Introduction to Internal Auditing

8/11/2019 Introduction to Internal Auditing

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Topics

Define internal auditing.

Discuss the difference between accounting and auditing.

Discuss the difference between internal and external

auditing. Discuss independence and objectivity.

Discuss the value proposition for internal auditing services.

Discuss available certifications for internal auditors.

Discuss job opportunities for internal auditors. Discuss the dilemma with being a professional internal

auditor.


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IIA Scope

The scope of internal auditing shouldencompass the examination of the adequacyand effectiveness of the organizations system ofinternal control and the quality of performance in

carrying out assigned responsibilities. InternalAuditors should: Review the reliability and integrity of financial and operating information and the means

used to identify, measure, classify, and report such information.

Review the systems established to ensure compliance with those policies, plans,procedures, laws, and regulations which could have a significant impact on operationsand reports, and should determine whether the organization is in compliance.

Review the means of safeguarding assets and, as appropriate, verify the existence ofsuch assets.

Appraise the economy and efficiency with which resources are employed.

Review operations or programs to ascertain whether results are consistent withestablished objectives and goals and whether the operations or programs are beingcarried out as planned.


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Relationship Between Auditing and Accounting

Accounting includes the collection, classification, summarization, and

communication of financial data; it involves the measurement and

communication of business events and conditions as they affect and

represent an enterprise. The task of accounting is to reduce a tremendous

amount of detailed information to manageable and understandable

proportions. Auditing does none of these things. Auditing must considerbusiness events and conditions too, but it does not have the task of

measuring or communicating them. Its task is to review the measurement

and communications of accounting for propriety. Auditing is analytical, not

constructive; it is critical, investigative, concerned with the basis for

accounting measurement and assertions. Auditing emphasized proof, the

support for financial statements and data. Thus, auditing has it principle

roots, not in accounting, which it reviews, but in logic on which it leans

heavily for ideas and methods. Mautz and Hussein (1961)


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Financial Reporting Assurance Services:

External versus Internal Audit

External Auditing is a form of assurance service where the CPA firm

issues written attestation reports that expresses an opinion about

the effectiveness of internal controls over financial reporting and

whether the financial statements are fairly stated in accordance with

GAAP.

Internal Audit also provides financial reporting assurance services

but for a different audience (management and BOD). The CEO and

CFO must certify the financial statements and assess and report on

the effectiveness of internal controls over financial reporting.


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Differences Between Internal and External

Auditors

External Auditor Internal AuditorIs an independent contractor. Is an organizations employee, or can be an

independent entity (outsourced or co-sourced).

Serves third parties who need reliable financial

information.

Serves the needs of the organization.

Focuses on the accuracy and understandability of

historical events as expressed in the financialstatements.

Focuses on future events by evaluating controls

designed to assure the accomplishment of entitygoals and objectives.

Is incidentally concerned with prevention and

detection of fraud in general, but is directly

concerned when the financial statements may be

materially affected.

Is directly concerned with the prevention of fraud

in any form or extent in any activity reviewed.

Is independent of management and the board of

directors both in fact and in mental attitude.

Is independent of the activities audited, but is

ready to respond to the needs of all elements ofmgmt and the board.

Review records supporting financial statements

periodically.

Reviews governance, risk management and

control processes as needed.

Is not part of the organizations internalcontrol

structure.

Is a part of the organizations internal control

structure.

Adapted from Sawyers Guide for Internal Auditors (2012)


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Independence of Internal Audit

Chief Audit Executive (CAE) must report to a

level within the organization that has

sufficient authority to ensure

Broad engagement coverage.

Due consideration of engagement outcomes.

Appropriate responses to engagement outcomes.

IIA recommends the CAE reports functionally to the board of

directors and administratively to the CEO (Practice Advisory 1110-1:

Organizational Independence)


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Objectivity of Internal Auditor

To ensure objectivity, internal auditors should

not:

Involve themselves in day-to-day operations.

Make management decisions.

Or put themselves in situations that result in

actual or potential conflicts of interest.


