Amy Baat, a local real estate broker, has been appointed to the board of directors of the PennMed Corporation. At a recent board meeting, Baat discovered two planned expenditures for auditing: The controller's budget included an amount for internal auditing, and the treasurer's budget included an amount for the 1999 financial statement audit by a major public accounting firm.

Baat didn't understand the need for two different expenditures for auditing. Since the fee for the financial statement audit was less than the cost of internal auditing, she proposed eliminating the internal audit function.

Required:

1. Explain to Baat the purposes served by internal auditing and by a financial statement audit.

2. What benefits does the public accounting firm performing an audit derive from internal auditing?