Role Of External Auditors In Corporate Governance

The role of external auditors in the corporate governance framework. Use UK as a case study.

Introduction

Corporate Governance deals with the ways especially in the “publicly traded firm, a separation exists between capital providers and those who manage the capital. This separation creates the demand for corporate governance structures.” (Gillan, S. L., 2006).

The suppliers of finance to ensure they will get a return on their investment by the use of corporate governance. In UK, with dispersed ownership would give rise to weak shareholder control and comparatively strong managers. Agency problem exists as there are conflict of interest between shareholders and management, to control the conflict of interest, therefore good corporate governance

The main principles of corporate governance are ethics and integrity, higher level of integrity must be carry out in the corporate office, when they make the decision must follow a code of exhibit ethical behaviour and code of conduct. The purpose of form the corporate governance can reduce the level of agency problem because the good corporate governance is separation of owner and managers. Prevent the conflict of interest between directors and shareholders to maximize the shareholders wealth, corporate governance like a middleman when directors make a decision not agree with shareholders, the role of corporate governance is clam it. Corporate governance can improve the transparency and accountability, let management understand their responsibilities and duties of the work for the corporation, it can make shareholders know more about what decision making and future developing of the

Corporate governance includes internal control and risk management. These two factors will be assessed in external auditing. External auditing functions as a monitoring role. External auditors have to identify internal control systems and risks and assess them.

As mentioned before, if a company has good internal control systems, external auditors can then rely more on test of controls and thus can do less substantive test. On the contrary, if internal control is bad, auditors need to do more substantive test which requires more audit time. Therefore, good corporate governance can help reduce audit work and time and enhance audit quality as resources are efficiently utilized.

Risk-based auditing focus more on high risk aspects and less on low risk aspects. To have a more accurate risk assessment, auditors need to have clear understanding of the company, the environment of the company and the industry, internal control systems, attitude of management response towards risk (Holm and Laursen, 2007). So, external auditors help shareholders to have a better knowledge about the