Internal controls, an internal audit function, and an audit committee are all elements of a strong corporate governance system. How should an external auditor evaluate these elements in making a risk assessment? What are the ethical signs that each system is operating as intended?

Question

What will be an ideal response?

Answer 1

The internal audit function should be an independent one with direct links between the internal auditors and audit committee so that top management does not have the opportunity to interfere in the reporting process. The ethical values of due care, responsibility, and accountability support an independent internal audit committee function. Internal controls should provide the foundation for proper accounting and reporting by establishing a control environment that fosters an ethical culture through the tone at the top set by management. Top management should promote honesty and integrity in the financial reporting systems. The corporate governance system establishes how matters of concern will be handled within the organization and with the external auditors. There should be clear communication lines within the organization for the internal auditors. The audit committee should be informed and actively involved in overseeing the financial reporting process. Risk assessment depends on the strength of these systems and whether they are operating as intended.