Auditing

The external auditor's report in corporate financial statements is seen as providing key assurance to the shareholders' interests. The U.S. Congress, U.S. Securities and Exchange Commission, and other interested parties, such as institutional shareholders, have taken steps to ensure that information is accurate and free from management influence. The U.S. Sarbanes-Oxley Act of 2002 made the audit committee the body that appoints and compensates the external auditor. The audit committee must now approve every nonattest fee. However, AICPA’s Rule of Conduct 101, Extended Audit Services, pertains to internal control-related services that are allowable under professional standards while maintaining the external auditor’s independence. The interpretation states that independence would not be considered impaired if “the member or his or her firm does not act or does not appear to act in a capacity equivalent to a member of client management or as an employee.” The vagueness included in this interpretation does not provide a clear outline of actions that may constitute actions that can cause external auditors to lack independence.

Internal auditing is an independent appraisal function that is performed in a wide variety of companies, institutions, and governments. What distinguishes internal auditors from governmental auditors and public accountants is the fact that they are employees of the same organizations they audit. Their allegiance is to their organization, not to an external authority. The authority that the internal auditor should report to is the audit committee of the organization. Although the internal auditor must be objective related to the organizational unit he is auditing, they may find this difficult to achieve considering that he is part of the organization and he will be conducting an audit on the quality of performance of his fellow colleagues. In addition, if access to audit committee can be intercepted by upper management, then internal...