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WHAT IS INTERNAL AUDIT?
IIA DEFINITION
“Internal auditing is an independent appraisal
   activity established within an organisation as
   a service to the organisation. It is a control
   which functions by examining and evaluating
   the adequacy and effectiveness of other
   controls.”

  - IIA Statement of Responsibilities
SAS 500 (ISA 610)
CONSIDERING THE WORK OF
INTERNAL AUDIT
Definition.   “An appraisal or monitoring activity
  established by management and the directors for the
  review of the accounting and internal control systems
  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”

   dropped    “independent”
   added     “accounting” to IIA definition.
FUNCTIONS OF INTERNAL AUDIT
Review and report upon:
 Control environment as a whole

 The process by which risks are identified,
  analysed and managed
 Controls over key processes / operational and
  functional
 The reliability and integrity of corporate
  management info
 The safeguarding of assets

 Compliance with relevant legislation
DIFFERENCES INTERNAL / EXTERNAL
AUDITORS
Internal                  External
 Scope – determined       Scope – determined

  by management             by statute
 Approach – ensure        Approach – opinion

  all systems efficient     on financial
  provide accurate          statements
  management info
 Responsibility –to         Responsibility - to
  management                  shareholders
ASSESSMENT OF INTERNAL AUDIT
ISA 610
Factors to consider:
 Organisational Status – reporting line/ no

  operating responsibility? etc
 Scope – terms of reference

 Due professional care - work planned,

  reviewed, working papers etc
 Technical competence – previous experience,

  quality of audit reports, qualifications etc.
INTERNAL AUDIT ROLE – CORPORATE
GOVERNANCE
Accountability & Audit
 Reviewing internal control and monitoring

 Risk -assist in identifying risks and developing

  models to prioritize and manage them
 Organisational control – review structure of

  organisation – cost/benefits of change
RISK MANAGEMENT – ROLE OF
INTERNAL AUDIT
Types of Risk:
 Business e.g competition

 Financial e.g liquidity

 Compliance e.g environmental regulations

 Operational e.g poor service

Need to:
 Identify- method/frequency?

 Assess – High /Low etc

 Deal with- accept,avoid etc

 Monitor
RISK MANAGEMENT – ROLE OF
INTERNAL AUDIT

System of Internal Control requires proper
  risk management and organisational
  control. Internal audit assist by:
 Objective assurance on adequacy of

  RM/control
 Improve identification / management of

  risks
 Strengthening control framework
OUTSOURCING INTERNAL AUDIT

Benefits      Disadvantages
SAS 480 (ISA 402) SERVICE
ORGANISATIONS
Main Proposals
 Planning – are outsourced activities relevant?

 Document contractual terms

 Effect on IR,CR and DR

 Evidence – review records held by client /
  monitoring procedures
 Relying on reports by service organisations
  auditors – Design of system or effectiveness
  too?
 If insufficient – qualify re scope
EXPERTS OF USE TO AUDITORS
   Surveyors – property valuation
   Geologists/ Chemists – stock or oil / gas
    reserves
   Solicitors – pending litigation
   Actuaries – pension fund valuations
ISA 620 USING THE WORK OF AN
EXPERT
Need for expert depends on:
 Materiality of item

 Risk of misstatement

 Quality/quantity of other evidence

Scope and assessment of work
 Assess competence e.g. qualifications

 Scope agreed – objectives,info,report

 Examine assumptions and methods used

 Report – compatible with other evidence,
FACTORS TO CONSIDER RE EXTENT
OF RELIANCE ON INTERNAL AUDIT
   Organisational status of internal audit
   Scope of internal audit function
   Technical competence
   Materiality /Risk of areas involved
   Level of judgement required
   Sufficiency of complementary evidence
   Specialist skills of internal audit
   Due professional care
       level of planning /supervision of internal audit work
       review working papers
       review previous audit reports
INTERNAL AUDIT & CORPORATE
GOVERNANCE
COMBINED CODE
 Going Concern

 Internal Control

 Directors Remuneration

TURNBULL
Internal Control
 Review effectiveness of internal control

 Review regular reports on internal control

Risks
 Identify

 Control – training, avoidance measures

 Monitor
EXTERNAL ASSISTANCE TO MANAGEMENT
   Management letter
   Offer other services e.g tax,consultancy
   Wider expertise – other companies in same
    industry
   May adopt business risk approach that can
    assist management with corporate
    governance responsibilities.
INTERNAL AUDIT – USEFUL TO
MANAGEMENT
   Internal focus on risks / controls
   Assist management with corporate
    governance responsibilities
   May accept greater responsibility than
    external re fraud detection
   VFM / operational audits assist in improving
    efficiency
   Internal audit reports more timely than
    external

