It aims to give a basic understanding of the internal audit. Recognize the knowledge, skills, and competencies required to fulfill the responsibilities of the internal audit activity. It also interprets the difference between assurance and consulting services provided by the internal auditor.

1. FOUNDATION
OF INTERNAL
AUDITING
Sana Baqai
-Chief Editor, IIA India
-Partner, Vinod Krishna & Associates

2. FOUNDATION OF INTERNAL AUDITING
AGENDA
Recognize the knowledge, skills, and competencies required (whether
developed or procured) to fulfill the responsibilities of the internal
audit activity
Interpret organizational independence of the internal audit activity
(importance of independence, functional reporting, etc.)
Interpret the difference between assurance and consulting services
provided by the internal audit activity
Demonstrate the knowledge and competencies that an internal
auditor needs to possess to perform his/her individual responsibilities
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3. INTRODUCTION TO INTERNAL AUDIT
DEFINITION, APPLICABILITY, SKILLS REQUIRED
FOUNDATION OF INTERNAL AUDITING

4. FOUNDATION OF INTERNAL AUDITING
“INTERNAL AUDIT” DEFINED
The Institute of Internal
Auditors (IIA)
‘Internal auditing is an independent, objective
assurance and consulting activity that adds value
to and improves an organization’s operations.
Internal Audit 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.’

5. FOUNDATION OF INTERNAL AUDITING
EVOLVING EXPECTATIONS FROM INTERNAL AUDIT FUNCTION OVER
THE YEAR
Verifier –
Focus on
Numbers and
Compliances
Evaluator
– Focus on
Processes
Problem
Identifier –
Focus on
Systems and
Controls
Solution
Provider –
Focus on
Objectives
and Risk
Management
Consultant and
Assurance
Provider – Focus
on Value Addition
and Corporate
Governance

6. SECTION 138 OF
COMPANIES ACT, 2013
• As per Section 138 of Companies
Act, 2013 read with Rule 13(1) of
the Companies (Accounts) Rules,
2014, certain classes of companies
are required to appoint an
Internal Auditor.
• The Board of a Company may
appoint Chartered Accountant,
cost accountant or any other
professional to conduct Internal
Audits.
• The Internal auditor may or may
not be an employee of the
company.

7. FOUNDATION OF INTERNAL AUDITING
APPLICABILITY OF INTERNAL AUDIT UNDER SECTION 138 OF COMPANIES
ACT, 2013 READ WITH RULE 13 OF COMPANIES (ACCOUNTS) RULES, 2014
Types of Companies/
Conditions
Private Companies Unlisted Public Companies Listed Companies
Turnover Rs. 200 Crore or more during
previous financial year
Rs. 200 Crore or more during
previous financial year
All listed
companies covered
Outstanding Loans /
Borrowings from
Banks or Public
Financial Institutions
Rs. 100 Crore or more at any
point of time during previous
financial year
Rs. 100 Crore or more at any
point of time during previous
financial year
Paid up Share Capital N.A. Rs. 50 Crore or more during
previous financial year
Outstanding Deposits N.A. Rs. 25 Crore or more at any
point of time during previous
financial year

8. SPECIFIC SKILL
FOUNDATION OF INTERNAL AUDITING
Planning Audit
Engagements
Team Building
Managing Audit
Engagements
Making Professional
Presentations
Knowledge
Management Skills
GENERAL SKILL
Technical Standards
Positive Attitude and
Interpersonal Skills
IT Skills
Interviewing Skills
Audit Documentation
Skills
Reporting Skills

9. Operations Risks
Objectives
• Technology as way of business than
support to operations
• Higher proportion of white collar
and smart workforce
• Remote working - Moving away from
physical boundaries of operations
• Increasing and changing compliance
requirements
• Customer centric than organization
centric
• Manage deficits
• Manage corruption – More stringent
norms
• Fast growth
• Increasing social responsibility -
Environmental, Health & Safety
• Higher volatility in stakeholders
confidence
• Fraudsters have access to more
data
• Employee in social media
• Higher Interconnected
dependencies coupled with lower
controls (E.g. BYOD)
• Compromising Segregation of Duties
under COVID
• Financial Instability
Role of Internal Audit is fast changing with significantly enhanced expectation
EXPECTATIONS FROM NEW AGE INTERNAL AUDIT

