Internal auditing is recognised as an independent objective which is based on the assurance and consulting activities which are designed to add value and enhance the performance of the organizations. The inclusion of the audit has been further beneficial for the business entities in achieving the objectives of the business by bringing a systematic and disciplined approach towards evaluating the effectiveness of the financial statements. These is ensured with improvements brought in the firms by risk control, risk management, government process and controls (DeFond and Zhang 2014).
Internal audit is considered as the function, which defines the specific units designated for the monitoring and controlling of the financial practices in a company. The financial statement is seen to present the information in an adequate manner which is needed by the various parties for making the different types of the strategic decisions in a timely and effective manner. The financial statements of the audit are seen to be published for the external parties for giving assurance that the financial reporting is seen to be in accordance with the present accounting standards (Ahmed Haji and Anifowose 2016).
In counter where the market is developed with the larger context, it is supposed to include the mechanisms to protect the potential and current players. The financial reporting factors of the public companies are seen to be organized in a manner which are important part within the capital market activities whichensures transparency principle application (Badolato, Donelson and Ege 2014).
In July 2013, the “Chartered Institute of Internal Auditors (the Chartered Institute)”, the Ireland and the UK of the IIA has released a publication for “Effective Internal Audit in the Financial Services Sector”(Caratas and Spatariu 2014). This is usually done with the application of additional benchmarking tools against which the firms are able to measure the various types of the internal audit functions. These functions are aimed to incorporate the different types of the strategies which are related to the focus on the IIA International Standards.
The important recommendations of the study are based on the relevant observations from the firms of UK which are directly in compliance to the implemented standards for the Chartered Institute of Independent Auditors. These particular aspects are often identified with the significant discourse on the financial conduct authority and corporate governance regulators. In this particular aspect it is important to understand that the study has considered the service regulators as the financial conduct authority along with the prudential regulation authority. In addition to this, the CG regulator for the study is seen to be based on the Financial Reporting Council (Munteanu and Zaharia 2014). The mandatory recommendations as per the important elements discussed in the IIA and “International Professional Practices Framework (IPPF)” comprise of number of mandatory elements which needs to be present in anaudit report. Some of these items are stated as definition of the internal auditing, code of ethics and practices as specified in the International Standards of Auditing.The standards are seen to be conducive for defining the associated ideas as per the internal auditors and mandatorily applicable to all the members of the IIA. The recommendations pertaining to the independent committee are intended to deliver the further guidance associated to the financial services of the internal auditors (Alzeban and Gwilliam 2014). This consideration is applicable to the company’s board of directors and executive managements. The important form of the recommendations to the management needs to be considered with the strong recommendation guidance as per IPPF and IIA support. The management is particularly thoughtful of the financial services and the recommendations pertaining to the internal audit functions which has a significant impact on the firms operating within UK (Ege 2015).
The primary role of the internal audit has been considered as per the guidance to the board and executive management to protect the sustainability and reputation of the organizations by protecting the assets. It is also assessed as per the considerations of the various types of the important information related to the significant risk identification based on appropriate risk function (Drogalas, Karagiorgos and Arampatzis 2015).
The purpose and the responsibility of the authority is also depicted to be conducive with the responsibilities pertaining to the audit activities which are defined formally and defined in terms of the internal audit charter which are consistent with the definition of the Internal Auditing and code of ethics. The chief audit executive should mandatorily include the periodic review of the internal audit charters and present the same to the senior management for the final approval process (Trotman and Trotman 2015).
The internal audit charter is depicted as a formal document which defines the various types of the activities pertaining to the audit purpose, responsibility and authority. In addition to this, the internal audit charter is also responsible for contributing to the various types of the requirements which are considered to be relevant to the inclusion of the nature of the chief audit executive functional reporting relationship. The board uses the different types of the procedures for the authorization of the information as per the personnel, record, physical properties which are related to the performance of engagements. These are often seen to define the scope of the internal audit activities. The final approval is depicted to be condoned with the studies which are related to these scopes of the internal auditors (Newton et al. 2016).
The Internal audit scope needs to be unrestricted in nature. There should not be any scope for the organizations pertaining to the delivery of the mandate. The chief audit executives are needed to report to various levels of the organizations which permits internal audit activity to fulfil their responsibilities. In addition to this, the chief audit executive is also required to confirm to the board in matters pertaining to the presentation of the information annually as per the organizational independence. In general, the organizational independence is depicted to include the different types of the components which may be achieved by the auditors as per the functional reporting role. The role of the board can be defined with the approval of the internal audit charter and approvals pertaining to risk-based factors for the internal audit plan. The approval of the risk based internal audit plan has been considered as per the communications as per the chief audit executive as per the internal audit activity (Burrell Nickell and Roberts 2014). The approving decisions are further based on the application matter relevant with the performance and several types of the other matters. The interpretation of the audit functions needs to be also assessed as per the approving the remuneration of the chief auditor and chief audit executive. It is also necessary to make the enquiries relevant to the remuneration of the chief audit executive and determine the necessary scope for the resource limitations (Association of Certified Faud Examiners 2014).
