Internal Auditing.2022

INTERNAL AUDITING
INTERNAL AUDITING: Definition

Definition:
Internal auditing is an independent, objective
assurance and consulting activity designed to add
value and improve an organization's operations. It
helps an organization accomplish its objectives by
bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management,
control, and governance processes. (By the Institute of
Internal Auditors (IIA))
INTERNAL AUDITING: Definition
The definition reflects the changing role of internal
auditors. Much of the work of internal auditors considers
operational and strategic risks and the management
processes set up to address them. Internal auditors are
expected to provide value to the organization through
improved operational effectiveness, while also performing
traditional responsibilities, such as:
Reviewing the reliability and integrity of financial and
operational information.
Ensuring compliance with policies and regulations.
Safeguarding the asset.
INTERNAL AUDITING: Role
Internal audit function is used by management and
the board of directors in the broad areas of
evaluating risks, evaluating compliance, and
performing financial and operational auditing.
Through these activities, internal auditors contribute
to effective corporate governance within an
organization, which include all management-
administered policies and procedures to control risk
and oversee operations within an organization.
Evaluating Risks and Controls:
Internal auditor’s specific experience within the organization
enables him to accurately gauge risks.
Internal auditor’s role as part of the process of managing risk is:
Identifying potential problems areas, both financial and operational.
Recommending ways to improving risk management and internal
control systems.
Monitoring corporate governance issues including ethics,
performance management and accountability , communications
throughout the organization in connection with risk management
and internal control and with firm wide values and acceptable
behaviors.
Reviewing operational procedures, eg value for money
initiatives, procurement and supply chain management
or HR process.
Reviewing compliance with laws and regulations.
Reviewing Compliance:
There are many rules and regulations that must be
followed by businesses and organizations. E.g
regulations on health and safety, product (drugs),
unfair competition, anti-pollution, employees’ right.
Internal auditors plays an important role in helping
management ensures that the organization complies
with the laws, rules, and regulations that apply to the
entity, as well as in ensuring that employees comply
with organizational guidelines and rules.
Financial Auditing:
It involves many of the same concepts discussed under
external auditing. But they differ in several ways:
E.g
Internal auditors do not audit periodic financial
statements, but tend to focus on specific financial issues
as directed by management.
Internal auditors reports do not follow a standardised
format. Their reports are normally uniquely composed
to fulfil the requirement of a particular assignment.
INTERNAL AUDITING
Operational Auditing:
Operational audit are primarily conducted to
indentify the causes of the problems or to enhance the
efficiency or effectiveness of operations (value for
money). In many organisations, internal auditors
spend most of their time performing operational
audits.
INTERNAL AND EXTERNAL AUDITING
Relationship of Internal and External Auditors:
Differences:
Internal auditors are responsible to management and
the board and it is focused on the operations of the
entire business.
External auditors are focused on the financial
statements and are responsible to users who rely on the
auditor to add credibility to those statements.
Internal Audit External Audit
Objectives Designed to add value and improve An exercise to enable auditors to

an organization's operations express an opinion on the
financial statements
Reporting Reports to people charged with Reports to the shareholders or

governance. Reports are private and members of a company on the
for the directors and management truth and fairness of the
of the company. accounts. Audit report is publicly
available to the shareholders and
other interested parties.
Scope Work relates to the operations of Work relates to the financial

the organization statements.
Relationship Often employees of the Independent of the company and

organization, although sometimes its management. Usually
the function is outsourced. appointed by the shareholders.
Similarities:
Both must be competent as auditors and remain
objective in performing their work and reporting results.
Both follow a similar methodology in performing their
audits, including planning and performing tests of
controls and substantive tests.
Both consider risk and materiality in deciding the extent
of their test and evaluating results. However, their
decisions about materiality and risks may differ because
external users may have different needs than
management and board.
Reliance on internal auditor:
External auditors rely on internal auditors when using
the audit risk model to assess control risk.
If internal auditors are effective, the external auditors
can significantly reduce control risk and thereby
reduce substantive auditing and in turn reduce audit
fee.
External auditor consider internal auditors to be
effective if they are:
Independent:
 Can it decide its own pattern of work?
 Does it have unrestricted access to management at the highest
level?
 Does the head of internal audit have a senior management or
board level position?
 Is the potential scope of its work restricted in any way?
 Is it free of any operational responsibilities?
 Can it communicate freely with the external auditors
Competent and well trained:
 Does the department contain sufficient numbers of trained,
competent professional accountants to carry out the role
effectively?
 Is it well enough resourced?
 Do they have professional qualifications and training
programmes both for trainees and for continuing professional
development
Have performed relevant audit tests of internal controls
and financial statements.
Audit standards permit the external auditor to use the
internal auditor for direct assistance on the audit. In
that way the external auditors may be able to complete
the audit in less time and at lower fee.
When internal auditors provide direct assistance, the
external auditor should assess their competence and
objectivity and supervise and evaluate their work.
OUTSOURCING INTERNAL AUDITING
SERVICES
It is one of the principles of good governance that the
internal audit function be independent.
Internal audit may be provided by in-house staff or an
outsourced team. Either way, it must be independent
from management structure and report directly to the
Audit Committee or the Chief Executive not the
Financial Director or Chief Finance Officer.
There are both advantages and disadvantages to
outsourcing.
SERVICES
Advantages:
The outsourced auditors are independnet from the
organisation.
There is a wide range of best practices available.
There re no staff administration or training costs.
The resources can be used flexibly as required.
Professional firms are responsible for the level of service
and its ethical standards – it can be sued for any failure.
External audit firms tend to have a higher level of
training, number of professional staff and technical
resources eg computer auditors.
SERVICES
Disadvantages:
Costs may be high.
There is likely to be a lack of commitment to the goalss
and objectives of the organisation.
Consistency of staff is not always available.
Professional firms cannot be ordered about in the same
way as your own staff.
There is loss of control over quality of staff provided.

Internal Auditing.2022

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INTERNAL AUDITING

INTERNAL AUDITING: Definition

Objectives Designed to add value and improve An exercise to enable auditors to

Reporting Reports to people charged with Reports to the shareholders or

Scope Work relates to the operations of Work relates to the financial

Relationship Often employees of the Independent of the company and

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