AutoBuild, a heavy manufacturing company, has both an internal audit department and an external audit firm. The Board of Directors is reviewing the annual audit plan.

Which of the following statements correctly distinguishes the primary objective of the external auditor from that of the internal auditor?

Answer options:

The external auditor reports to executive management, while the internal auditor reports to the shareholders.

The external auditor expresses an opinion on the truth and fairness of the financial statements, while the internal auditor evaluates and improves the effectiveness of risk management and controls.

The external auditor is responsible for detecting all fraud, while the internal auditor is responsible for preventing fraud.

The external auditor is an employee of the company, while the internal auditor is an independent contractor.

How to approach this question

Focus on the end goal: External audit is for shareholders (financial statements), Internal audit is for management (processes and controls).

Full Answer

B.The external auditor expresses an opinion on the truth and fairness of the financial statements, while the internal auditor evaluates and improves the effectiveness of risk management and controls.✓ Correct

The primary objective of an external audit is to provide an independent opinion to shareholders on whether the financial statements give a true and fair view. Internal audit is an independent appraisal function established within an organization to examine and evaluate its activities, risk management, and internal controls.

Common mistakes

Believing that external auditors are primarily there to detect fraud. Their primary role is expressing an opinion on the financial statements.

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