The risk assessments and the prioritisation aspect need to be considered with the internal audit work. In this setting the audit needs to include the necessary elements of the business strategy which needs to be independent of the view pertaining to the emerging and systematic risk factors. The chief planning of the audit functions will be discussed with the preparation of an appropriate risk-based plan which will be able to prioritise the internal audit activities which are consistent with the goals of the organizations. The main interpretations have been identified with the significant nature of the considerations for the study which have been able to focus on the developing of a relevant risk-based plan. Internal audit needs to make the relevant plan which will be considered as per the scope of the audit plan and it does not necessarily cover the relevant aspects of the audit report (Bruynseels and Cardinaels 2014).
The internal audit in general has been consistent in generating the important information which is useful in depicting the relevant changes of the internal audit plans and approval of the same as per the audit committee. They need to have the flexibility for dealing with the unplanned events pertaining to the prioritising audit plans and consider the different types of the emerging risk factors in audit. The changes in the audit plan needs to be recognised as per the ongoing risk assessment. It is important for the chief executive to communicate the relevant matters relating to the internal audit activities considered with the resource requirements. The senior management is of the opinion of considering the review and approval of the final audit plan. The chief audit executive’s role is further determined with periodical assessment as per the governance and process which is there on the accomplishment of several objectives (Matari, Swidi and Fadzil 2014).
The governance factors are depicted with the promoting of the ethical values in the organization which is considered with the operating effectiveness of the internal structure of the governance along with processes implemented in the organisation. The information presented by the executive management pertaining to strategy and decision making of operational aspects need to be also present in the financial statement of the company. The internal audit components are further identified with the scope of supporting strategy and operational decision making by the control functions. It is able to consider whether the information presented to the executive management is presented in a fair manner thereby considering the strategies associated to corresponding business model, benefits, as options, risks and other factors. It needs to be further understood that the internal audit cannot be held responsible for setting of risk appetite in an organisation. The risk appetite may be as a result of review of active involvement of the executive management and the board members however whether there needs to be any separate provision made within it should be embedded within the activities of the organisation which is limited to the reporting made in the organisation. The interpretation of the risk management processes is depicted with organisational objective support which are aligned with appropriate response to these risks, organisational motives and relevant information available on carrying out the desired responsibilities (Alzeban and Sawan 2015).
The scope of the internal audit can be considered with the control culture and risk which are essential for assessing whether risk actions are in line with ethical values, policies and risk attitude of the management. The chief audit executives in the organisations need to manage a really report to the senior management related to audit activities which is able to recommend on significant areas of risk which may take place in the future related to Mitra’s statement, governance issue and as per the request made by senior management of the board. Therefore, it can be stated that the main function of internal audit should be able to evaluate the effectiveness of the risk management process and improve the ideas in which there is disparity in disclosure of any information as per compliance of accounting standards (Petra?cu and Tieanu 2014).
The main aim of the research is to provide an outline for the internal audit and find out how the financial reporting is affected by internal control thereby identifying ways to improve effectiveness of these controls.
The main objectives of the study are listed below are as follows:
The main resources for the secondary data are taken from online resources, journals, books, e-books and extensive use of university library resources. In addition to this, a significant amount of data has been also included from the internal control findings ofVirtusa Corporation. The main source of primary data is collected from theinterview with manager.This information will be used to compare the effectiveness of Virtusa Corporation with other organizations.
The limitation of the study is concerned with identifying only the issues pertaining to auditing and material misstatements rather than any other financial parameters to show the effectiveness among different corporations. In addition to this, the demographic aspect has been also considered as a major limitation for the study. This is due to the fact that all the organizations considered for evaluation will be based in the United Kingdom.
The research study will be segregated into six chapters. The first chapter has discussed on the background of study, aims of the research, research objectives, brief research methodology and limitations of the research. The second chapter has addressed the literature review of the theory of internal audit and internal control. The third section of the study relates to the methodology used in this research. The fourth chapter is able to depict the observations and findings of the research. The final section has concluded the study along with providing recommendations for future work.
The global business environment has been changing considerably and visibly over the last few decades, owing to phenomena of international significance like that of Globalisation, liberalisation of trade and commerce in different countries and also technological as well as infrastructural innovations (Ferraro and Briody 2013). All these factors have cumulatively contributed in making the global business scenarios more integrated, inclusive and interconnected and there has also been creation of what is known to be a “Global Marketplace” for almost all types of industries and businesses (Jankalová 2012).
Accounting and finance being one of the most significant components of any business, the need for efficiency and effectiveness in the same can also be seen to be felt, across the globe (Bull 2014). Aspects like internal auditing and internal control on financial statements and activities have been gaining increasing importance in the operational frameworks of business all across the world.
Over the years considerable debates and discussions have been done in these aspects and there exist huge literary and scholarly evidences in the domain of importance, implications, meaning and applications of internal auditing in business organizations in the contemporary period.
The term “Audit”, refers to a systematic examination of the financial records, statutory accounts, vouchers and financial activities of any organization, which help to explore the extent of truth and fairness in the financial statements and also the non-financial disclosures of the same (Arens, Elder and Mark 2012). As Louwerset al. (2015) opine, the process of auditing of business organizations or any other concern, also ensures the proper and systematic maintenance of books and financial records by the concern, following the legal framework, thereby making it easier for the organizations to take financial decisions and steps towards different business endeavours.
