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Internal audit: keeping a watchful eye
Philip Dunn outlines the role of the internal audit function in ensuring good governance is maintained
The latest AAT Professional Diploma in Accounting at Level 4 includes a Unit External Auditing. Section 3 is headed ‘Evaluate the audited entity’s system of internal control’ and there is reference in 3.1 of the monitoring of controls by management and/or an internal audit function.
This article therefore will be of interest to those studying this unit and to both ICB members and students who need an awareness of the internal audit function, together with ACCA students preparing for F8.
The global Institute of Internal Auditors (IIA) defines internal auditing as an independent, objective assurance and consulting activity designed to add value and improve on 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.
This definition is simply a statement of the fundamental purpose, nature and scope of internal auditing. It is an authoritative guidance for the internal auditing profession and is part of their International Professional Practices Framework (IPPF).
With corporate scandals in the latter decade of the 20th century both in the US and Europe, there has been greater focus and a more disciplined approach to corporate governance.
Developments such as the Cadbury Combined Code UK (1992) and Sabanes-Oxley US Legislation (2002), together with the recent Financial Reporting Council’s Corporate Governance Code express the need for strict internal controls and directors’ responsibility for such controls, as well as the establishment of audit committees. Directors should review annually the internal audit function, and the board should review its scope of work, its authority and resources.
What, then, are the principal activities of an internal audit department?
• Examination and evaluation of both financial and operating information.
• Review of compliance with legislation and regulations.
• Review of internal policies with emphasis on the authorisation of transactions.
• Assessment of internal risk.
• Review of the cost effectiveness, efficiency and value for money audits (public sector).
There are, therefore, both differences and similarities between the internal audit and external audit function.
There needs to be a professional relationship between the external auditors and the internal audit department. The external auditors need a clear understanding of the internal audit function, so that an effective audit approach can be planned and whether it is possible or desirable to rely on the work of the internal audit team. They would need to be assured of the technical competence and professional due care of those assigned with the internal audit responsibility.
It is essential that internal audit should operate in an environment where it can:
• Plan and carry out its work as required.
• Have full access to the senior management team through the board and where appropriate the audit committee.
• To be able to communicate openly with the external auditors.
• Be free from operating responsibility.
It is desirable that internal and external auditors meet periodically to share experiences, benefit from their individual skills expertise and perspectives and thus increase the economy and efficiency of the entire audit process.
It is often the case within the public sector – for example the NHS, police authorities and district, borough and county councils – that internal auditors conduct value for money (VFM) audits. With the increased pressure on public sector funding and the need for the provision of quality services such exercises have become an integral part of the internal audit function.
As we move globally towards the integration of corporate governance ethics and principles in the conduct of business activity it is clear that the role of the internal auditor will gain further prominence.
In conclusion one could ask the question: would the recent Tesco scandal have been avoided with more strict internal controls?
• Dr Philip E Dunn, Assessor and Freelance Writer, Kaplan Financial
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