Internal Audit

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Internal Audit
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Definition

• Is an independent activity established by
  management to examine and evaluate the
  organizations risk management processes and
  systems of control, and to make recommendations
  for the achievement of company objectives

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Definition

• By Institute of Internal Auditors
• Key Elements of the definition
• Independent, objective assurance and consultancy
  activity
• Designed to add value and improve an
  organizations operations
• Helps an organization accomplish its objectives
• Brings a systematic, disciplined approach to
  evaluate and improve the effectiveness of risk
  management, control and governance processes

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Functions

• The function of Internal Audit may have following
  activities
• Review of the accounting and internal control
  systems. Internal auditing is ordinarily assigned
  specific responsibility by management for
  reviewing these systems, monitoring their
  operation and recommending improvements thereto.
• Examination of financial and operating
  information.

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Functions

• The function of Internal Audit may have following
  activities (Contd..)
• Review of the economy, efficiency and
  effectiveness of operations including
  non-financial controls of an entity.
• Review of compliance with laws, regulations and
  other external requirements and with management
  policies
• Special investigations into particular areas, for
  example suspected fraud.

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Functions

• The function of internal audit assists a company
  to practice proper corporate governance
  principles.

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Risk Management Internal Audit

• Risk Management Is the process of evaluating and
  controlling risk to ensure that the organization
  is managed as effectively as possible
• Internal Audit can ensure that it best add value
  by using a risk based approach that maximizes the
  benefits to the organization
• Risk based internal audit means assessing,
  evaluating and prioritizing risk in order to
  direct audit attention effectively

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Outsourcing of Internal Audit

• Advantages
• Cost Efficiency
• Attractive for short term assignments
• Independence is increased
• Management can concentrate on their core
  activities
• Problems like strike, high labor turn over do not
  occur

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Outsourcing of Internal Audit

• Disadvantages
• Independence issues may arise if it is the same
  external auditor
• Independence can be challenged by the management.
  
• Lack of knowledge/ awareness of organization
  objective, culture etc.
• Cost may increase
• Standard of service - No assurance on quality.

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Value for Money Audit (VFM)

• VFM is concerned with obtaining the best possible
  combination of services for the least resources
• It is therefore a pursuit of Economy, Efficiency
  and Effectiveness (3Es)
• Economy Least cost
• Efficiency Best use of resources
• Effectiveness Best results
• These are measured using Performance Indicators

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Financial IA Operational IA

• FIA Embraces the conventional tasks of examining
  records and evidence to support financial and
  management reporting
• OIA Covers the examination and review of a
  business operation, including the control
  procedures

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SLAuS 24CONSIDERING THE WORK OF INTERNAL
AUDITING

• The external auditor should consider the
  activities of internal auditing and their effect,
  if any, on external audit procedures.
• "Internal auditing" means an appraisal activity
  established within an entity as a service to the
  entity. Its functions include, amongst other
  things, examining, evaluating and monitoring the
  adequacy and effectiveness of the accounting and
  internal control systems.

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SLAuS 24CONSIDERING THE WORK OF INTERNAL
AUDITING

• While the external auditor has sole
  responsibility for the audit opinion expressed
  and for determining the nature, timing and extent
  of external audit procedures, certain parts of
  internal auditing work may be useful to the
  external auditor.
• The scope and objectives of internal auditing
  vary widely and depend on the size and structure
  of the entity and the requirements of its
  management.

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SLAuS 24CONSIDERING THE WORK OF INTERNAL
AUDITING

• Relationship Between Internal Auditing and the
  External Auditor
• The internal audit function's objectives vary
  according to management's requirements. The
  external auditor's primary concern is whether the
  financial statements are free of material
  misstatements.
• Nevertheless some of the means of achieving their
  respective objectives are often similar and thus
  certain aspects of internal auditing may be
  useful in determining the nature, timing and
  extent of external audit procedures.

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SLAuS 24CONSIDERING THE WORK OF INTERNAL
AUDITING

• The external auditor should obtain a sufficient
  understanding of internal audit activities to
  assist in planning the audit and developing an
  effective audit approach.
• During the course of planning the audit the
  external auditor should perform a preliminary
  assessment of the internal audit function when it
  appears that internal auditing is relevant to the
  external audit of the financial statements in
  specific audit areas.

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SLAuS 24CONSIDERING THE WORK OF INTERNAL
AUDITING

• When obtaining an understanding and performing a
  preliminary assessment of the internal audit
  function, the important criteria are
• (a) Organizational Status
• (b) Scope of Function
• (c) Technical Competence
• (d) Due Professional Care

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SLAuS 24CONSIDERING THE WORK OF INTERNAL
AUDITING

• Evaluating and Testing the Work of Internal
  Auditing
• When the external auditor intends to use specific
  work of internal auditing, the external auditor
  should evaluate and test that work to confirm its
  adequacy for the external auditor's purposes.

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SLAuS 24CONSIDERING THE WORK OF INTERNAL
AUDITING

• This evaluation may include consideration of
  whether
• (a) the work is performed by persons having
  adequate technical training and proficiency
• (b) sufficient appropriate audit evidence is
  obtained to afford a reasonable basis for the
  conclusions reached
• (c) conclusions reached are appropriate in the
  circumstances and any reports prepared are
  consistent with the results of the work
  performed and
• (d) any exceptions or unusual matters disclosed
  by internal auditing are properly resolved.