In this context, Abbott, Parker and Peters (2012), discusses about two primary types of audits which take place for any organization in a generalised framework- the external audit and the internal audit. According to the authors, internal audit refers to an independent assurance and consulting operation within the organizations concerned, which is primarily designed with the aim of adding value to the organization by improving the overall operational framework of the same. Lenz and Hahn (2015), perceive internal auditing framework as a systematic and disciplined activity, which acts as a catalyst in the improvement of the following aspects in the operational framework of any organization, especially commercial and business ones:
Along with the above-mentioned activities, internal auditing systems also help in designing and providing beneficial recommendations and insights, formed on the basis of the analysis of the different operational activities and business processes of the organizations (Feizizadeh 2012).
From the above discussion and review of the perceptions and opinions present regarding the notion of “Internal Audit”, it can be concluded that internal audit is one of the most essential components in the operational framework of any organization, especially commercial organization, which have immense implications on the overall profitability, prosperity, competitiveness as well as long term sustainability of the same in the increasingly dynamic and complex business environment (Ege 2014).
The notion and concept of internal auditing being a broad and multi-lateral one, there exist various opinions and perceptions among the scholars across the globe regarding the activities which fall under the domain of internal auditing in an organization and the roles which internal auditors play in the operational frameworks of the same. Some of the primary and most significant roles, played by the internal auditing systems, in general, can be seen to be highlighted by K. Johlet. al. (2013), to be as follows:
The roles of internal auditors, in different types of institutions, especially in business and commercial organizations, can be seen to be sub-divided into different components of a systematic and disciplined approach, by Roussy (2013), the primary components of the approach put forward by the author being as follows:
Pizzini, Lin and Ziegenfuss (2014) stated that an important function of internal audit is to support management in attaining suitable organizational goals that also offers assurance regarding the fact that the management has implemented an effective internal control system on risk prevention. It has also been gathered from the research that internal audit offers internal consulting services to overall company in accordance with advices, facilitation along with training and counsels. Christ, Masli, Sharp and Wood (2015) also indicated that internal auditing serves as an independent, objective assurance along with consulting conduct that is developed to add value and enhance operations of companies. It facilitates an organization in classifying areas for offering better procedures of risk management. Cohen, Krishnamoorthy and Wright (2017) explained that internal audit serves as an internal control mechanism within the companies. This is in consideration to the fact that the management and directors of the company implement internal control technique that offers assurance regarding achievingcompanyobjectives regarding operations, compliance and financial reporting with the accounting regulations.
Yee, Sujan, James and Leung (2017) indicated that the external auditing standards reflects the control environment can be better through employing effective function of internal audit. Evaluating the internal controls structure of the company is ensured on the behalf of the executive for monitoring distinct operations concerned with maintaining the control process along with information system. The information asymmetry between the senior manager’s result and division weakens the capability of the senior managers in maintaining its control operations. Christ, Masli, Sharp and Wood (2015) revealed that the internalaudit can also serve as an effective governance mechanism. From the viewpoint of agency cost, the function of effective governance in the company is maintained through aligning management’s interests with that of the stakeholders for decreasing the agency costs. These researchers also revealed that internal and external audit along with effective audit committee are distinct corporate governance mechanisms employed in supervising the management behaviour. This theoretical point is also supported through determining certain evidences of researchers that analyses the evidences fromresearches in analysing the association among the audit committees along with internal audit. Christ, Masli, Sharp and Wood (2015) also added that as per the economic theory most of the companies arecentred on attaining their goals that considers profit maximising that is not that accepted in the recent competitive world. In addition, few researchers namely, Christ, Masli, Sharp and Wood (2015) indicated that generally the announced as well as published organizational objectives are of less operational support in selecting among the alternative plans. In such scenario, an organization’s set of goals are linked with the company’s philosophy.
In the research work of Feng et al. (2014), it has been found that appropriate internal auditing function is related to enhanced respect to financial reporting with respect to assurances regarding the internal control quality over financial reporting, lower earnings level management and minimised incidence of fraud. The internal auditing function is a significant mechanism for protecting the reliability of yearly accounts. It has been identified that the implementation of internal auditing as function in corporate governance along with their coordination with suitable audit committee could contribute to reduce earnings management (Gaynor et al. 2016).
Many scholars have confirmed empirically that the dynamics depicting the positive effect of internal audits on the financial reporting and corporate governance procedures largely concentrates on the clear explanation of the responsibilities and roles of the internal auditing functions. They need to be positioned appropriately and lines related to organisational reporting (Ma’Ayan and Carmeli 2016). Moreover, providing training to the internal auditors in line with the modifications in the environment and the working procedures. In addition, the awareness of the higher-level management of the significance of internal control along with risk management for effective management of the organisation has a crucial role in ascertaining the substance of the effectiveness related to internal audit functions. The additional frequent settings between the internal audit functions and the audit committee contribute to the movement of pertinent information and detailed analysis of any issue that has been identified timely. Thus, it would assist in providing significant accounting information to the outside users for undertaking significant economic decisions (Maroun 2017).
The objective of the literature review section was to provide an outline for the internal audit and find out how the financial reporting is affected by internal control thereby identifying ways to improve effectiveness of these controls. It was gathered from analysing previous researchers carried out on this topic that an important function of internal audit is to support management in attaining suitable organizational goals that also offers assurance regarding the fact that the management has implemented an effective internal control system regarding risk prevention. Moreover, this section also facilitated in developing research objectives considering existing theories on development of a risk-based culture. Such elaborations are further deemed important for constructing an effective organizational commitment for risk management.
