Chapter 15 Internal Auditing Copyright  2006 McGraw-Hill Australia Pty Ltd 15- Learning Objective 1: The Evolving Nature of Internal Auditing (IA) • • • • • • The traditional view of internal auditing is that it is an independent appraisal function, established within an entity as a service to the organisation (Ref AUS 104/ AUASB Glossary) It involves examination and evaluation of: Internal control and information systems; Financial and operating information; Economy, efficiency and effectiveness of operations; and Whether or not the entity has complied with relevant legislation Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-2 New Definition of IA • Internal auditing: is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s 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 (Definition from Institute of Internal Auditors website) Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-3 Institute of Internal Auditors (IIA) • Professional organisation, represented in > 120 countries • Aim is to represent, promote and develop professional practice of internal auditing • First established in Australia in 1952 Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-4 Learning Objective 2: Current Standards for Internal Auditor (issued by IIA) • Standards for the Professional Practice of Internal Auditing (SPPIA) issued by IIA • Purposes: – – – – Outline basic principles; Provide a framework for performing and promoting IA activities; Establish the basis for the measurement of IA performance; and Foster improved organisational processes and operations Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-5 Attribute and performance standards • Attribute Standards: – • Address characteristics of organisations and individuals performing IA activities Performance Standards: – Describe the nature of IA activities and provide criteria against which performance of these services can be measured Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-6 Current attribute and performance standards of the IIA Attribute Standards Performance Standards 1000 Purpose, Authority, and Responsibility 2000 Managing the Internal Audit Activity 1100 Independence and Objectivity 2100 Nature of Work 1200 Proficiency and Due Professional Care 2200 Engagement Planning 1300 Quality Assurance and Improvement Program 2300 Performing the Engagement 2400 Communicating Results 2500 Monitoring Process 2600 Management’s Acceptance of Risks Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-7 Independence of internal audit (IIA standard 1100) • • • • • Essential that IA is, and is seen to be, independent of the area being audited IA department should report to board of directors or audit committee Head of IA should have direct access to board of directors Board should approve appointment or removal of head of IA Management and Board should be aware of work schedules, staff requirements and budgets of IA department Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-8 Learning Objective 3: The Current Practice of Internal Audit • Most important areas of work undertaken by IA in Australia are: – – – – Computer and financial audit Internal control reviews Fraud detection Operational audit Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-9 Learning Objective 4: The Future of Internal Audit • Major issues confronting IA include: – – – – Outsourcing of IA, especially to Big Four; Difficulty in changing profile of IIA, so that members are seen to be more value adding than checking; Expectations gap between chief executive officers and internal audit managers; and Development of specialised IA groups, e.g quality, environmental auditors, and whether IIA can adequately cater for these groups Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-10 Factors driving change • Ability of IA to show that it adds value • Benchmarking of IA departments as a means of assessing quality • Greater emphasis on corporate governance and risk management in current environment, and IA’s increasing role in these areas Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-11 Risk-related tasks of importance to IA’s • Provide expert advice about risk exposures and their • • • • • management; Raise awareness about risk exposures; Contribute to the improvement of risk management systems; Provide ongoing assurance about the efficiency and effectiveness of risk management systems; Focus on the risk exposures associated with the achievement of an organisation’s objectives; and The services provided by IA will be distinctly related to the management of risk exposures Ref.: Exhibit 15.2 (p 697) Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-12 Control-related tasks of importance to IA’s • Provide expert advice about control strategies, structures and systems; • Raise awareness about risk exposures and related controls; • Contribute to improvement of control systems; • Provide ongoing assurance about efficiency and effectiveness of control strategies, structures and systems; • Contribute enhanced understandings of different types of control that can be used in organisations; • Focus on control as a facet of risk management; and • The services provided by IA will be distinctly related to management of risk exposures Ref.: Exhibit 15.3 (p 697) Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-13 Expected future relationship with external auditor • As both groups of auditors move to the risk analysis approach, greater co-ordination between IA and EA can be expected • Co-ordination aided by recent developments in corporate governance, with audit committee playing key co-ordination role Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-14 Learning Objective 5: Approaches to Assessing Risk Management, Control and Governance Processes Copyright  2006 McGraw-Hill Australia Pty Ltd Revised PPTs t/a Auditing and Assurance Services in Australia 3e by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15-15 ... 15- 2 New Definition of IA • Internal auditing: is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations It helps an organisation... traditional view of internal auditing is that it is an independent appraisal function, established within an entity as a service to the organisation (Ref AUS 104/ AUASB Glossary) It involves examination... by Grant Gay and Roger Simnett Slides prepared by Roger Simnett 15- 3 Institute of Internal Auditors (IIA) • Professional organisation, represented in > 120 countries • Aim is to represent, promote