Module 6: Internal Audit

Question 1

What is internal auditing?

Answer 1

An independent, objective assurance and consulting activity designed to add value and improve the organisations operations.
It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.

Question 2

What are the key elements of the audit function? IM WISE

Answer 2

1. Independent of the day to day operations of the business
2. Measures and evaluates objectively
3. Within the organisation
4. Integral part of the framework of business controls
5. A service to all levels of the organisation
6. Looks at effectiveness and efficiency of operations

Question 3

What are some of the internal audit functions (IAF) main objectives?

Answer 3

1. To provide reasonable assurance to execute management and the board on the adequacy and effectiveness of risk management and control systems of the company
2. To assist all members of an organisation to effectively discharge their responsibilities.

Question 4

Do internal auditors need the same qualifications as external auditors?

Also explain the composition of internal auditors, who do they report to?

Answer 4

No internal auditors do not need the same qualifications as external auditors. However, there is internal audit qualifications available. Can also join the chartered institute of internal auditors.

The IAF should report to the audit committee, if there isn’t one then it is the CEO. It is also important that the auditor is independent of the various operational parts of the company.

Question 5

Do all companies need to carry out internal audit?

Answer 5

No, there is no statutory requirement. Some require internal audit by statute or due to regulatory arrangements.

Question 6

What does UK Corporate Governance Code recommend in relation to IAF?

Answer 6

1. Where the company has an IAF, the audit committee should monitor and review the effectiveness of the company’s internal audit function
2. Where an internal audit function does not exist, the audit committee should consider annually whether there is need for an IAF

Question 7

What are the responsibilities and relationships of IAF to:

1. Directors
2. Shareholders
3. Management

Answer 7

1. The NEDs who sit on the audit committee have a duty to oversee the activities of their executive colleagues who operate the business on behalf of shareholders.
   The IAF has responsibility to provide the directors objective assurance over the quality of control exercised by management.
2. IAF should also provide assurance regarding the effective operation and control of company to shareholders
3. IAF provides management with an independent view on the quality of internal controls. Management gain assurance that systems are operating effectively.

Question 8

In the interest of maintaining independence, it is important to recognise that it is the responsibility of directors to manage the overall risk management of organisation and to identify risks. What should role of internal audit be?

Answer 8

1. To challenge the processes and controls established by management to identify and respond to risks
2. Monitor progress to resolve issues and action points raised
3. Assist the organisation in facilitating risk workshops and other such activities designed to increase awareness of risk and controls.

Question 9

Types of audit?

Answer 9

1. Financial audit - may conduct a financial audit prior statutory financial statement audit
2. Systems audit - Review and evaluation of the systems by which an organisation regulates and controls its activities. Evaluate the design of controls and conclude on its effectiveness and efficiency.
3. Management Audit - Evaluates and appraises the processes and policies of management of the organisation used to control the resources available for achieving its business requirements.
4. Value for money audit - Common in the public sector. Takes various forms; Review of business activities to identify the scope for improved VFM, investigations of specific incidents where VFM was not secured, reviews of systems necessary to achieve VFM.
5. Contract audit - Common in public sector. Involves review of high value and potentially high risk contracts.
6. Operational audit - Systematic review and evaluation of an organisation, determining its effectiveness in pursuing its objectives. E.g. construction company compliance with health and safety

Question 10

More types of internal audits?

Answer 10

1. Post implementation review - An objective appraisal of the success or otherwise of a business initiative. Measures achievement against original objectives.
2. Investigations - Undertake investigations in relation to fraud or operational losses, even breaches of security.
3. Inspection and quality control - periodic examination of procedures applied and transactions to ensure their operation complies with laid down set of instructions
4. Compliance audit - Adherence to particular laws, regulations, policies, government restrictions
5. Follow-up audit - conducted after an internal or external audit report has been issued.
6. Culture audit - Checks values and attitudes.

Question 11

What are the aspects that contribute to an effective internal audit function? PARISS

Answer 11

1. Process - There should be an internal audit programme or internal audit plan which is created by the internal audit manager and approved by the audit committee.
2. Audit committee - The IAF should report to and be overseen, monitored and reviewed by audit committee.
3. Resource and competence - Sufficient resources to effectively carry out internal audit. Audit team should be competent.
4. Independence - Internal auditors should be independent of the operations they are examining.
5. Status of internal audit - Should have appropriate standing within organisation and are taken seriously.
6. Standards - Auditors must undertake their work with due professional care. International internal audit standards can be used.

Question 12

How can an organisation help ensure independence in IAF?

Answer 12

1. Having an internal audit function report directly to the audit committee
2. Having the internal audit plan approved by the audit committee
3. Having the audit committee appoint the internal audit manager
4. Remunerating internal audit staff to support independence
5. Ensuring internal audit staff are not involved in operational areas.