The research was considered with the following a deductive study. This was seen to be conducive in answering the different aspects of the research questions related to the topic. The collection of the data was considered with the internal auditing data from the rival firms of Virtusa based in the UK. This section of the study will identify various types of the discussions which are seen to be relevant in terms of the following of the different techniques of the studies focusing on the use of Data Sampling Method, Research Approach, Data collection Method and analysis.
The main aspects of the research methodology chapter will be considered with the use of experience gained during placement year in the finance role to prepare the case study. It will be further based on analysing the data by conducting interview with the managers of accountancy firms based in the UK. In addition to this, some of the other sources of the secondary information is based on analysing the annual financial reports and other accounting documents. Lastly, the research has also included extensive research on the given topic as per use of the relevant materials from the online library resources. The research methodology has been designed in such a manner that it will be able to answer the various aspects of impact of internal control from the financial statements. In addition to this, it will be also useful in stating the ways by which internal audit is conducive for improving effectiveness of internal control in an organisation. Lastly, the diverse categories of the approach to research will be able to compare the implementation process of internal controls among different organisations to find its effectiveness (Silverman 2016).
The study has aimed to consider simple random sampling as the main form of the technique for the selection of the managers from the rival firms. This has been mainly conducive for conducting qualitative research using the primary and secondary information. The consideration of simple random sampling technique was suitable for the research as it provided an unbiased opinion of the managers. The total number of managers selected was 4 out of 20 managers as per simple random sampling technique. However, as the majority of the research was based on secondary data the application of such a technique was considered in evaluation of the data gathered from the secondary sources (Ledford and Gast 2018).
The consideration of the research approach was based on several types of techniques which focused on evaluating the results of the previously attained performance from the annual report and internal audits of the company. Therefore, the most suitable approach for research in this aspect has been taken into account with the deducing the results from financial statements. Moreover, the analysis of the research was taken into consideration with the quantitative research approach. This was mainly considered as suitable for the various types of the factors such as answering the various aspects of effectiveness of internal auditing in financial statements (Panneerselvam 2014). In addition to this, it was also depicted to be useful in stating the ways by which internal audit was conducive for improving effectiveness of internal control in an organisation. Lastly, the different types of the approach to the research was able to compare and contrast the implementation process of internal controls among different organisations to find its effectiveness. The incorporation of the exploratory research was also evident in this study (Choy 2014). This was mainly seen with the difficulties of collecting the data associated to the internal auditing. This was evident in form of the data collected through analysis of annual financial reports, other accounting documents and experience gathered during placement year in the finance role will be interpreted with the use of various type of statistical analysis. In addition to this, the qualitative research was done by conducting interview with the managers. The nature of the questions was mainly directed towards the effect of internal control on financial reporting and the different ways by which the internal audit helped a company to improve its effectiveness of internal controls. The conduction of the interview with the managers was also beneficial in gathering information in the outlining of the main metrics for internal audit (Smith 2015).
The secondary data sources are mainly taken from the different types of the sources of the information which are seen to be based on the online resources, journals, books, e-books and extensive use of university library resources. Additionally, a considerable amount of data is collected form of use of experience gained during placement year in the finance role to prepare a case study and Interviews with managers. In addition to this, a significant data has been also collected from analysis of annual financial reports and other accounting documents and Extensive research on internal auditing using university library resources. It needs to be also seen that the major aspects of the collection of the data is further considered with the rival firms of Virtusa (Flick 2015).
The secondary analysis of the qualitative data has been mainly seen to be based on consideration of analytical process. This is the main statistical tool used to evaluate the quantitative data collected from the experience gained during placement year in the finance role, annual financial reports and other accounting documents. The technique followed for the analysis of the primary data has been further based on the use of interview transcripts. This has been seen to be conducive for analysing the various types of the opinion of the managers on effective of internal audit (Dumay and Cai 2015). An analysis among Virtusa and Verint has been selected as they belong to the same sector and are focused on delivering similar kind of products and services. They are even of similar size and therefore their comparison and evaluation will be helpful in the construction of an effective paper.
This section of the paper has the intention of providing an idea about the internal audit control that is existent in the company. In this section of the paper, all the aspects will be covered and thereafter proper analysis of the financial statements will be made with another company with the help of which the internal audit process of the company will be understood in a precise manner.
The managers have been interviewed in order to discover the aspects they have in mind and their perspectives of the audit process that is existent internally. It is known that internal audit has a significant role in the development of the objectives of financial reporting. The managers who are associated to the audit process have been selected as they adequate and proper knowledge about the process that is incorporated and how well this process has been helpful for the companies to attain their objectives of financial reporting. It is due to this fact that two managers from Virtusa and Verint has been selected for the survey and they have been asked the same question in order to have an idea about the differences within their audit process.
The first question that has been asked to the managers has been the time they have been associated with the organization. The senior manager of Virtusa replied that he has been in the organization for more than 8 years and has sufficient and adequate data related to the company. The deputy manager of Virtusa mentioned that she has been working over 3 years and likes her time in the organization.
On the other hand, the senior manager of the Verint reverted that he has been working in the firm for over 3 years and the deputy manager is just 6 months old in the firm.
