Internal Audit

Why Internal Audit

● Internal Control assists the organisation in achieving its objective.

● Internal control ensures placing policies and procedures in place to manage the business.
● Internal AUDIT - helps in evaluation of internal control on a continuous basis.
● In some countries internal audit may be required by law, but in most of the cases it is completely
optional.
● It is always in the favour of the business to have an independent internal audit department as per
the need and size of the business.
● In case of small business personal intervention of the owner may replace the need for internal audit.
● Generally speaking the need and size for internal audit depends on
○ Size of the business.
○ Nature of business.
○ Value addition wr.t. Money spent.
○ Management's overall attitude and style.
○ Current control conditions and experiences

Difference between External Audit and Internal Audit

Basis External Auditor Internal Auditor

Objective To form an opinion on whether a set of To improve a company’s

accounts are “true and fair” operations, in terms of efficiency
and effectiveness of their internal
controls

Report To Shareholders Management (TCWG etc)

Independence More Less

Qualification Required Not specified in general

Availability of Report Public For Internal Use

Appointment Shareholders Management

Status Should not be an employee May be an employee

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 Objectives of Internal Audit Function

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 Limitations of an internal audit function

Independence
One of the biggest problems faced by internal auditors is that one of their key duties is to form an
objective, “independent” opinion on company matters, despite the fact that they are employees.

Resources
Another possible problem occurs when there are insufficient resources to form an effective IA function.

Fear of Losing jobs

If internal auditors identify errors or fraud, they may be unwilling to disclose it to the Board of Directors for
fear of possible repercussions (e.g. a fellow employee losing their job).

Mitigating Limitation - Separate Reporting Channels

To mitigate some of these problems, IA normally report their findings to the audit committee, who
themselves take a more objective view of the company than the executive directors may.

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 Outsourcing

Outsourcing is very common in case of internal audit. Sometimes management finds it more beneficial to
outsource internal audit of the organisation to professional firms having expertise in the same.

Outsourcing of internal audit simply means conduct of internal audit by outside organisation instead of
employees of the firms.

Advantages & Disadvantages

Advantages Disadvantages

More “independent” since they will not be employees Lack of client-specific knowledge

External accountants are likely to have a pool of qualified Loss of internal audit as a training ground for
accountants available, many with industry experience new managers of the business

Using experienced auditors should increase the reliability of Possible loss of control over how and when the
their findings work is performed

Should be cheaper than having a full-time presence – no Possible self-review threat if the external
need to recruit staff for the IA department, no “down time” auditors are being used
for underutilised staff and less training costs

Quicker set up time Potential confidentiality issues

Types of Internal Audit Assignments

● Value for money assignments

● Operational Audits
● IT system Audit
● Financial Audits

Value for Money Assignment

A value for money audit is concerned with obtaining the best possible combination of services for the least
resources. It is therefore the pursuit of ‘Economy’, ‘Efficiency’ and ‘Effectiveness’ – sometimes referred to as
the three ‘Es’:

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Economy relates to least cost. The systems in an organisation should operate at a minimum cost associated
with an acceptable level of risk.

Efficiency relates to the best use of resources. The goals and objectives of an organisation should be
accomplished accurately and on a timely basis with the least use of resources.

Effectiveness provides assurance that organisational objectives will be achieved.

Operational Audit

The focus of operational audit is on the improvement of the processes of the organisation. By improving the
process efforts are made to improve the overall profitability of the organisation.

Focus is on automation of processes by reducing the chances of error and wastage.

IT System Audit

Reliability of systems are checked with respect to preparation of financial statements.

Controls in the IT system are also checked with respect to prevention detection and correction of
misstatements.

Other aspects that the internal auditor will check will be that whether the company is getting value for
money from the IT systems and company is doing optimum utilisation of the IT system.

Audit of IT systems will also include evaluation of the maintenance of the system.

Financial Audit

Internal financial audits will help the organisation to ensure that information which is required for decision
making is reliable and is available on time.

Internal financial audits will also help the organisation to recognise any event causing an issue with the
financial health of the organisation on timely basis.

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The goal of internal financial audit is to come up with reports which will help in producing reliable and timely
data and early detection of any issues with the financial health of the organisation.

Reporting
● No formal reporting structure is there
● The format will be based on the agreement of internal orders with the management of the
organisation.
● As discussed earlier, reports of internal auditors are for internal use only.
● Also as per the earlier discussion we all know that external auditors can also use internal auditors
report if external auditor is about to place reliance on the work of internal audit function

General Content of Internal Audit Report

Title
The internal auditor’s report should have an appropriate title expressing the nature of the Report.

Addressee
The internal auditor’s report should be appropriately addressed as required by the circumstances of the
engagement. Ordinarily, the internal auditor’s report is addressed to the appointing authority or such other
person as directed.

Terms of reference
summarising who requested the report and what the purpose of the report is

Executive Summary Paragraph

The Executive Summary paragraph of the internal auditor’s report should clearly indicate the highlights of
the internal audit findings, key issues and observations of concern, significant controls lapses, failures or
weaknesses in the systems or processes.

Observations (Main Report) Paragraph

The Observations paragraph should clearly mention the
● process name,
● significant observations,
● findings,

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 ● analysis and
● comments of the internal auditor.

Date
The date of an internal auditor’s report is the date on which the internal auditor signs the report expressing
his comments and observations.

Internal Auditor’s Signature

The report should be signed by the internal auditor in his personal name.

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