Internal Audit

Lecture # 09
By: Kanchan Damithendra
What is Internal Audit?
 Scope and Objectives of Internal Auditing
Monitoring of internal control. The establishment of adequate internal control is a
responsibility of management which demands proper attention on a continuous basis.
Internal auditing is ordinarily assigned specific responsibility by management for
reviewing controls, monitoring their operation and recommending improvements thereto.

Examination of financial and operating information. This may include review of the
means used to identify, measure, classify and report such information and specific
inquiry into individual items including detailed testing of transactions, balances and
procedures.

Review of the economy, efficiency and effectiveness of operations including non

financial controls of an entity.

Review of compliance with laws, regulations and other external requirements and with
management policies and directives and other internal requirements.
International Standard
• The International Auditing and Assurance Standards Board (IAASB) is
an independent standard-setting body
• Serves the public interest by setting high-quality international
standards for auditing, quality control, review, other assurance, and
related services, and by facilitating the convergence of international
and national standards.
• In doing so, the IAASB enhances the quality and uniformity of practice
throughout the world and strengthens public confidence in the global
auditing and assurance profession
http://www.iaasb.org/clarity-center/clarified-standards
Local Standard (SLAuS)
General Principles and Responsibilities
SLAuS 200 - Objective and General Principles Governing and Audit of Financial
Statements
SLAuS 210 - Terms of Audit Engagements

RISK ASSESSMENT AND RESPONSE TO ASSESSED RISKS

SLAuS 300 - Planning an Audit of Financial
Statements
SLAuS 315 - Understanding the Entity and Its Environment and Assessing the Risks
of Material Misstatement
SLAuS 320 - Audit Materiality
AUDIT EVIDENCE
SLAuS 500 - Audit Evidence
SLAuS 501 - Audit Evidence – Additional Considerations for Specific
Items
SLAuS 505 - External Confirmations

USING WORK OF OTHERS

SLAuS 600 - Using the Work of Another Auditor
SLAuS 610 - Considering the Work of Internal Audit

AUDIT CONCLUSIONS & REPORTING

SLAuS 700 - The Auditor’s Report on Financial Statements
SLAuS 710 - Comparatives
Relationship Between Internal Auditing and the
External Audit
Relationship Between Internal Auditing and the
External Audit
 AUDIT
PROCESS

Planning Fieldwork Audit Report Audit Follow-Up

Announcement Transaction Testing Discussion Draft Follow-up Review

Letter
Initial Meeting Advice & Informal Exit Conference Follow-up Report
Communications
Preliminary Survey
Audit Summary Formal Draft Audit Annual Report
to the Board
Internal Control Working Papers Final Report
Review

Audit Program Client Response

Client Comments
 Audit Planning

• 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.
 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.

• Initial Meeting: the client describes the unit or

system to be reviewed, the organization, available
resources (personnel, facilities, equipment, funds),
and other relevant information.
• Preliminary Survey: In this phase the auditor gathers
relevant information about the unit in order to obtain
a general overview of operations.

• Internal Control Review: The auditor will review the

unit's internal control structure, a process which is
usually time-consuming.
 Audit Program
• Preparation of the audit program concludes the preliminary review
phase. This program outlines the fieldwork necessary to achieve the
audit objectives.
 AUDIT REPORT
.
W/P Est. Act.
Audit Step : To communicate the results of the audit to management No. Hrs. Hrs.

A. Prepare a Draft Report:

1. Write report introduction, background & scope.

2. Consolidate conclusion summaries into a report, x-ref
3. Write memo for less significant items.
4. Submit report for review & clear review notes.
5. Set up the Exit Conference and distribute Draft Report
6. Conduct Exit Conference to brief on the audit results and request a date for completion of the
corrective action plan. (Note: If any material changes to the audit report are identified,
establish the date for revised report to be issued.)

