Internal Audit Procedure

ACI Animal Genetics

Every successful audit is based on sound planning and an atmosphere of

constructive involvement and communication between the client and the auditor. I
see quite a few audit organizations that include a Web-based explanation to their
clients how the audit process works. The purpose of providing this page is for
those audit organizations that have not explained to their clients how, in general,
the audit process works.
Audit Process

Although every audit project is unique, the audit process is similar for most
engagements and normally consists of four stages: Planning (sometimes called
Survey or Preliminary Review), Fieldwork, Audit Report, and Follow-up Review.
Client involvement is critical at each stage of the audit process. As in any special
project, an audit results in a certain amount of time being diverted from your
department's usual routine. One of the key objectives is to minimize this time and
avoid disrupting ongoing activities.

Internal Audit Process

Planning  

During the planning portion of the audit, the auditor notifies the client of the audit,
discusses the scope and objectives of the examination in a formal meeting with
organization management, gathers information on important processes, evaluates
existing controls, and plans the remaining audit steps.

Announcement Letter

The client is informed of the audit through an announcement or engagement letter

from the Internal Audit Director. This letter communicates the scope and
objectives of the audit, the auditors assigned to the project and other relevant
information.
Initial Meeting

During this opening conference meeting, the client describes the unit or system to
be reviewed, the organization, available resources (personnel, facilities, equipment,
funds), and other relevant information. The internal auditor meets with the senior
officer directly responsible for the unit under review and any staff members s/he
wishes to include. It is important that the client identify issues or areas of special
concern that should be addressed.

Preliminary Survey

In this phase the auditor gathers relevant information about the unit in order to
obtain a general overview of operations. S/He talks with key personnel and reviews
reports, files, and other sources of information.

Internal Control Review

The auditor will review the unit's internal control structure, a process which is
usually time-consuming. In doing this, the auditor uses a variety of tools and
techniques to gather and analyze information about the operation. The review of
internal controls helps the auditor determine the areas of highest risk and design
tests to be performed in the fieldwork section. Click here for an annual internal
control review plan.

Audit Program

Preparation of the audit program concludes the preliminary review phase. This
program outlines the fieldwork necessary to achieve the audit objectives.

Fieldwork
The fieldwork concentrates on transaction testing and informal communications. It
is during this phase that the auditor determines whether the controls identified
during the preliminary review are operating properly and in the manner described
by the client. The fieldwork stage concludes with a list of significant findings from
which the auditor will prepare a draft of the audit report.

Transaction Testing

After completing the preliminary review, the auditor performs the procedures in
the audit program. These procedures usually test the major internal controls and the
accuracy and propriety of the transactions. Various techniques including sampling
are used during the fieldwork phase. 

Advice & Informal Communications

As the fieldwork progresses, the auditor discusses any significant findings with the
client. Hopefully, the client can offer insights and work with the auditor to
determine the best method of resolving the finding. Usually these communications
are oral. However, in more complex situations, memos and/or e-mails are written
in order to ensure full understanding by the client and the auditor. Our goal: No
surprises.

Audit Summary
Upon completion of the fieldwork, the auditor summarizes the audit findings,
conclusions, and recommendations necessary for the audit report discussion draft.

Working Papers
Working papers are a vital tool of the audit profession. They are the support of the
audit opinion. They connect the client’s accounting records and financials to the
auditor’s opinion. They are comprehensive and serve many functions.

Working Paper Documentation

Audit Report
Our principal product is the final report in which we express our opinions, present
the audit findings, and discuss recommendations for improvements. To facilitate
communication and ensure that the recommendations presented in the final report
are practical, Internal Audit discusses the rough draft with the client prior to
issuing the final report. For an audit report template including an executive
summary click here.

Discussion Draft

At the conclusion of fieldwork, the auditor drafts the report. Audit management
thoroughly reviews the audit working papers and the discussion draft before it is
presented to the client for comment. This discussion draft is prepared for the unit's
operating management and is submitted for the client's review before the exit
conference.
Exit Conference

When audit management has approved the discussion draft, Internal Audit meets
with the unit's management team to discuss the findings, recommendations, and
text of the draft. At this meeting, the client comments on the draft and the group
works to reach an agreement on the audit findings.

Formal Draft
The auditor then prepares a formal draft, taking into account any revisions
resulting from the exit conference and other discussions. When the changes have
been reviewed by audit management and the client, the final report is issued.

Final Report
Internal Audit prints and distributes the final report to the unit's operating
management, the unit's reporting supervisor, the Vice President for Administration,
the University Chief Accountant, and other appropriate members of senior
University management. This report is primarily for internal University
management use. The approval of the Internal Audit Director is required for
release of the report outside of the University.

Client Response
The client has the opportunity to respond to the audit findings prior to issuance of
the final report which can be included or attached to our final report. However, if
the client decides to respond after we issue the report, the first page of the final
report is a letter requesting the client's written response to the report
recommendations.
In the response, the client should explain how report findings will be resolved and
include an implementation timetable. In some cases, managers may choose to
respond with a decision not to implement an audit recommendation and to accept
the risks associated with an audit finding. The client should copy the response to
all recipients of the final report if s/he decides not to have their response
included/attached to Internal Audit's final report.

Client Comments

Finally, as part of Internal Audit's self-evaluation program, we ask clients to

comment on Internal Audit's performance. This feedback has proven to be very
beneficial to us, and we have made changes in our procedures as a result of clients'
suggestions.

Audit Follow-Up
Within approximately one year of the final report, Internal Audit will perform a
follow-up review to verify the resolution of the report findings.
Follow-up Review

The client response letter is reviewed and the actions taken to resolve the audit
report findings may be tested to ensure that the desired results were achieved. All
unresolved findings will be discussed in the follow-up report.

Follow-up Report

The review will conclude with a follow-up report which lists the actions taken by
the client to resolve the original report findings. Unresolved findings will also
appear in the follow-up report and will include a brief description of the finding,
the original audit recommendation, the client response, the current condition, and
the continued exposure to Indiana University. A discussion draft of each report
with unresolved findings is circulated to the client before the report is issued. The
follow-up review results will be circulated to the original report recipients and
other University officials as deemed appropriate.

Internal Audit Annual Report to the Board 

In addition to the distribution discussed earlier, the contents of the audit report,
client response, and follow-up report may also communicated to the Audit
Committee of the Board as part of the Internal Audit Annual Report.

The Process: A Collaborative Effort

As pointed out, during each stage in the audit process--preliminary review, field
work, audit reports, and follow-up--clients have the opportunity to participate.
There is no doubt that the process works best when client management and Internal
Audit have a solid working relationship based on clear and continuing
communication.
Many clients extend this working relationship beyond the particular audit. Once
the audit department has worked with management on a project, we have an
understanding of the unique characteristics of your unit's operations. As a result,
we can help evaluate the feasibility of making further changes or modifications in
your operations.