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10 intaud

  • 1. WHAT IS INTERNAL AUDIT? IIA DEFINITION “Internal auditing is an independent appraisal activity established within an organisation as a service to the organisation. It is a control which functions by examining and evaluating the adequacy and effectiveness of other controls.” - IIA Statement of Responsibilities
  • 2. SAS 500 (ISA 610) CONSIDERING THE WORK OF INTERNAL AUDIT Definition. “An appraisal or monitoring activity established by management and the directors for the review of the accounting and internal control systems 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”  dropped “independent”  added “accounting” to IIA definition.
  • 3. FUNCTIONS OF INTERNAL AUDIT Review and report upon:  Control environment as a whole  The process by which risks are identified, analysed and managed  Controls over key processes / operational and functional  The reliability and integrity of corporate management info  The safeguarding of assets  Compliance with relevant legislation
  • 4. DIFFERENCES INTERNAL / EXTERNAL AUDITORS Internal External  Scope – determined  Scope – determined by management by statute  Approach – ensure  Approach – opinion all systems efficient on financial provide accurate statements management info  Responsibility –to  Responsibility - to management shareholders
  • 5. ASSESSMENT OF INTERNAL AUDIT ISA 610 Factors to consider:  Organisational Status – reporting line/ no operating responsibility? etc  Scope – terms of reference  Due professional care - work planned, reviewed, working papers etc  Technical competence – previous experience, quality of audit reports, qualifications etc.
  • 6. INTERNAL AUDIT ROLE – CORPORATE GOVERNANCE Accountability & Audit  Reviewing internal control and monitoring  Risk -assist in identifying risks and developing models to prioritize and manage them  Organisational control – review structure of organisation – cost/benefits of change
  • 7. RISK MANAGEMENT – ROLE OF INTERNAL AUDIT Types of Risk:  Business e.g competition  Financial e.g liquidity  Compliance e.g environmental regulations  Operational e.g poor service Need to:  Identify- method/frequency?  Assess – High /Low etc  Deal with- accept,avoid etc  Monitor
  • 8. RISK MANAGEMENT – ROLE OF INTERNAL AUDIT System of Internal Control requires proper risk management and organisational control. Internal audit assist by:  Objective assurance on adequacy of RM/control  Improve identification / management of risks  Strengthening control framework
  • 10. SAS 480 (ISA 402) SERVICE ORGANISATIONS Main Proposals  Planning – are outsourced activities relevant?  Document contractual terms  Effect on IR,CR and DR  Evidence – review records held by client / monitoring procedures  Relying on reports by service organisations auditors – Design of system or effectiveness too?  If insufficient – qualify re scope
  • 11. EXPERTS OF USE TO AUDITORS  Surveyors – property valuation  Geologists/ Chemists – stock or oil / gas reserves  Solicitors – pending litigation  Actuaries – pension fund valuations
  • 12. ISA 620 USING THE WORK OF AN EXPERT Need for expert depends on:  Materiality of item  Risk of misstatement  Quality/quantity of other evidence Scope and assessment of work  Assess competence e.g. qualifications  Scope agreed – objectives,info,report  Examine assumptions and methods used  Report – compatible with other evidence,
  • 13. FACTORS TO CONSIDER RE EXTENT OF RELIANCE ON INTERNAL AUDIT  Organisational status of internal audit  Scope of internal audit function  Technical competence  Materiality /Risk of areas involved  Level of judgement required  Sufficiency of complementary evidence  Specialist skills of internal audit  Due professional care  level of planning /supervision of internal audit work  review working papers  review previous audit reports
  • 14. INTERNAL AUDIT & CORPORATE GOVERNANCE COMBINED CODE  Going Concern  Internal Control  Directors Remuneration TURNBULL Internal Control  Review effectiveness of internal control  Review regular reports on internal control Risks  Identify  Control – training, avoidance measures  Monitor
  • 15. EXTERNAL ASSISTANCE TO MANAGEMENT  Management letter  Offer other services e.g tax,consultancy  Wider expertise – other companies in same industry  May adopt business risk approach that can assist management with corporate governance responsibilities.
  • 16. INTERNAL AUDIT – USEFUL TO MANAGEMENT  Internal focus on risks / controls  Assist management with corporate governance responsibilities  May accept greater responsibility than external re fraud detection  VFM / operational audits assist in improving efficiency  Internal audit reports more timely than external