in Singapore Telecommunications Limited.

 

References:

Abbott, L. J., Daugherty, B., Parker, S., & Peters, G. F. (2016). Internal audit quality and financial reporting quality: The joint importance of independence and competence. Journal of Accounting Research, 54(1), 3-40.

Contessotto, C., & Moroney, R. (2014). The association between audit committee effectiveness and audit risk. Accounting & Finance, 54(2), 393-418.

Lisic, L. L., Neal, T. L., Zhang, I. X., & Zhang, Y. (2016). CEO power, internal control quality, and audit committee effectiveness in substance versus in form. Contemporary Accounting Research, 33(3), 1199-1237.

Rolls-royce.com. (2018).  Retrieved 8 June 2018, from https://www.rolls-royce.com/~/media/Files/R/Rolls-Royce/documents/annual-report/2017/2017-full-annual-report.pdf

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