10. FOUNDATION OF INTERNAL AUDITING
THE IIA’S THREE LINE MODEL
Update of Three Line of Defense

11. FOUNDATION OF INTERNAL AUDITING
THREE LINE OF DEFENSE

12. FOUNDATION OF INTERNAL AUDITING

13. FOUNDATION OF INTERNAL AUDITING
PRINCIPLES OF THE THREE LINE MODEL
Principle 1.
Governance
1
Principle 2.
Governing
Body Roles
2
Principle 3.
Management
and first and
second line
roles
3
Principle 4.
Third line
roles
4
Principle 5.
Third line
independence
5
Principle 6.
Creating and
protecting
value
6

14. FOUNDATION OF INTERNAL AUDITING
COMPETENCIES
REQUIRED

15. FOUNDATION OF INTERNAL AUDITING
COMPETENCIES THAT AN INTERNAL AUDITOR NEEDS TO POSSESS
An Internal Auditor shall be free from
any undue influences which force
him to deviate from the truth. This
independence shall be not only in
mind, but also in appearance.
Independence
“Due professional care” signifies
that the Internal Auditor exercises
reasonable care in carrying out the
work to ensure the achievement of
stated objectives.
Due Professional Care
The Internal Auditor shall be honest,
truthful and be a person of high
integrity. He shall operate in a highly
professional manner and seen to be
fair in all his dealings.
Integrity
The Internal Auditor shall keep
information confidential and
secured which he has gathered
during the period under audit.
Confidentiality
The Internal Auditor shall conduct his
work in a highly objective manner,
especially in gathering and evaluation
of facts and evidence. He shall not
allow prejudice or bias to override his
objectivity.
Objectivity
The Internal Auditor shall have
sound knowledge, strong
interpersonal skills, practical
experience and professional
expertise in certain areas and other
competencies required to conduct a
quality audit.
Skill and Competence

16. FOUNDATION OF INTERNAL AUDITING
INTERNATIONAL STANDARDS FOR THE PROFESSIONAL PRACTICE OF
INTERNAL AUDITING (STANDARDS)
Issued by: The Institute of Internal Auditors

17. FOUNDATION OF INTERNAL AUDITING
1100 – INDEPENDENCE AND OBJECTIVITY
 The internal audit
activity must be
independent, and
internal auditors
must be objective
in performing
their work.
Interpretation:
• Independence is the freedom from conditions that threaten the ability of the
internal audit activity to carry out internal audit responsibilities in an unbiased
manner. To achieve the degree of independence necessary to effectively carry
out the responsibilities of the internal audit activity, the chief audit executive
has direct and unrestricted access to senior management and the board.
This can be achieved through a dual-reporting relationship. Threats to
independence must be managed at the individual auditor, engagement,
functional, and organizational levels.
• Objectivity is an unbiased mental attitude that allows internal auditors to
perform engagements in such a manner that they believe in their work product
and that no quality compromises are made. Objectivity requires that internal
auditors do not subordinate their judgment on audit matters to others. Threats
to objectivity must be managed at the individual auditor, engagement,
functional, and organizational levels.

18. FOUNDATION OF INTERNAL AUDITING
1110 – ORGANIZATIONAL INDEPENDENCE
 The chief audit executive
must report to a level
within the organization that
allows the internal audit
activity to fulfill its
responsibilities. The chief
audit executive must
confirm to the board, at
least annually, the
organizational
independence of the
internal audit activity.
Interpretation:
Organizational independence is effectively achieved when the chief
audit executive reports functionally to the board. Examples of functional
reporting to the board involve the board:
• Approving the internal audit charter.
• Approving the risk-based internal audit plan.
• Approving the internal audit budget and resource plan.
• Receiving communications from the chief audit executive on the
internal audit activity’s performance relative to its plan and other
matters.
• Approving decisions regarding the appointment and removal of the
chief audit executive.
• Approving the remuneration of the chief audit executive.
• Making appropriate inquiries of management and the chief audit
executive to determine whether there are inappropriate scope or
resource limitations.