The next question that has been asked to the managers has been that what has been the audit process that has been incorporated by the companies. The managers of Virtusa were liberal in expressing the technique. The senior manager of the company expressed the fact that they make use of the process that is approved by the International Standards in order to comply with the other rival companies. They maintain a transparent process mainly due to the fact that they do not want to hide anything from their stakeholders. In this manner, they would like to maintain a cordial relationship so that effectiveness of the company is maintained.
The deputy manager unlike the senior manager was a bit reluctant in answering the question and therefore replied that they followed the general standards that have been laid down and therefore has agreed.
When the same question was asked to the managers of Verint, the senior manager expressed the fact that they have a team of auditors who undertake the audit on an annual basis based on the standards that have been laid down. He even expressed that the internal audit process requires some changes as the process is not flawless.
The deputy manager did not give us any new information but expressed what the senior manager had expressed.
The next question that was asked was that to the managers was that what role does the board of director play in the internal audit process. The senior manager of Virtusa said that they are the ones who approve the charter of the internal audit and they are the ones who review the work of the auditors. They appoint, evaluate and replace the chief auditor and even ensure that there exists a direct and open relationship among them and the auditors. They approve the risk based internal audit and even review the processes in order to have an idea about the potential of the audit that is undertaken.
The deputy manager did not express all these points but stated that they are the ones who permit allow all the actions and the functions that are undertaken by the internal auditors. It is seen that the board of the director are the nervous system for internal audit.
The senior manager of Verint has expressed that board of director has a check on the performance that is done by the auditors and looks into the errors that have been highlighted in order to resolve them and maintain an effective performance of the companies.
The deputy manager has explained that he does not have adequate knowledge about it as he is new to the organization.
This question has been asked to the managers in order to have an idea about the strategies and the culture that is created for the purpose of internal auditing. The senior manager of Virtusa has explained the fact that they have their own strategy that is known as F.I.H, which is the initials for Foresight, Insight and Hindsight. With the help of this process, the future aspect is taken care of along with finding the best practise that can be incorporated and independent assurance of the risk management policies that have been incorporated.
The deputy manager was ignorant towards this question and therefore only replied that they have their unique process, which she does not want to disclose.
On the other hand, the senior manager of Verint addressed that the culture and the strategy they incorporate is transparency and open communication with the help of which all the issues can be highlighted and accordingly the development of the company can be attained.
The deputy manager of this firm has expressed the same thing and therefore it can be said that this company has their own way of handling internal audit.
This question relates to having an understanding of how internal audit maintain their objectivity and independence. It is seen that internal audit perform in order to execute their role in an efficient manner. In this manner confident management is undertaken and in this manner sustainable level of objectivity and independence is attained.
The deputy manager on the other hand has said that freedom is given by the board of director and this enhances the performance of the audit team.
On the other hand, the senior manager of Verint expresses the fact that their company has specific standards and policies that have addressed the fact that internal auditors have their own powers and responsibilities with the help of which they perform their task in an effective manner.
The deputy manager has explained the same thing and therefore there are no other issues to explain.
The last question that is asked to the managers has been that what kind of relationship internal audit create with their stakeholders. It is seen that the senior manager of Virtusa has expressed the fact that the work that is performed by the internal audit develops and enhances their relationship with the stakeholders and in this manner better performance is attained.
The deputy manager expresses that internal audit has a proper relationship with the auditors but it is seen that internal auditors do not have proper relationship with the managerial level.
The managers of Verint verifies the fact that there stakeholders and the internal auditors have a healthy relationship and in case of any query they resolve the issues with each other.
It is therefore seen that these questions have been helpful in the development of the idea with the help of which better analysis can be ascertained and thereby the results of the paper can be attained.
The placement in the Virtusa Corporation Company has helped me learn key applications of Auditing and how the same can solve the practical operations of the company in a structured and in a more structured way. The practical training assignment has introduced to assess the knowledge gained during the course of the training and the application of the same in the corporate world. Concurrent practical training along with the theoretical knowledge gained in the auditing and accountancy field is an undoubtedly the unique feature of any professional course(Groomer and Murthy 2018).
Auditing is an independent and a management function which is a continuous monitoring of the internal controls of the company. The key accounting and finance data of a company do provides us with basic data for the actions of the management of a company. The three key features of an Auditing as reviewed by me during the placement was Insights, Assurance and Objectivity of the Audit(Hurley 2015).
The internal auditor of the company plays an important role in assessing and evaluation of the financial data of the Company and so was the case with the Virtusa Corporation. The key role and responsibility assigned to us was to evaluatethe Virtusa Corporation Company’s operational review and the operational controls of the company. The main responsibility assigned to us was to ensure that there is an adequate and significant internal control. The internal controls should be such that the examining and scrutiny of the key accounting procedure is smooth and effective. Our key role was also to ensure that there are certain guidelines and principles laid down for the effective control and usage of the assets of the company to safeguard against the misappropriation of assets. Observing and evaluation of the financial data should be done independently and that was the prime rule of Auditing. The scope of Auditing and an Internal Auditor work include review of the important accountancy and financial information’s of a company, which includes reviewing Internal Control and the Systems and Procedures of a Company,Organisation Structure of the Company, Utilization of Resources, Assessing the Reliability and Relevance of the Financial Information, Compliance with Policies, Plans and Regulations(Chan, Chiu and Vasarhelyi 2018).
