Purposes of an External Audit, LO 1, 2, 4 The Rasmus Company manufactures small
ID: 2354540 • Letter: P
Question
Purposes of an External Audit, LO 1, 2, 4
The Rasmus Company manufactures small gas engines for use on lawnmovers and other power equipment. Most of its manufacturing has historically been in Midwest, but it has recently opened plants in Asia that account for about 30% of its production. The company’s stock is listed on the New York Stock Exchange.
a. Explain the rationale and value of an audit of a publicly held company to investors, creditors, and to the broader community as a whole.
b. Explain why an audit of internal controls provides value to the investing public.
c. Explain the importance of an audit committee to the reliability of the financial statements and the audit function.
Explanation / Answer
a. A lack of business ethics, corruption, outsourcing, and greed have led too many companies to make business decision and allowing their own greed to handle a companies financials with reckless abandon. An audit can lead them back to the light of reason. b. The internal audit function should have full and free access to the company’s audit committee; unrestricted access to the company’s records, documents, property, and personnel; and authority to discuss initiatives, policies, and procedures regarding risk assessment, internal controls, compliance, financial reporting, and governance processes with management and other corporate governance participants. Auditors should be knowledgeable in professional standards, rules, laws and regulations, and understand their clients’ industry and business, corporate governance, financial reporting process, and internal controls. By including these key aspects, the investing public can be assured of the auditors integrity, objectivity, confidentiality and competency. These character aspects will give confidence to the investing public that their dollars are being invested and managed wisely. c. Audit committees play a critical role in the financial reporting system by overseeing and monitoring management's and the independent auditors' participation in the financial reporting process.
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