4: Internal Audit Flashcards
(24 cards)
What is the definition of Internal Audit? (3)
- An appraisal or monitoring activity
- Established by management and directors
- Review of the accounting and internal control systems
What are the 6 factors affecting the need for internal audit?
▪ Nature of operations – the more diverse or complex the more there is to monitor
▪ Scale and size – more employees likely to undertake human error
▪ Cost / Benefit
▪ Internal / External change triggers – new markets / new products
▪ Problems with existing systems and controls
▪ Compliance requirements
What are 4 advantages of internal audit?
✓ Reduces the risk of fraud and error
✓ Increases the confidence of the financial statements
✓ Deficiencies will be highlighted sooner and can be rectified to improve the systems
✓ Value for money audits can be initiated within the company
What are 5 disadvantages of internal audit?
✓ The Internal audit department could be reviewing their own work
✓ Directors influencing the internal audit department, may direct attention away from problem areas
✓ The internal audit department may have to report directly to management who have been involved in fraud or issues
✓ Internal audit staff may have been in service for a considerable time and therefore loose professional scepticism
✓ Standard of internal audit departments could be variable
Who is the role required by for External Audit?
It is a statue for limited companies
Who is the role required by for Internal Audit?
Directors, usually in larger organisations
Who are External Auditors appointed by?
External auditors are appointed by the company’s shareholders.
Who are Internal Auditors appointed by?
Internal auditors are appointed by management.
Who do External Auditors report to?
External auditors report to the shareholders or members of the company.
Who do Internal Auditors report to?
Internal auditors normally report to management or those charged with governance.
What do External Auditors report on?
The main objective of the external auditor is to express an opinion on the truth and fairness of the financial statements.
What do Internal Auditors report on?
Improving a company’s operations, by reviewing the efficiency and effectiveness of the company’s internal controls.
What do External Auditors give an opinion on?
The truth and fairness of the Financial Statements
What do Internal Auditors give an opinion on?
Adequacy of the systems, and contributes to the effectiveness and efficiency of resources
What is the scope of an External Audit?
To fulfil the statutory obligation
What is the scope of an Internal Audit?
Determined by the requirements of management or those charged with governance.
If you Outsource the internal audit, what do you have increased focus on?
Cost and efficiency of the internal audit function
If you Outsource the internal audit, what can you do with staff?
Draw from a broader range of skills.
If you Outsource the internal audit, what risk is passed onto the outsources company?
The risk of staff turnover
If you Outsource the internal audit, what cost is avoided?
Cost of employing permanent staff
If you Outsource the internal audit, what can be increased?
Independence
If you Outsource the internal audit, what do you lack control over?
The standard of service
If you Outsource the internal audit, what do you risk in terms of conflict of interest?
This can increase if they work in the day to day of the company
What can directors do to the an outsourced internal audit team?
Reduce their independence by threatening not to renew contract at external audit.
