Welcome!Internal Auditing

CHAPTER 1

Definition

• Internal auditing is an independent, objective, assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes.

Key components

1. Helping the organization accomplish its objectives

• Strategic objectives – choices management makes on behalf of the organization’s stakeholders. Example: increase market share by acquiring other companies.

• Operations objectives – effectiveness and efficiency of the operations, including performance and profitability goals and safeguarding resources against loss.

Key components

1. Helping the organization accomplish its objectives (continued)

• Reporting objectives – reliability of internal and external reporting of financial and non financial information

• Compliance objectives – pertain to adherence to applicable laws and regulations

See Exhibit 1-1

Key components

2. Evaluating and Improving the Effectiveness of Risk Management, Control, and Governance Processes

• Risk management – deal with risks that could affect the organization’s ability to achieve its objectives.

• Control – process conducted by management to reduce risks to acceptably low levels.

• Governance – process conducted by the Board of Directors to authorize, direct and oversee management toward the achievement of objectives.

Key components

3. Assurance and Consulting Activity Designed to Add Value and Improve Operations

• Assurance activity – examination• Consulting – advisory services for customers

Key components

4. Independence and Objectivity• Independence – the internal audit function must

report to a level within the organization that has sufficient authority to ensure broad engagement coverage, due consideration of outcomes, and appropriate responses to those outcomes. The audit function should report functionally to the Board of Directors & administratively to the Chief Executive Officer.

• Objectivity – means that the auditor is able to make impartial, unbiased judgments.

Key components

5. Systematic and Disciplined Approach • Planning the engagement• Performing the engagement, and• Communicating engagement outcomes

Financial Reporting Assurance ServicesExternal Audits

• Required by Federal Laws• Assurance service in which a CPA firm issues a written

report that expresses an opinion about whether the financial statements are fairly stated in accordance with generally accepted accounting principles.

• US Sarbanes-Oxley Act of 2002 requires the external auditor to also attest to the effectiveness of the company’s internal control over financial reporting.

• Cpa firms provide their services for the benefits of third parties.

The INTERNAL AUDIT ProfessionThe targets of internal audit include:• Operational effectiveness and efficiency of

business processes.• Reliability of information systems and the quality

of the decision-making information produced by those systems.

• Safeguarding assets against loss, including losses resulting from management and employee fraud.

• Compliance with organization policies, contracts, laws, and regulations.

The Institute of Internal Auditors• The internal audit profession’s leader in

certification, education, research, and technological guidance.

• Certified Internal Auditor – the only globally accepted certification for internal auditors

• Internal auditor – the IIA’s bi monthly magazine, publishes articles of widespread interest to internal auditors around the world.

Competencies Needed to Excel as an Internal Auditor

• Integrity• Passion• Work ethic• Curiosity• Creativity• Initiative• Flexibility