B. Obtain Corrective Action Plan

1. Analyze the Corrective Action Plan for adequacy and document.

2. Advise agency management of any apparent inadequacies in the Corrective Action
Plan & resolve.

C. Prepare a Final Report:

1. Add the revised Corrective Action Plan to the Draft Report to prepare the Final Report.
2. Submit report for review & clear review notes.
3. Distribute the final report.

REPORTING: Date Completed April 4, 2010 _____69_____Total Hours:

 Discussion Draft
At the conclusion of fieldwork, the auditor drafts the
report. Audit's goal is to complete the audit and issue a
draft audit report within 30 days after the completion of
fieldwork.
Audit management reviews the audit working papers
and the discussion draft before it is presented to the
client for comment. This discussion draft is submitted to
the client for review before the exit conference.
 Exit Conference
Internal Audit meets with the unit's management
team to discuss the findings, recommendations, and
text of the discussion draft. At this meeting, the client
comments on the draft and the group works to reach
an agreement on the audit findings.
 Exit Conference
Is an opportunity for the auditor, department management, process owners,
and other to review and validate audit outcomes.
The Exit Conference should accomplish the following:

1) Present observations and determine if the current operating context might

affect past transactions.

2) Confirm facts, observations, and conclusions, e.g., that the findings are
accurate.

3) Validate the cause leading to findings and present recommendations.

4) Estimate the effect of the findings on operations or its risk management.

5) Solicit draft management comments on the audit findings and determine if

alternative recommendations adequately eliminate the cause of findings.

6) Define the timeline for issuing the final audit report and implementing
recommendations.
 Audit Finding
Audit Findings
Reconciliation Supervisory Review (Urgent)
During our sample review of account reconciliations, it was noted
that many account reconciliations were not being reviewed by the
supervisor in Item Processing and Deposit Operations.

Recommendation
We recommend management review all accounts at least monthly.

Action Plan
The Supervisor of the Item Processing Department was advised of
this requirement and has implemented changes as requested.
The Deposit Operations Manager will sign and review all account
reconciliations. A secondary signature by the balancing associate
and/or supervisor will also be implemented. This procedure is
currently in place.
 Exit Conference Checklist
Procedure
Set the date, time, and location of the exit meeting.
The agenda should include the following:
• Accomplishment of the audit objectives (theirs and ours).
• Discussion of potential audit findings and
recommendations.
• Discussion of when management’s response
will be due.
• Audit reporting process.
• Follow up process.
Document results of the exit meeting.
 Exit Conference
This section of the report summarizes the pertinent
information regarding the Audit Exit Conference. It
includes:
The date the conference was held.

The persons in attendance and their titles.

A statement that a summary of the Findings and

Recommendations was discussed.
 Audit Exit Conference WP
Audit Location (Faculty Division)---------------------------------------------------------------------------------------------

Audit Date---------------------------------------------------------------------------------------------------------------------------

Lead Auditor------------------------------------------------------------------------------------------------------------------------

Audit team Member--------------------------------------------------------------------------------------------------------------

JOSE
The main purpose of this meeting is to immediately present audit observations to the senior management in a timely manner at the end of
the audit and in such a manner so as to ensure that they clearly understand the results of the audit.

List Observations:

The lead auditor should present observations, taking into account their
perceived significance and identifying key non-conformance areas.

Key Non-conformances:
 Formal Draft
The auditor then prepares a formal draft, taking into
account any revisions resulting from the exit
conference and other discussions. This report is
issued to the audited requesting a written response
to
any audit findings and recommendations.
When the changes have been reviewed
by audit management and the client,
the final report is issued.
 AUDIT REPORT
Our principal product is the final report in which we present the
audit findings and discuss recommendations for improvements.
Once the fieldwork is completed, Internal Audit will draft a report
to include the result of the audit including recommendations for
improvement. After the draft report is completed, it will be
forwarded to department management for review and discussion
at a scheduled exit conference.
 Report Issuance Control Sheet

Spelling and Grammar Check Performed by: ______PABLO____________________

Quality Assurance Review (QAR) Performed by: ______VILMARI__________________

Approval of final draft with responses Director of Audits: ___AMANDA_________________