The internal auditor should have the key expertise which is crucial and necessary for assessing the control system of the management of the company. The Accounting and Financial function involved in the role and responsibility of an internal auditor must be discharged carefully. The most important responsibility of an internal auditor was to inform any incorrect representation of facts, information and data to the concerned authorities. The Internal Auditor of the company should asses the key operational performance of the company. The evaluation of the internal auditor is to determine whether and in which extent the role of auditing can be assessed. The evaluation done by the Internal Auditor includes the assessment and monitoring the key adequacy and effectiveness of the internal controls systems in the company. The scope for the Internal Auditor involves examining the financial and the key operations of the company. The five crucial steps of auditing that shows the use and the way the role of auditing is dependent is planning of schedule of audit, processing of the same, conducting and reviewing, representation and reporting of the key role played while auditing and following up with the issue and discrepancies found(Gepp et al. 2018).
It is also important to assess whether the company has maintained and followed certain guidelines and principle and the rules and regulations which it should adhere. Improvement in the assessment and effectiveness of the risk management of the company helps in defining the key objective and role of an internal auditor(Byrnes 2015). The basic elements that should be covered in the report of an internal auditor is the coverage period of auditing done. It should well define the functions, methodologies and the functions of the different items o the financial statement of the company. The key material issues which is highlighted in the context to the role of auditing and the key observations should be clearly mentioned in the audit report of the company(Arena and Sarens 2015).
The auditing role and the functions the Internal Auditor plays in an organisation is very important. It is crucial to note that the internal auditor of the company should asses all the financial information of the company independently and the same should not be compromised by the internal actor which would then not give true and fair representations of the financial data of the company (Amani and Fadlalla 2017). The role of internal auditor is to ensure that the guidelines and principle which are set up should give direction to the management of the company in properly operating the primary activities of the company, These key and important aspects of the Auditing and the role of the Internal Auditor during the placement in the Virtusa Company has helped us gain further practical application of the use and application of the auditing in the corporate world. The practical training and assessment of auditing has provided us with an opportunity to better asses of with the financial data and provide us with an advancement in the academic career. The key skills gained and used from the practical training was Analytical and Reviewing data critically, application and evolvement of data analytics and development of an overall communication skills in the field of professional auditing are some of the key functions learned (Alles et al. 2018).
The financial statement of Virtusa Corporation can be identified from the above figure, where the revenues of the organization have relevantly increased over time. This increment has mainly allowed the organization to boost its gross profit, while the relevant administrative expenses have declined the overall profitability of the organization. The interest company of the organization has relevantly increased over time, which is affecting its financial stability and reducing the net profits.
The total revenues of the company have improved while other operations have declined abruptly, which is raising the concern for the organization and increasing its expense. The competitive condition of the organization has relevantly deteriorated over time, which can be seen from its declining financial position. Hence, Virtusa is considered to have higher competitive edge against Verint Systems.
After evaluating the balance sheet of Virtusa, the financial condition of the company has been detected. Total assets of the organization have relevantly improved overtime, where the increment in total assets is supported by total liabilities of the company. However, the total equity of the company has declined over time, which is seen in the annual report.
The financial performance of the company is seen in the above figure, where the total assets and liabilities of the company have relevantly improved over time. The assets and liability condition of the organization is relevantly higher in value in comparison to its competitor. The low debt level of Virtusa in comparison to Verint system depicts its overall financial performance. The balance sheet position of Verint system is declining due to the high level of debt that has been achieved by the company which is relevantly accumulated by Virtusa for conducting the business.
Analysing Financial Ratios Virtusa Corporation and Verint Systems Inc.:
|
PROFITABILITY RATIOS |
Formula |
2018 |
2017 |
|
Net Profit Margin |
Net profit / sales |
-0.58% |
-2.77% |
|
Gross Profit Margin |
Gross profit / sales |
60.64% |
60.21% |
|
SHORT-TERM SOLVENCY RATIOS |
Formula |
2018 |
2017 |
|
Quick ratio |
Quick Assets / Current Liabilities |
1.55 |
1.45 |
|
LONG-TERM SOLVENCY RATIOS |
Formula |
2018 |
2017 |
|
Debt to equity |
Total liabilities / total shareholders’ equity |
1.28 |
1.33 |
|
Debt to total assets |
Total liabilities / total assets |
0.56 |
0.57 |
|
Leverage ratio |
Total assets / total shareholders’ equity |
2.28 |
2.33 |
|
Interest coverage |
(Net profit + Income + interest) / Interest |
0.82 |
0.16 |
Table 4.1: Financial ratios of Verint Systems Inc
(Source: Verint.com2018)
The above table indicates the level of financial ratios of Verint System, which has relevant improved over time. The profitability ratio of Verint system indicates a steep decline in their net income, which has been conducted due to high level of administrative expenses. The company has been acquiring debt in supporting its overall operations, which is directly affecting the current financial position. However, the stability is seen in 2018, where quick ratio of the company has improved, while the losses have substantially declined. The improvement in long term solvency condition is also seen, which depicts that the management is taking adequate steps in stabilizing the overall financial condition. The debt position of the company is relevantly high, where the rising level of finance cost is hampering its net profitability condition.
