9 Flashcards
What factors should be considered when assessing the need for internal audit?
Scale & diversity of activities
Complexity of operations
Number of employees
Cost/benefit considerations
Management’s desire for assurance on risk/control
Control environment history (e.g., past fraud/control issues)
What are the elements of best practice in the structure and operations of internal audit?
Sufficiently resourced (qualified staff)
Independent & objective
Appointed by audit committee
No operational responsibilities
Access to all areas of the organization
What is the primary objective of internal audit?
To provide independent, objective assurance and consulting to add value and improve an organization’s operations through evaluating risk management, control, and governance processes.
Compare the role of internal audit and external audit (differences).
The internal audit function is primarily focused on improving the efficiency and effectiveness of internal controls (IC) within the organization. It provides assurance and consulting services aimed at enhancing risk management, control, and governance processes. Internal auditors report directly to management or those charged with governance, such as the audit committee, and their work is tailored to the needs of the organization, often covering a wide range of areas beyond financial reporting (e.g., operational reviews, IT audits, value for money assessments). The internal audit reports are not public and may be performed by employees of the organization or an outsourced provider, which can help maintain a degree of independence.
In contrast, the external audit is focused on expressing an independent opinion on the truth and fairness of the financial statements. External auditors report to the shareholders and their audit opinion is publicly available in the annual report. The scope of external audit is generally limited to financial statement accuracy and compliance with accounting standards and legal requirements. External auditors are fully independent of the company, appointed and removed by the shareholders, ensuring objectivity in their assessment of the financial statements.
What are the limitations of the internal audit function?
Employees of the company → Familiarity threat
May be part of the finance function
Independence risk (especially if involved in operational areas)
Mitigations:
Separate reporting lines
Independent review of IA work
Outsourcing
What is outsourcing of the internal audit function?
Using an external company to perform internal audit instead of in-house staff.
What are the advantages of outsourcing internal audit?
Access to qualified, skilled staff
Specialist expertise
Flexibility and cost control
Access to latest technologies
Objective perspective
What are the disadvantages of outsourcing internal audit?
Lack of organizational knowledge
Potential high fees
Ethical threats to independence
Contractual constraints
Less control over quality
What are common internal audit assignments?
Value for money (3 Es- economy, efficiency and effectiveness)
Operational audits
IT systems reviews
Financial audits
Fraud investigations
Customer experience (e.g., mystery shoppers)
What is the 3 Es framework for Value for Money (VFM) audits?
Economy: Best resources at lowest cost
Efficiency: Max output for least input
Effectiveness: Achieving objectives
What is the purpose of operational audits in internal audit?
To systematically review the efficiency and effectiveness of operations (e.g., reviewing ordering processes).
Describe the format and content of internal audit reports.
Terms of reference
Executive summary
Body of the report (findings, evidence, recommendations)
Appendices
Note: These reports are for internal use only, not public.