19. FOUNDATION OF INTERNAL AUDITING
1120 – INDIVIDUAL OBJECTIVITY
 Internal auditors
must have an
impartial, unbiased
attitude and avoid
any conflict of
interest.
Interpretation:
Conflict of interest is a situation in which an internal auditor, who is in a
position of trust, has a competing professional or personal interest. Such
competing interests can make it difficult to fulfill his or her duties
impartially. A conflict of interest exists even if no unethical or improper
act results. A conflict of interest can create an appearance of impropriety
that can undermine confidence in the internal auditor, the internal audit
activity, and the profession. A conflict of interest could impair an
individual's ability to perform his or her duties and responsibilities
objectively.

20. FOUNDATION OF INTERNAL AUDITING
1130 – IMPAIRMENT TO INDEPENDENCE OR OBJECTIVITY
 If independence or
objectivity is impaired
in fact or appearance,
the details of the
impairment must be
disclosed to appropriate
parties. The nature of
the disclosure will
depend upon the
impairment.
Interpretation:
▪ Impairment to organizational independence and individual
objectivity may include, but is not limited to, personal conflict of
interest, scope limitations, restrictions on access to records,
personnel, and properties, and resource limitations, such as funding.
▪ The determination of appropriate parties to which the details of an
impairment to independence or objectivity must be disclosed is
dependent upon the expectations of the internal audit activity’s and
the chief audit executive’s responsibilities to senior management
and the board as described in the internal audit charter, as well as
the nature of the impairment.

21. FOUNDATION OF INTERNAL AUDITING
1130 – IMPAIRMENT TO INDEPENDENCE OR OBJECTIVITY (CONTD.)
 A1 – Internal auditors must refrain from assessing specific operations for which they were previously
responsible. Objectivity is presumed to be impaired if an internal auditor provides assurance services
for an activity for which the internal auditor had responsibility within the previous year.
 A2 – Assurance engagements for functions over which the chief audit executive has responsibility must
be overseen by a party outside the internal audit activity.
 A3 – The internal audit activity may provide assurance services where it had previously performed
consulting services, provided the nature of the consulting did not impair objectivity and provided
individual objectivity is managed when assigning resources to the engagement.
 C1 – Internal auditors may provide consulting services relating to operations for which they had
previous responsibilities.
 C2 – If internal auditors have potential impairments to independence or objectivity relating to
proposed consulting services, disclosure must be made to the engagement client prior to accepting
the engagement.

22. FOUNDATION OF INTERNAL AUDITING
1200 – PROFICIENCY AND DUE PROFESSIONAL CARE
1210 – Proficiency
 Internal auditors must possess
the knowledge, skills, and other
competencies needed to perform
their individual responsibilities.
The internal audit activity
collectively must possess or
obtain the knowledge, skills, and
other competencies needed to
perform its responsibilities.
Engagements must be performed with proficiency and due professional care.
Interpretation:
Proficiency is a collective term that refers to the
knowledge, skills, and other competencies required of
internal auditors to effectively carry out their
professional responsibilities. It encompasses
consideration of current activities, trends, and emerging
issues, to enable relevant advice and recommendations.
Internal auditors are encouraged to demonstrate their
proficiency by obtaining appropriate professional
certifications and qualifications, such as the Certified
Internal Auditor designation and other designations
offered by The Institute of Internal Auditors and other
appropriate professional organizations.

