A study examining the pros and cons of adopting auditors within a company

Category: Accounting

There is increasing demand from small company about exemption from audit on their financial statement. Indeed, some of the countries such as Singapore, Australia and UK have exempted small company from audit. However, in Malaysia, audit still is a compulsory statutory requirement for all the companies' regardless size. In this report, we have conducted an interview of two companies, Panasonic Malaysia Sdn. Bhd. and Syarikat Perniagaan Lam Zhuan Sdn. Bhd. The Panasonic is the electronic and electrical industry, while the Syarikat Perniagaan Lam Zhuan Sdn. Bhd. is the toys and foods industry. We had set a set of questionnaires to interview the manager and directors of the companies respectively. The objectives of the interview that we conducted are based on the issues such as necessity to appoint auditors for the company, as well as the pros and cons to adopt the auditors within the company. Besides that, we also analysis the companies' expectation on value added services from professional accounting firms.

An auditor is an outside accountant that occupied by the board in order to review the financial statements. The main purpose of auditor is to reviewer on the accurateness of the financial statements. Besides that, the auditors are usually examining some of the usual dealings or transaction as well as analysis internal controls, accounting procedures, and financial reporting systems. An audit offered to provide a spot check on the financial information and to guarantee the accuracy of the financial statements that are free from material misstatement. An auditors are able to assists the company in ensuring that the organization is run effectively. Besides that, it also makes sure that the community records of the company are kept accurately and taxes was paid appropriately on time.

Nowadays, there have two types of audits which are internal audit and external audit. The internal audits are similar to external audits because they are analysis the processes and operations which use by a company to prepare the financial statements (eHow, 2010). Furthermore, the internal auditors are employed by the organization as an employee while external auditors are independent. Internal auditor is consulting an organization on the way to develop and reach their goals. Moreover, internal auditor are mostly focus on evaluate the business processes and give recommend to the organization. Some of the auditor can engage the internal control topics which are the reliability of financial statement, fraud detection, or agreement of laws and regulations (BusinessKnowledgeSource, 2010). On the other hand, the external auditors are mostly focus on the financial statement whether there have misleading. The external auditors are necessary to give confidence to their investors, regulators and the public. The auditors' opinion is representations in the financial statements must true and not mislead (eHow, 2010).

The advantages of internal auditors can help in validate the effectiveness of their organization's internal controls and check for misstatements that might occurs such as waste, or fraud. The duty of the internal auditors is to check and evaluate the financial information, information systems, procedures, and internal controls in order to ensure the account is correct and accuracy being recorded. The internal auditor can provide a proper accounting system to the company for decision making. In order to reach the objective, the company should have an internal audit to well handle their business is effectively. Besides, internal audit provide an orderly arrangement of personnel, process and strategy to the company to achieve a positive outcome. An auditors can analyze that the weaknesses of the company and provide opinion as well as recommendation to improve the company performance. According to Business Knowledge Source stated that the management can improve their company performance through the report that provided by the internal audits to achieve better result. Besides that, they also mentioned the internal audits are useful in control over the business activities. Through an internal audit, the company can get rid of complexity and uncertainty that might occur and look forward to have a solution to verify the problems (BusinessKnowledgeSource, 2010). Internal audits can help in eliminated or reduce the probability of the error or fraud that occur within the company. Furthermore, the company intend to employ internal auditors in order to provide them a spot check on their employees and also account, therefore, this will reduce the chance of fraud happening. Therefore, appoint internal auditor can make the company to have a smoothly business operation.

However, there are some disadvantages to the internal auditors. Firstly, sometimes the internal auditor can fail to check the planned frauds. Since the management of the organization are playing many tricks in order to control the accounts and to hide the inefficiencies. Besides that frauds will not reveal and the audited accounts will not constantly demonstrate the true and fair picture. There is a room for fraud, if the management provides the false information. Thus, sometimes the internal auditor will give an undesirable result to their organization. Another disadvantages to the internal auditor, they can fail to disclose the accurate information of what is happening to the organization. The background of entry may not be totally clear to internal auditor and management may be unclear on their clarifications. An auditor has to give the audit report to the company whether these things has happen or not. Lastly, the internal auditor doesn't always show the true view. Since the principle of internal auditor's is fails, they don't see the real business affairs and the picture of the audit is changed (BusinessKnowledgeSource, 2010).

Before an organization choice an external auditor, they must have selective procedures to decide which accounting firm is right for them. There are some factors to help them to choice it which are the size of the firm, the range of the job, the legal requirement of the firm and the financial plan obtainable an external auditor. The organization can hire the "Big Four" accounting firm to audit their financial statement. Furthermore, there are some advantages and disadvantage of having an external auditor in the organization. The first advantage of having an external auditor is the short-term benefits. The organization may experience instant benefits from having an external auditor, the primary benefit being that any procedure or operational insufficiency the auditor finds can be rapidly to correct or improve. Besides that, many firms rely on their financials to calculate the tax filings which would be inaccurate because of the defective statements whereby the result in the tax penalties and interest. The next advantage of having an external auditor is the long-term benefits. The external auditor can guarantee the management and board of director in the organization. Besides that, the accounting controls and procedure used are helpful and enhance the confidence in the organization with investors, regulators and the general public (eHow, 2010).

Conversely, the main disadvantages of external auditors are that the external auditors can be expensive. Therefore, the company must plan their budget appropriately and properly in order to ensure that they are not over budget. However, in some circumstances, the company have to face the hassle of changing the external auditor because the auditor will be require to change yearly or after a period of time (QFinance, 2009). Moreover, external auditor focus areas are much narrower because they concerned only on the financial aspects of the organization. However, the observance and the operation subject or issues are not in the responsible of the external audit. Apart from that, the external audits many unintentionally fall short in accurately adjust the opinion or outlook on the financial stamens that are misstated. In other words, no matter that the external auditor perform their job according to the generally accepted auditing standards (GAAS), the material misstatement that exist in the financial statement might be not detected, then this caused the external auditor offer wrong or inappropriate opinion an recommendation to the company (Colbert, 1995).