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Lesson#40
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CONSIDERING THE WORK OF INTERNAL AUDITING
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CONSIDERING THE WORK OF INTERNAL AUDITING
Introduction (Meaning of Internal Audit)
Internal audit is part of internal control, set by the
management, delegating its supervisory functions
to specially assigned staff, with the objective to see that the
internal controls are in operation and to
assist them in fulfilling their responsibilities such as
1. safeguarding of the assets
2. reliability of financial records and
3. efficiency in operation
Definition
“Internal auditing” means an appraisal activity
established within an entity as a
service to the entity.
Its functions include, amongst other things, examining,
evaluating and monitoring the adequacy and
effectiveness of the accounting and internal control system.
DIFFERENCE BETWEEN INTERNAL AND EXTERNAL AUDITORS
INTERNAL AUDITOR EXTERNAL AUDITOR
Objective: Accounting
system and internal
control are operating efficiently.
Report on Financial statements.
Responsibility
Responsibility to the management. Responsibility to the share holders.
Scope of work
Determined by management.
Determined by the statute; otherwise
determined through mutual agreement
between auditor and the client.
Scope and Objectives of the Internal Audit Function
Although the exact nature of internal audit function is
determined by the management, however,
generally the aims and objectives of the internal audit function
are:
i) Review and assessment of the internal control procedures and
accounting system.
ii) Examination of financial and operating information for
management, including detailed
testing of transactions and balances.
iii) Review of efficiency, economy and effectiveness of
operation.
iv) Review of compliance with laws, regulations, management
policy and other internal
requirements.
Relationship between Internal Auditing and the External Auditor
Management’s Requirements Vs Independent Report on Financial
Statements
Unlike the internal auditor who is an employee of the
enterprise, the external auditor is required to be
independent of the enterprise, usually having a statutory
responsibility to report on the financial
statements giving an account of management’s stewardship.
Common Means
Some of the means adopted by both the auditors to achieve their
respective objectives are common,
e.g. evaluation of internal control. Therefore, certain aspect
of internal auditing may be useful in
determining the nature, timing and extent of external audit
procedures.
Dependence Vs Independence
Whatever be the degree of autonomy given by the management to
internal auditing it cannot enjoy
the same degree of independence as external auditors. Moreover,
the responsibility for the report is
that of the external auditor alone, and therefore is indivisible
and is not reduced by the reliance on
internal auditing.
page
129
As a result, all final judgments relating to matters which are
material to the financial statements or
other aspects on, which he is reporting, must be made by the
external auditor himself.
Understanding of Internal Auditing
The external auditors should obtain a sufficient understanding
of internal audit activities to assist in
planning the audit and developing an effective audit approach.
Effective internal auditing will often allow a reduction in the
procedures performed by the external
auditors but cannot eliminate them entirely. However, external
auditor may decide not to use the
internal auditor’s work.
Preliminary Assessment of Internal Auditing
After obtaining understanding of internal auditing, if it
appears that its work is relevant for external
auditors, the external auditor should, during the course of
planning perform preliminary assessment
of internal auditing function. An effective internal audit may
allow a modification in the nature, timing
and extent of procedures performed by external auditors.
Criteria while Obtaining Understanding and Preliminary
Assessment of Internal Auditing
Before relying on the work performed by the internal auditor, it
is necessary for the external auditor
to make an assessment of the effectiveness and relevance of the
internal audit function by considering
the following:
i) Organizational
status: The internal auditor is an
employee of the entity and therefore
cannot be independent, however the external auditor should
evaluate to what extent he is
free in performing his duties and communicate with external
auditor and consider any
constraints placed upon his work.
Ideally, internal auditor should be reporting to the highest
level of management and should
be free from other operating responsibility.
ii) Scope and
Objectives of Internal Audit Function:
The external auditor should examine
the range and aim of the assignments assigned to internal
auditors by the management and
whether management acts on internal audit recommendations.
iii) Technical
Competence: The external auditor
should ascertain whether staff of the internal
audit function has adequate technical training and proficiency
as auditors.
iv) Due
Professional Care: The external
auditor should consider whether the internal auditor
has performed his work with reasonable care and skill i.e. work
is properly planned,
supervised and reviewed. He should also consider existence of
working papers, work
programs, audit manuals etc.
Liaison and Coordination
The extent of liaison would normally encompass the following:
i) Initial planning to formulate a joint approach to minimize
the tests performed by the two
auditors i.e. tests level, sample selection, documentation of
work performed, review and
reporting procedures.
ii) Regular meetings between the internal and external auditors
during the year.
iii) Exchange of knowledge between the two auditors i.e. the
external auditors should be
informed of any significant matter that comes to the knowledge
of internal auditor which
he believes may affect to work of external auditor. Similarly
the external auditor should
inform the internal auditor of any significant matters which may
affect his work.
Evaluating Internal Audit Work/Review/Controlling
Where the external auditor has decided to place reliance on the
work of internal auditor, he should
review the working papers to satisfy himself as to:-
i) Audit programs are adequate.
ii) The work is performed by trained staff and the work of
assistants is properly
supervised, reviewed and documented.
iii) Sufficient appropriate audit evidence was obtained.
iv) Conclusions made are appropriate.
v) Reports prepared are based on the work done.
page
130
vi) Exceptions or unusual items have been properly resolved. The
external auditor
should record all the working he has received. The external
auditor should also
test the work of internal auditor.
Testing the Work of Internal Auditing
It can be done in the following ways:
i) Re-performing the work done by internal auditor, on test
basis, to ensure that the same
results are achieved;
ii) Selecting a few similar items and perform independent test;
and
iii) Observation of internal auditing procedures. |
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