23. FOUNDATION OF INTERNAL AUDITING
1210 – PROFICIENCY (CONTD.)
 A1 – The chief audit executive must obtain competent advice and assistance if the internal auditors
lack the knowledge, skills, or other competencies needed to perform all or part of the engagement.
 A2 – Internal auditors must have sufficient knowledge to evaluate the risk of fraud and the manner in
which it is managed by the organization, but are not expected to have the expertise of a person
whose primary responsibility is detecting and investigating fraud.
 A3 – Internal auditors must have sufficient knowledge of key information technology risks and controls
and available technology-based audit techniques to perform their assigned work. However, not all
internal auditors are expected to have the expertise of an internal auditor whose primary
responsibility is information technology auditing.
 C1 – The chief audit executive must decline the consulting engagement or obtain competent advice
and assistance if the internal auditors lack the knowledge, skills, or other competencies needed to
perform all or part of the engagement.

24. FOUNDATION OF INTERNAL AUDITING
1220 – DUE PROFESSIONAL CARE
 Internal auditors
must apply the care
and skill expected
of a reasonably
prudent and
competent internal
auditor. Due
professional care
does not imply
infallibility.
A1 – Internal auditors must exercise due professional care by considering the:
Extent of work needed to achieve the engagement’s objectives.
Relative complexity, materiality, or significance of matters to which assurance
procedures are applied.
Adequacy and effectiveness of governance, risk management, and control processes.
Probability of significant errors, fraud, or noncompliance.
Cost of assurance in relation to potential benefits.
A2 – In exercising due professional care internal auditors must consider the use of
technology-based audit and other data analysis techniques.
A3 – Internal auditors must be alert to the significant risks that might affect objectives,
operations, or resources. However, assurance procedures alone, even when performed with
due professional care, do not guarantee that all significant risks will be identified.
C1 – Internal auditors must exercise due professional care during a consulting engagement by
considering the:
Needs and expectations of clients, including the nature, timing, and communication
of engagement results.
Relative complexity and extent of work needed to achieve the engagement’s
objectives.
Cost of the consulting engagement in relation to potential benefits.

25. FOUNDATION OF INTERNAL AUDITING
1230 – CONTINUING PROFESSIONAL DEVELOPMENT
 Internal auditors must enhance their knowledge, skills, and other competencies through continuing
professional development.

26. FOUNDATION OF INTERNAL AUDITING
1300 – QUALITY ASSURANCE AND IMPROVEMENT PROGRAM
 The chief audit
executive must
develop and maintain
a quality assurance
and improvement
program that covers
all aspects of the
internal audit activity.
Interpretation:
A quality assurance and improvement program is designed to enable an
evaluation of the internal audit activity’s conformance with the
Standards and an evaluation of whether internal auditors apply the
Code of Ethics. The program also assesses the efficiency and
effectiveness of the internal audit activity and identifies opportunities
for improvement. The chief audit executive should encourage board
oversight in the quality assurance and improvement program.

27. FOUNDATION OF INTERNAL AUDITING
ATTRIBUTES OF OUTSTANDING INTERNAL AUDITOR (TRUSTED
ADVISORS)*
Personal
Ethical resilience
Results Focused
Intellectually curious
Open Mindedness
Relational
Dynamic
Communications
Insightful
Relationships
Inspirational Leaders
Professional
Critical Thinkers
Technical Expertise
* Courtesy: ‘Trusted Advisors – Key Attributes of Outstanding Internal Auditors’ by Richard Chambers

28. FOUNDATION OF INTERNAL AUDITING
ASSURANCE VS. CONSULTING SERVICES
 What happens after the report is delivered?
 Did the audit have an impact?
 Did it create productive and beneficial change in the organization?
 Did it identify opportunities for improvement?
 Outcome V/s Output
 Quality Over Quantity
The end result is not the report; it is making things better for the good of the organisation.

29. FOUNDATION OF INTERNAL AUDITING

30. FOUNDATION OF INTERNAL AUDITING
SANA BAQAI
PARTNER, VINOD KRISHNA & ASSOCIATES
CHIEF EDITOR, THE INSTITUTE OF INTERNAL AUDITORS, INDIA
SANA.BAQAI@VKAASSOCIATES.COM +91-9971938000