1 Internal Audit

2 Definition Is an independent activity established by management to examine and evaluate the organization’s risk management processes and systems of control, and to make recommendations for the achievement of company objectives

3 Definition By Institute of Internal Auditors: –Key Elements of the definition Independent, objective assurance and consultancy activity Designed to add value and improve an organization’s 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

4 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.

5 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.

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

7 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

8 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

9 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.

10 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

11 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

12 SLAuS 24 CONSIDERING 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.

13 SLAuS 24 CONSIDERING 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.

14 SLAuS 24 CONSIDERING 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.

15 SLAuS 24 CONSIDERING 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.

16 SLAuS 24 CONSIDERING 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:

17 SLAuS 24 CONSIDERING 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.

18 SLAuS 24 CONSIDERING 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.