|
PROFITABILITY RATIOS |
Formula |
2018 |
2017 |
|
Net Profit Margin |
Net profit / sales |
0.12% |
1.38% |
|
Gross Profit Margin |
Gross profit / sales |
28.92% |
27.69% |
|
SHORT-TERM SOLVENCY RATIOS |
Formula |
2018 |
2017 |
|
Quick ratio |
Quick Assets / Current Liabilities |
2.54 |
3.82 |
|
LONG-TERM SOLVENCY RATIOS |
Formula |
2018 |
2017 |
|
Debt to equity |
Total liabilities / total shareholders’ equity |
1.31 |
0.58 |
|
Debt to total assets |
Total liabilities / total assets |
0.51 |
0.37 |
|
Leverage ratio |
Total assets / total shareholders’ equity |
2.55 |
1.58 |
|
Interest coverage |
(Net profit + Income + interest) / Interest |
1.16 |
2.54 |
Table 4.2: Financial ratios of Virtusa Corporation
(Source: Virtusa.com 2018)
The financial ratio of Virtusa Corporation can be seen in the above table, where the financial position of the company has relevantly increased over time. The company’s overall gross profit margin has increased, while the high accumulation of debt has reduced the net profit margin substantially during the financial year of 2018. The overall quick ratio of the company has also declined, while having adequate values to support the short term financial obligations. The company has relevantly favored more debt in recent years for supporting its financial activities, which has relevantly declined the solvency condition of the organization. The debt position of the company has increased over time, which has directly affected the level of exposure they have in current financial position. The interest coverage ratio has mainly declined over time, which is indicating that the company’s current debt is relevant high and needs to be taken under control for reducing the negative impact of finance cost on its profits.
The relevant comparison of Virtusa Corporation and Verint Systems Inc. can be conducted for identifying the competitive edge of the company against each other. The performance of Verint Systems Inc. has improved during the financial year of 2018, which is not close to the overall current condition of Virtusa Corporation. This relevantly indicates that the fanatical position of Virtusa after declining is still higher than Verint System, which increases its competiveness in the market against its peers. This relevantly indicates that Virtusa Corporation has adequately maintained their operational level, which has allowed them to increase their performance overtime, while maintain positive financial position. Therefore, it could be understood that the the current financial position of Virtusa is relevantly higher than Verint system even with its declining position, as the company has adequate financial exposure to supports its short term obligations.
The financial statement of both the companies which are Virtusa Corporation and Verint Systems Inc is being considered for the year 2018. The annual reports of the business has been prepared as per the requirement of conceptual framework which is followed as per consistent practices of such companies.
The cash flow statement in most businesses are prepared for the purpose of displaying the cash position of a business and also provide a detail analysis regarding the various activities which are undertaken by both the companies for the purpose of generating cash inflows for the business. The cash flow statement also shows the various cash outflow for the business during the period. The cash flow statement of Virtusa Corporation and Verint Systems Inc is prepared following the indirect method of preparing the cash flow statement (Bhandari and Iyer 2013). Under this method, the non-cash items of the business such as depreciation are added back to the amount of net income and also the changes in current assets and liabilities are also incorporated. This gives the cash flow from operations of the business (Uwonda and Okello 2015). As per the cash flow statement of Virtusa Corporation, the net cash from operation for the year 2018 is shown to be $ 62,699,000 and the same is shown to have tremendously improved during the year (Hales and Orpurt 2013). This suggest that there have been significant improvements in the operating activities of the business during the year. On the other hand, the cash flow from operating activities of Verint Systems Incis shown to $ 176,327,000 which has also improved significantly from the analysis of previous year. A comparative analysis of both the companies reveal that the cash flow from operating activities is much higher for Verint Systems Inc in relation to Virtusa Corporation which suggest that the former has better operational structure or more large scale of operations in comparison to Virtusa Corporation (Park and Jang 2013).
The cash from investing activities of Virtusa Corporation which is shown in the cash flow statement for 2018 includes various assets which are sold or purchased during the year. The management of Virtusa has purchased significant amount of assets during the year which shows large amount of cash outflow for the business for the year. The business during the year has sold a part of property, plant and equipment which is shown for $ 261,000 and also has traded in both short term and long-term securities during the year (Robinson and Sensoy 2016). The net cash flow from investment activities which is shown in the financial statement is shown to be negative which is shown to be $ 52,827,000 for 2018. The negative figure shows more of cash outflows which is due to the significant amount of purchases which is undertaken by the business during the period. The cash flow statement of Verint Systems Inc for the year 2018 also shows that the management of the company has also undertaken significant purchases for assets for the business. The cash flow statement shows that a significant amount of is expended on business combinations which is shown to be of $ 102,978,000. The only source of significant amount of revenue which can be recognized from the financial statement is from the sales of matured securities of the business. The net cash from investing activities of the business is shown to be $ 144,481,000 which has slightly reduced from previous year estimates (Kroes and Manikas 2014). In a comparative analysis, the net cash flow from investing activities shows that the outflows for such activities is much more in case of Verint Systems Inc than Virtusa Corporation.
