AUDITING - INTERNAL AUDIT PRESENTATION

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INTERNAL AUDIT

Prepared and Presented By

Honory Mkelemi

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Learning objectives:i.Introduction.ii.Definition.iii.Objectives of internal audit.

iv.Scope and functions of internal audit.

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….learning objectives.v.The essentials of effective internal audit.

vi. Relationship between internal audit and external audit.

vii. Reliance of external auditor on the work of internal auditor.

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1.0 Introduction • Many large organizations have an internal audit department within the organization as an integral part of internal control.

…..introduction

The scope and functions of this department vary considerably from one organization to the other.

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…..introduction.

• Internal audit is concerned mainly with a review of various operations. Traditionally, internal audit embraced financial transactions and financial records only.

…..introduction.

However, internal audit now extends to such matters which are not directly of a financial or accounting nature.

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2.0 Definition The Institute of Internal Auditors defines internal audit as;‘The independent appraisal activity within an organization for the review of accounting, financial and other operations as a basis for protective and constructive service to the management’.

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….definition.• According to this definition, internal audit deals primarily with accounting and financial matters, but it may also properly deal with matters of an operating nature.

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….definition.• The International standard in auditing 610 defines internal audit as an appraisal activity established within an entity as a service to the entity. Its functions includes amongst other things monitoring internal control.

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3.0 Objectives of internal audit i.To analyze the existing

system of internal control and suggest improvements in this system.

ii. To operate an effective system of internal audit as an important function of the control activities.

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…. Objectives of internal audit.iii.To correct and detect

inefficient operations and weak points. Based on this, to recommend changes.

iv. To verify mainly the accuracy, the integrity and reliability of financial and other related records.

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…. Objectives of internal audit.v.To ascertain whether the

organization adheres to the standard accounting practices and the properly established methods of accounting.

vi. To take up an investigation at the special request of the management.

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4.0 Scope and functions of internal auditThe scope and functions of internal audit vary widely and depend on the size and structure of the entity and the requirements of its management. Ordinarily, internal audit activities include one or more of the following;

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….Scope and functions

i. Monitoring and internal control

• Establishment of an adequate internal control is the responsibility of management. controls, monitoring their operation and recommending improvements thereto.


Internal audit is ordinarily assigned specific responsibilities by management for reviewing

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ii. Examination of financial and operating information

Includes identifying, measuring, classifying and reporting information. Involves detailed testing of transactions and balances.


iv.Review of the economic efficiency and effectiveness of operations.

v.Review of compliance of laws, regulations and other external requests.

vi.Special investigations into particular areas eg. Suspected fraud.

5.0 The essentials of effective internal auditing i. Independence

The auditor should have the independance in terms of organization status and personal objectivity which permits the proper performance of his duties.

….. essentials of effective internal auditingii. Staffing and training• The internal audit unit should be appropriately staffed in terms of numbers, grades, qualifications and experience, having regard to its responsibilities and objectives.

…..essentials of effective internal auditingThe internal auditor should be properly trained to fulfill all his responsibilities.

• The effectiveness of the internal audit depends substantially on quality, training and experience of its staff.

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….. essentials of effective internal auditing

iii. RelationshipsThe internal auditor should seek to foster constructive working relationship and mutual understanding with management, external auditors and any other review agencies.


iv.Due care - the internal auditor should exercise due care in fulfilling his responsibilities.

v. Planning, controlling and recordingThe internal auditor should adequately plan, control and record his work.All internal audit plans should be sufficiently flexible to respond to changing priorities.


vi.Evaluation of the internal control system.

The internal auditor should identify and evaluate the organization internal control system as a basis for reporting upon its adequacy and effectiveness.


vii. Evidence The internal audit should obtain sufficient, relevant and reliable evidence on which to base reasonable conclusions and recommendations.

….. essentials of effective internal auditingviii.Reporting and follow-up.The internal auditor should ensure that findings, conclusions and recommendations arising from each audit assignment are communicated promptly to the appropriate level of management and he should actively seek a response.


• He should ensure that arrangements are made to follow-up audit recommendations, to monitor what action has been taken on them.

6.0 Relationship between the internal audit and

external audit

The relationship between the internal audit and external audit are highlighted below;

….relationship between..

A:Common functionsBoth are interested to ascertain whether;i. An effective internal control system is in place to detect and prevent fraud and errors.

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ii. The system of internal control is operating systematically and satisfactorily.

iii. The accounting system and procedures are adequate to provide information that is necessary for the preparation of financial statements.

….relationship between..B: Differences between internal

audit and external audit

i.Functions and responsibilitiesThe functions and responsibilities of the internal audit are determined by management, whereas those external audit are determined statutorily.


ii. Objectives • The main objective of the internal auditor is to ensure that there is an efficient accounting system, the accounting statements and other accounting data presented to management are accurate and disclose all material facts.

….relationship between..• The main objective of the statutory auditor, is to see that the balance sheet submitted to the shareholders shows a true and fair view of the state of affairs, and that the profit and loss account shows a true and fair view of the profit or loss for the year ended on that day.


iii. AppointmentThe internal auditor

is appointed by management, whereas the statutory auditor, in the case of a company, is appointed by the shareholders.


iv. ResponsibilityThe internal auditor is responsible to management and reports to management and the Audit Committee, if this exists. The statutory auditor is responsible to the shareholders and reports to them.


v.Employment The internal auditor is an employee of the company; the statutory auditor is not.

vi.Independence The internal auditor does not enjoy that independence and status as is enjoyed by the statutory auditor.

7.0 Reliance of statutory auditor on the work of internal audit

The statutory auditor must inquire carefully about internal audit before determining the extent to which he can rely on the work of the internal auditor. The statutory auditor will have to consider the following factors:

…. Reliance of statutory auditor

i.Composition of the internal audit staff.

ii. Qualifications and competence of internal audit staff.

iii. The authority given to internal audit department.

iv. Efficiency of the work of internal audit staff.

…. Reliance of statutory auditor

v.Internal audit reports.vi. Points raised by

internal auditor in his/ her report.

vii. How the points raised by the internal auditor are dealt with by the management and the extent of action taken by the management.

AUDITING - INTERNAL AUDIT PRESENTATION

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