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IIA Value Proposition

1.) Assurance = Governance, Risk and Control Internal Audit helps the organization meet strategic, operation,

compliance and financial objectives by providing assurance on

the organizations governance, risk management and internal

control processes.

Internal Audit does not lead governance, risk management or

control processes.


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Assurance Services

Purpose: to assess evidence relevant to a subject matter

of interest to someone and provide conclusions

regarding the subject matter.

Who determines the nature and scope of engagement?Internal Audit function

Parties involved? Three parties: the auditee directly

involved in the subject matter of interest, the internal

auditor making the assessment and providing the

conclusions, and the user relying on the internal auditors

assessment and conclusions.


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Consulting Services

Purpose: Provide advice and other assistance, generally

at the request of engagement customer.

Who determines the nature and scope of engagement?

The customer and the internal audit function mutuallyagree on the nature and scope of the engagement.

Parties involved? Two parties: the customer seeking

advice and the internal auditor providing the advice.


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2.) Insight = Catalyst, Analyses and Assessment. Internal Audit provides a catalyst for improving organizational

effectiveness and efficiency.

Internal Auditors provide insight and recommendations for

improvements based on analyses and assessments of data and

business processes.


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3.) Objectivity = Integrity, Accountability and Independence

Internal Audit is an objective source of independent advice that

provides value to governing bodies and management.


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Modern Internal Auditing

Has been impacted by:

Globalization

Increasingly complex corporate structures

Technological advances (E-commerce, mobile

computing, etc.)

Large corporate scandals


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Certified Internal Auditor (CIA)

Is the only globally accepted certification for

internal auditors.

To obtain CIA certification, a candidate must: Pass a three part exam

Internal Audit Basics

Internal Audit Practice Internal Audit Knowledge Elements

Have a minimum of two years internal audit experience or its

equivalent.


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Specialty Certifications

IIA sponsors:

Certification in Control Self-Assessments

Certified Government Auditing Professional

Certified Financial Services Auditor

Certification in Risk Management Assurance

ISACA sponsors:

Certified Information Systems Auditor

Association of Certified Fraud Examiners sponsors:

Certified Fraud Examiner


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Competencies to Excel as an

Internal Auditor

Inherent personal qualities key to be a

successful internal auditor are:

Integrity

Passion

Work ethic

Curiosity

Creativity Initiative

Flexibility


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Interpersonal

Skills

Tools and

Techniques

Standards Knowledge

Areas

Communication

Leadership

Conflict Mgmt

Collaboration

Team Capabilities

Influence

Management

Operational and

ManagementResearch Tools

Forecasting

Project Mgmt

Risk and Control

Assessment

Techniques

Data Collection

and AnalysisTools and

Techniques

CAATTs

International

Standards for theProfessional

Practice of

Internal Auditing

Code of Ethics

Financial

Accounting andFinance

Managerial

Accounting

Regulatory, Legaland Economics

Quality

Framework

Ethics and Fraud

IT

Governance, Risk

and Controls

IIA Internal Auditor Competency Framework


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Pathways into Internal

Auditing

Public/private companies, government

entities, not-for-profit and firm specializing in

internal audit hire new college graduates.

Experience public accounting professional

often take internal audit positions sometime

within clients they used to audit as anexternal auditor.


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Pathways out of Internal

Auditing

Internal auditors may pursue executive

positions.

Internal auditors may pursue positions with

professional service firms that provide

assurance or consulting services (especially

internal auditors with specialized, highly-

valued expertise in a particular industry orsubject matter).


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Internal Auditors Dilemma

A profession is characterized as having a

code of ethics, professional standards, and

require specialized training, among others.

Compared to other professions, the difficult

choices an internal auditor may face may be

more extreme and/or damaging to onecareer.


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Summary

We learned about internal auditing and how it

differs from external auditing.

We defined independence and objectivity, as

it relates to the internal audit function.

We talked about the value proposition that

supports having an active internal audit

function within an enterprise.

We talked about internal audit certifications

and jobs.

Documents

Introduction to Internal Auditing