Engagement Manager: ___JOSE ____________________

Check all reports (original and all copies). Verify the following:

1. They contain all pages, in the appropriate order __________

2 All copies are straight and legible; and __________

3. The signature page has been signed. __________

Report Distribution*:
President

Client Management

Chief Business Officer

Director of Internal Audit

Chancellor

Vice Chancellor for Academic Affairs

Executive Vice Chancellor for Health Affairs

Executive Vice Chancellor for Business Affairs

Institution Compliance Officer

Others (list)

Reading File (unbound hard copy – stamped and placed in Reading File)

Unbound hard copy provided to Office Associate

* As determined by type of audit and institution where engagement is conducted (Academic, Medical, or System Administration).

Compliance Officer should be included in report distribution if engagement involves a compliance issue.
 Final Report
After audited management has been given an
opportunity to respond to the Preliminary Draft, the
Final Draft Report is presented to the Accountability
Oversight Committee for approval. Upon approval of
the Final Draft the Final Report is issued.
Auditor distributes the final report the Chief Financial
Officer, the Chief Accountant, the President, the Board
of Directors, and other appropriate members of senior
management. Final Reports are considered public
information and will be available to anyone.
 Independent Auditors' Report
To the Board of Directors and Shareholders
Miami/Fort Lauderdale Area

• We have audited the accompanying balance sheets of COMMERCIAL LENDING PARTNERS, LLC as of December
31, 2009, 2008 and 2007, and the related statements of income, retained earnings, and cash flows for the
years then ended. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.

• We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

• In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of COMMERCIAL LENDING PARTNERS, LLC as of December 31, 2009, 2008 and 2007, and the results
of its operations and its cash flows for the years then ended in conformity with accounting principals generally
accepted in the United States of America.

Jose Cintron, MBA

April 4,2010
 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.
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
 Client Response Example
Client Response (1) - Treasury balances are reconciled monthly.
Treasury activity is reconciled daily. Differences are isolated to the
period of October 1, 2002 and prior, and have been controlled
since that date.
Adjusting entries are made with proper documentation and
review.
Moving the function to a private sector financial institution has
been
discussed and poses two major obstacles. The first obstacle is the
negotiability of a private sector check versus a U.S. Treasury check.
This would obviously cause problems for account holders in
remote locations as U.S. Treasury checks are readily negotiated at
local merchants. A private sector financial institutions checks would
not be as negotiable. The second obstacle is the financial resources
required to obtain the services of a private sector institution.
 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.
 Client Comment Example
"I would highly recommend Schmidt & Associates to any credit union
currently searching for a quality auditing firm. I have been very impressed
with the scope of the audits and the level of detail employed by
representatives of the firm during their monthly and quarter
contacts. Furthermore, I always receive prompt attention whenever I have
questions regarding regulatory or compliance issues."
Greg Kidwell
Members First Credit Union
Columbus, Ohio
11,000 Members, $38 Million in Assets
 Audit Follow up
• Depending on the nature of the audit or the audit findings, the
Follow-Up procedure may formal or informal”.
 Audit
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
• FOLLOW UP REPORT
• AUDIT ANNUAL REPORT TO THE BOARD
 Followed up review
• The actions taken to resolve the audit report findings may be tested
to ensure that the desired results were achieved.
 Followed up Report
• To resolve the original report findings.
• Unresolved findings will include a brief description of the finding, the
original audit recommendation, the client response, the current
condition, and the continued exposure to the board of company.
 Audit Annual Report
• Memorandum to the senior manager that notifies them that
audit activities are underway and describes the follow-up
process.
This memo should include:
• timeframes for the project,
• a copy of the outstanding findings relating to areas reporting.
• a request that they distribute the findings to these areas and ask
the managers to provide Internal Audit with the information
requested,
• a statement that these comments were previously distributed as
part of an audit report or close-out letter
• notification that the results will be reported to Board of
Trustees.
• The Announce Memo report Findings Access database provides
sample wording for the notification memo.
• The notification memo should be sent