S6: Internal Audit

Defining Internal Audit Internal Auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. 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. 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.

Functions of Internal Audit Review of accounting and other control systems in compliance with laws, regulations and other requirements. Review of accounting and other control systems in compliance with laws, regulations and other requirements. Examination of operations and records of an organisation undertaken by specially assigned staff Examination of operations and records of an organisation undertaken by specially assigned staff An independent appraisal and review of the accounting, financial and other operations on a continuous basis as a protective and constructive arm of management An independent appraisal and review of the accounting, financial and other operations on a continuous basis as a protective and constructive arm of management

Functions of Internal Audit (contd.) A type of control which functions by measuring and evaluating the effectiveness of other types of controls A type of control which functions by measuring and evaluating the effectiveness of other types of controls Examination of financial and operational reports to determine their accuracy, usefulness and utilisation to the management Examination of financial and operational reports to determine their accuracy, usefulness and utilisation to the management Reviewing the sub-units of the organisation with respect to their adequacy, efficiency and effectivenss Reviewing the sub-units of the organisation with respect to their adequacy, efficiency and effectivenss To serve as means of safeguarding the assets To serve as means of safeguarding the assets To check the economy and efficiency with which organisational resources are applied and to suggest improvements To check the economy and efficiency with which organisational resources are applied and to suggest improvements

Assessment of effectiveness of Internal Audit To check whether To check whether Internal audit unit has appropriate organisation set-up Internal audit unit has appropriate organisation set-up Procedures encompass financial as well as operational areas Procedures encompass financial as well as operational areas Auditors function independently, have requisite organizational status and desired degree of objectivity Auditors function independently, have requisite organizational status and desired degree of objectivity Work is planned and executed appropriately Work is planned and executed appropriately

Assessment of effectiveness of Internal Audit The external auditor may assess the The external auditor may assess the Seriousness with which Internal audit reports are treated by the senior management and followed up Seriousness with which Internal audit reports are treated by the senior management and followed up The periodicity and regularity of evaluation by Internal Audit and the quality of the work done The periodicity and regularity of evaluation by Internal Audit and the quality of the work done

Reliance on the work of Internal Auditor Based on the assessment of the effectiveness of the Internal Audit the external auditor may decide on the Based on the assessment of the effectiveness of the Internal Audit the external auditor may decide on the Extent of reliance on the internal audit Extent of reliance on the internal audit Size of the sample Size of the sample Extent of substantive testing Extent of substantive testing Areas to be covered Areas to be covered If he finds a weak internal audit in place he may have to enlarge his scope of test If he finds a weak internal audit in place he may have to enlarge his scope of test

Case Study Case Study