1. Internal Auditing & Management Control ACCT 620 Otto Chang Professor of Accounting

2. DEFINITION OF INTERNAL AUDITING 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.

3. Conceptual Overview of Internal Auditing Management Control Internal Auditing Primary Objectives: Appraisal of Control Primary Determinant of Activities: Relative Risk Means of Fulfilling Responsibilities: Independence

4. Control Objectives Reliability and the integrity of information Compliance with policies, plans, procedures, laws, and regulations Safeguarding of assets Economical and efficient use of resources Accomplishment of established objectives and goals for operations and programs

5. Division of Control Responsibilities Control Areas of Management Responsibilities Primarily Concerned Formulation of Control Administrative Management Operational Management Implementation of Control Operational Management Testing Compliance with Internal Auditing Controls Operational Management Evaluation of Control Internal Auditing Administrative Management Operational Management

6. SERVICES PROVIDED BY THE INTERNAL AUDITOR Risk analysis and risk management Evaluation of internal control Compliance audit Management and operational audit Fraud detection

7. EVOLUTION OF INTERNAL AUDITING èFrom accounting to management orientation. èFrom junior sibling of public accountant to distinctive discipline. èFrom adversary to problem-solving partner.

8. Audit Direction--What and When to Audit Cost and benefit of internal audit –Costs: audit staff’ time and related expenses –Benefits: Improvement in business operation and control Avoiding would-be loss “Threat value” of an Audit In many cases, the relative costs of audits do not differ significantly. Thus, risk become the dominant factor.

9. Risk Assessment Estimated Risk = Estimated loss amount X Estimated probability

10. Ideal Positioning of Internal Auditing A dministrative Responsibility Reporting Responsibility Board of Director Audit Committee Internal Auditing Executive Management Middle Management Operational Management

11. Practical Positioning of Internal Auditing Board of Director Audit Committee Middle Management Operational Management Executive Management Internal Auditing

12. Multiple Roles of Internal Auditing Auditing Investment Control Analysis System Design Market Control Appraisals Implementation Organizational Management Planning Performance Strategies Appraisals Consultants Internal Auditing