The cash flow from financing activities of Virtusa Corporation for the year 2018 shows that the management has raised significant amount of capital for the business which is done through issues of equity options and debt capital (Brown, Huang and Pinello 2013). The main sources of cash outflows is shown to be for repayment of debts of the business and also payment for acquisition of businesses. The net cash flow from operations for the business is shown to be $ 37,442,000 which is positive which suggest that the inflows of the business is more than the outflows of the business. On the other hand, the cash flow from financing activities of Verint Systems Inc shows that the business has taken a significant amount of loan during the period which is shown to be $ 444,341,000 which is the main source of capital which is used by the management of the company for financing various activities of the business. The main cash outflow is shown to be $ 431,888,000 which is relating to repayment of loans by the business which is aimed to reduce the overall debts of the business (Katchova and Enlow 2013). The net cash from financing activities is shown to be negative which is due to the huge amount of loan repayment made by the business during the period.
The overall cash and cash equivalent balance for Verint Systems Inc is shown to be much better than Virtusa Corporation as per the cash flow statement which is shown for both the companies. The liquidity position of Verint Systems Inc is shown to better than Virtusa ltd for the year 2018.
The completion of the analysis leads to the discovery of various factors. It is seen that with respect to the internal audit there exists various factors and issues. The factors are inclusive of controlled environment, assessment of the risks, control activities, monitoring and communication and information. By looking into the internal audit process of the two companies that have been taken into consideration, it is seen that for Virtusa Corporation, controlled environment has been the biggest issue as the internal audit process had insufficient ethical and integrity values. It is therefore seen that financial reports disclosed by the management of the company showed better performance in accordance to the actual scenario of the company. It is even seen that for Verint Corporation, internal audit process has been proper and effective and their financial reporting did not disclose any kind of discrepancies. It is seen that internal audit process has been different for the two companies and it is seen that Virtusa has looked to focus mainly on the information and communication process without thinking about the risk assessment and ethical values and this has led to an impact on their financial reporting process. On the other hand, Verint has maintained proper internal audit process and therefore it is seen that looking into all the factors of internal audit has extensive impact on the performance of the companies.
The analysis has been able to highlight that internal audit has an impact on the construction of the financial reports and this has been observed with the help of the analysis which indicates that Verint having a better internal auditing process has been able to provide flawless financial reporting process with respect to Virtusa. This evidence has been able to disagree with the research question which states that internal audit does not have an impact on financial reporting for an organization.
Conclusion
This section will conclude the entire discussion based on which further recommendations can be provided. The entire paper has discussed about internal auditing related to assurance and consulting activities with the help of which any organisation can add value in its performance to increase it further. This system is considered as independent objective which in turn becomes beneficial for business organisations to obtain their respective business objectives in a systematic way that can further evaluate the effectiveness of any companies’ financial statements. It is already stated that internal audit acts as function that can further monitor and control company’s financial practices. With the help of this financial statement, information can be presented in an adequate way by which different parties make different form of strategic decisions in an adequate way. Hence, through publishing financial statements related to audit, external parities can receive assurance regarding the financial reporting related with the present accounting standards. For understating the true implication of internal audit functions, the study has intended to observe those UK based firms, which directly follow the IIA International Standards of the Chartered Institute of Independence Auditors.
The study has intended to provide an overview related to the internal audit to know that how internal control can influence financial reporting in an effective way. Based on this, the study has tried to identify various ways for improving effectiveness of these controls. For this, some research objectives have been formed for focusing on the essential sections of the entire study.
The study has applied appropriate statistical analysis based on these primary and secondary data and consequently has obtained desired outcome that has successfully addressed the chief objectives of this study. According to the outcome, internal control has significant impact on financial statements of any company. Moreover, the research has obtained some ways with the help of which internal audit can successfully help any organisation to improve its effectiveness regarding internal control.
Based on the outcome, the study can successfully recommend some points through which other researchers as well as organisations can understand about the further implication of internal audit. At first, the chief focus of any organisation will be to focus on role, status and position of internal audit. Moreover, it is also essential to find the leadership and scope of internal audit as well as capacity building of staff within this system. Focusing on these issues, the study can obtain more ways through which internal audit can improve effectively improve internal control of any organisation. For instance, this process can improve the general control environment within offices and this in turn helps managers to take proper decisions regarding mitigate risks in a systemic way. In this situation, seminars and training programmes are required to provide sustained campaigns based on the importance of internal controls. Moreover, company can construct the capacity for its accounting and finance related staffs so that they can discharge their responsibilities successfully.
The researcher has tried to conduct the entire analysis accurately. However, it has experienced some limitations as well. Firstly, the entire study has tried to identify some specific issues related with auditing along with material misstatements instead of any other financial parameters, which can be affective for other organisations. Moreover, the study does not consider the demographic aspect and conducts the entire analysis on UK only. In this context, the analysis has provided a biased outcome. In addition to this, the study has experienced difficulties to obtain primary as well as secondary data from their respective sources. Initially, the manager of Virtusa Corporation was not interested to provide enough information about their company. Based on the ethics of research, the researcher cannot force manager to give answers of all questions that have been asked in the interview. Moreover, it has become difficult to collect secondary data from various sources due to unavailability of sufficient information from journals, e-books and other sources. This further has generated huge trouble at the time of statistical analysis.
The research study has left many aspects on which further research can be possible. The chief focus of future research will to consider all limitations for obtaining comparatively better outcome. As internal audit is considered as an essential factor of each organisation, the future research can focus on the same of other countries. Moreover, further research can focus on the role of finance and accounting staffs of any particular company in the context of internal audit.
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