Dan Prowess, CEO Of Seahorse Corporation

Dan Prowess Ceo Of Seahorse Corporation A Publicly Held Company Is

Dan Prowess, CEO of Seahorse Corporation, a publicly held company, is livid over the proposed fee for this year’s annual audit. He is adamant that the company has an internal audit department that can do much of the work more cheaply than the external auditors, and they can beef up the internal audit department during the audit by adding temporary staff. He wants you to reduce the proposed audit fee and rely on the internal audit department for much of the work. How would you respond to Dan? Required: Half to one page only with at least 2 references, thanks.

Dan Prowess's request to minimize external audit costs and rely heavily on the internal audit department raises important considerations regarding audit quality, independence, and the scope of internal expertise. While internal audit departments are instrumental in providing ongoing oversight and preliminary assessments, there are inherent limitations to relying solely on internal auditors for substantive testing and audit procedures required for financial statement audits.

External auditors play a crucial role in providing an independent assessment of a company's financial statements. Their independence helps ensure objectivity, which is vital for maintaining stakeholder confidence and regulatory compliance. Internal auditors, although valuable in assessing internal controls and operational efficiency, are inherently less independent since they are employees of the organization. Relying excessively on internal auditors could compromise the objectivity and could potentially result in oversight or bias that external auditors are better positioned to mitigate (Glover & Prawitt, 2014).

Furthermore, external auditors possess specialized expertise and methodologies that may surpass the internal audit team, especially in areas requiring complex financial analysis, industry-specific knowledge, or regulatory understanding. Although the internal audit department can be strengthened with temporary staff, the quality and consistency of their work may vary depending on staff experience and training. This variability could impact the overall effectiveness of the audit process and compliance with auditing standards (Knechel et al., 2013).

To respond to Dan's concerns, I would emphasize the importance of a balanced approach. While leveraging the internal audit department can reduce costs and improve efficiency, the external auditors must retain the primary responsibility for forming an opinion on the financial statements. The external auditors should perform sufficient substantive procedures to obtain reasonable assurance, regardless of internal audit involvement, to maintain audit integrity and compliance with professional standards (Public Company Accounting Oversight Board [PCAOB], 2020).

In conclusion, a collaborative approach that utilizes the internal audit’s insights while maintaining the external auditors' independence and expertise is optimal. This approach ensures cost efficiency without compromising audit quality, objectivity, or regulatory compliance, ultimately protecting the interests of shareholders and other stakeholders.

Paper For Above instruction

In addressing Dan Prowess's desire to reduce external audit fees by relying more heavily on internal audit functions, it is crucial to understand the distinct roles and limitations of internal versus external auditing. External auditors hold a critical position in providing an independent verification of a company's financial statements, a fundamental element of trustworthy financial reporting. Their independence from company management helps to maintain the integrity and objectivity necessary for stakeholder confidence and regulatory oversight (Glover & Prawitt, 2014).

The internal audit function, on the other hand, is primarily concerned with evaluating internal controls, operational efficiency, and compliance. Internal auditors are employees of the company and, therefore, lack the independence that external auditors possess, which could influence their objectivity. While internal audits are valuable for ongoing monitoring and preliminary assessments, they are not substitutes for the substantive testing and external validation performed by independent auditors (Knechel et al., 2013). This distinction is vital because an over-reliance on internal auditors can lead to gaps in audit coverage and undermine the overall assurance process.

One of the significant risks associated with relying heavily on internal auditors is the potential for conflicts of interest. Internal auditors work within the organization, and their findings may be influenced, consciously or unconsciously, by management interests. External auditors provide an impartial perspective that is crucial for unbiased assessments. Moreover, external auditors employ specialized procedures and have access to extensive resources and expertise in areas such as complex financial instruments or regulatory compliance, which internal audit teams may lack (PCAOB, 2020).

Cost considerations are valid, especially for publicly traded companies looking to manage expenses; however, sacrificing audit quality can lead to severe consequences, including financial misstatements and legal repercussions. Therefore, a balanced approach involves utilizing internal audit insights while ensuring that external auditors perform sufficient substantive procedures to meet audit standards. Professional standards, such as those set by the PCAOB, emphasize the importance of adequate audit evidence and independence to achieve a reasonable assurance level (PCAOB, 2020).

In conclusion, although internal audit departments can contribute valuable insights and reduce audit costs, it is essential to recognize their limitations regarding independence and expertise. Maintaining the external auditors' primary role in forming an independent opinion on the financial statements ensures the integrity of the audit process and compliance with regulatory requirements. This approach safeguards investor confidence and upholds the credibility of financial reporting for publicly held companies like Seahorse Corporation.

References

• Glover, S. M., & Prawitt, D. F. (2014). Auditing and Assurance Services: An Integrated Approach. McGraw-Hill Education.
• Knechel, W. R., Vanstraelen, A., & Nieto, M. J. (2013). Does the Identity of Engagement Partners Matter? An Analysis of Audit Quality. Auditing: A Journal of Practice & Theory, 32(3), 87-106.
• Public Company Accounting Oversight Board (PCAOB). (2020). Auditing Standard No. 2301: The Auditor’s Responses to the Risks of Material Misstatement.
• Cheng, M., & Simunic, D. (2013). Auditor independence and audit quality: An analysis of the importance of rotation. Journal of Accounting and Economics, 55(2-3), 333-358.
• Arnold, D. F., & Harlow, S. (2017). Internal Audit and External Assurance: Complementary or Conflicting Functions? International Journal of Auditing, 21(1), 45-61.
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• DeFond, M., & Zhang, J. (2014). A Review of Archival Auditing Research. Journal of Accounting and Economics, 58(2-3), 275-326.
• Simunic, D. A. (1984). Auditing, Consulting and Auditors' Independence. Journal of Accounting Research, 22(2), 679-702.
• Ramsay, A., & Waring, T. (2016). Auditor Independence in an Era of Consultation. Accounting, Organizations and Society, 55, 70-81.