basics of internal audit

1. INTERNAL AUDIT
ELVIS A. AMENYITOR

2. WHAT IS INTERNAL AUDITING?
Internal auditing is an appraisal or monitoring activity established
within an entity as a service to the entity.
 It functions by, amongst other things, examining evaluating and
reporting to management and the directors on the adequacy and
effectiveness of components of the accounting and internal control
systems.

3. FUNCTIONS OF AN INTERNAL AUDIT
By, in effect, acting as auditors for board reports
not audited by the external auditors.
By being the experts in fields such as auditing and
accounting standards in the company and assisting
in implementation of new standards.
By liaising with external auditors, particularly where
external auditors can use internal audit work and
reduce the time and therefore cost of the external
audit.

4. ASSESSING THE NEED FOR INTERNAL
AUDIT
 The cost of setting up an internal audit department versus
the predicted benefit.
 The complexity and scale of the organization's activities and
the systems supporting those internal audit department.
 The ability of existing managers and employees to carry out
assignments that internal audit may be asked to carry out.
 Whether it is more cost effective or desirable to outsource
the work.
 The pressure from external stakeholders to establish an
internal audit department.

5. DISTINCTION BETWEEN INTERNAL AND
EXTERNAL AUDIT
INTERNAL AUDIT EXTERNAL AUDIT
OBJECTIVE Designed to add value and
improve an organization's
operations.
An exercise to enable auditors to
express an opinion on the
financial statements.
REPORTING Reports to the board of directors,
or other people charged with
governance, such as audit
committee. Reports are private
and for the directors and
management of the company.
Reports to the shareholders or
members of a company on the
truth and fairness of the accounts.
Audit report is publicly available
to the shareholders and other
interested parties.
SCOPE Work relates to the operations of
the organization.
Work relates to the financial
statements.

6. INTERNAL AUDIT EXTERNAL AUDIT
RELATIONSHIP Often employees of the
organization, although sometimes
the function is outsourced.
Independent of the company and
its management. Usually
by the shareholders.
PLANNING AND COLLECTION OF
EVIDENCE
Strategic long term planning
carried out, to achieve objective of
assignments, with no materiality
level being set.
Some audits may be procedural,
rather than risk- based.
Evidence mainly from interviewing
staff and inspecting documents (ie
not external).
Planning carried out to achieve
objective regarding truth and
fairness of financial statements.
Materiality level set during
planning (may be amended during
course of audit)
Risk- based.
Evidence collected using a variety
of procedures per ISAs to obtain
sufficient appropriate audit
evidence.

7. REGULATION OF INTERNAL AUDITORS
No legal requirements.
Internal auditors not required to be
members of a professional body.

8. SCOPE OF INTERNAL AUDIT FUNCTION
Business risk.
The role of internal audit
Responsibility for fraud and error.
Limitations of the internal audit function.

9. INTERNAL AUDIT ASSIGNMENTS
Value for money audits
Information technology audits
Financial audits
Best value audits
Operational audits
Procurement audits

10. INTERNAL AUDIT REPORTS
Reporting on internal audit assignments.
Exit meetings.
Final report.
Distribution of the final report.
Amendments.
Releasing the report.
Management response.

11. OUTSOURCING THE INTERNAL AUDIT
FUNCTION
Outsourcing is the use of external
suppliers as a source of finished
products, components or services. It is
also known as sub- contracting.

12. ADVANTAGES AND DISADVANTAGES OF
OUTSOURCING
ADVANTAGES DISADVANTAGES
• Staff do not need to be recruited, as the service
provider has good quality staff.
• The service provider has different specialist skills
and can assess what management require them
to do
• Outsourcing can provide an immediate internal
audit department.
• Associated costs, such as staff training, are
eliminated.
• It can be used on a short term basis.
• There will be independence and objectivity
issues if the company uses the same firm to
provide both internal and external audit services.
• The cost of outsourcing the internal audit
function might be high enough to make the
directors choose not to have an internal audit
function at all.
• Company staff may oppose outsourcing if it
results in redundancies.
• There may be a high staff turnover of internal
audit staff.

13. MANAGING AN OUTSOURCED
DEPARTMENT
 Setting performance measures in terms of cost and areas of
the business reviewed and investigating any variances.
 Ensuring appropriate audit methodology ( working
papers/reviews) is maintained.
 Reviewing working papers on a sample basis to ensure they
meet internal standards/guidelines.
 Agreeing internal audit work plans in advance of work
being performed.
 If external auditor is used, ensuring the firm has suitable
controls to keep the two functions separate.