Internal Audit

Internal Audit is a separate function within an organization that reviews and assesses its activities. Its goal is to help improve the organization by evaluating how well it manages risks, controls, and processes. This independent review supports the organization in achieving its goals and improving its operations.

Scope of Internal Audit

Internal Audit focuses on checking if the organization’s internal controls are well-designed and working properly. According to AAS-6, internal controls are policies and procedures that help the organization achieve its goals, ensure accurate accounting, prepare financial information on time, protect assets, and detect fraud and errors. The scope and objectives of internal audit can differ based on the organization’s size, structure, and needs. Typically, internal audit covers:

• Review of Accounting Systems and Controls: Ensures that the accounting system and related controls are effective and suggests improvements if needed.
• Examination of Financial and Operating Information: Checks how financial and operational information is identified, measured, classified, and reported, including detailed tests of transactions.
• Assessment of Efficiency and Effectiveness: Reviews how well the organization operates and manages its financial controls, which helps external auditors assess the reliability of financial records.
• Physical Verification: Examines and verifies the actual existence and condition of the organization’s physical assets.

• Check Accuracy and Authenticity: Ensure that financial, accounting, and statistical records are accurate and genuine.
  Follow Accounting Policies: Verify that accepted accounting practices are followed when preparing financial accounts.
• Proper Asset Management: Make sure that assets are bought or sold with proper authorization and that access to assets is restricted to authorized individuals and times.
• Legitimate Liabilities: Confirm that any liabilities are related to legitimate activities of the organization.
• Effective Internal Checks: Ensure that the internal checks system is effective and cost-efficient.
• Prevent and Detect Issues: Prevent and detect fraud and errors.
• Review Internal Controls: Regularly review the internal control system and report any issues or weaknesses to the appropriate authorities for timely corrective action.

• Formal Charter: The internal audit function should have an official document outlining its role and responsibilities, approved by the board.
• Clear Reporting Structure: The reporting structure for internal audit should be well-defined and documented. The head of internal audit should be a senior member of the organization, with the authority to decide the content of all reports. This person should report directly to the board audit committee and have access to the chairman of the board and the chairman of the audit committee. Additionally, they should report to the chief executive as determined by the board.
• Detailed Testing: The internal audit should conduct thorough testing in all areas covered by its charter to ensure compliance with requirements and report findings to the board audit committee.
• Competency: The internal audit team should have the necessary skills, including the ability to handle non-financial matters.
• Coordination with External Auditors: The internal audit should regularly work with external auditors to maximize cooperation. Their work often complements each other, and regular consultation can enhance effectiveness. For example, external auditors might offer advice on areas the internal audit is reviewing, while internal auditors can provide specific expertise to assist external auditors.
• Audit Committee and External Auditors: The board audit committee should inform the external auditors about corporate governance issues the organization needs to follow. They should also periodically discuss with external auditors the operation of the internal audit function, including staffing, audit plans, and compliance testing.
• Reviewing Procedures: The internal audit should periodically review procurement and disposal procedures as required by the board audit committee and report back to them.

According to AAS-7, external auditors should evaluate the work of internal auditors as part of their audit. This helps them decide the nature, timing, and extent of their own audit procedures. Internal auditors’ tasks are set by the management, while external auditors work under legal requirements. However, their methods can be similar, so external auditors can often use the internal auditors’ work to plan their procedures. External auditors must also check if the internal audit follows compliance and substantive procedures. Despite using internal auditors’ work, external auditors remain fully responsible for their reports.

When an external auditor decides to rely on the internal audit, they should coordinate with the internal auditors. This includes understanding the internal auditors’ plans, discussing areas of reliance, and reviewing methods and documentation.

External auditors should have access to internal audit reports and be informed of significant issues. Likewise, they should inform internal auditors of important matters that might affect their work.

External auditors should consider these factors when relying on internal auditors’ work:

• Adequacy of audit programs concerning the audit scope.
• Planning, supervision, and review of the assistants’ work.
• Availability of sufficient and appropriate audit evidence.
• Appropriateness of conclusions and the related report.
• Any exceptions or unusual matters identified by the internal audit.

• When external auditors evaluate the internal audit function, they should consider the following:
  
  a. Organization Status: Check if the management places any restrictions on the internal auditor’s reporting.
  
  b. Scope of Function: Determine the range and depth of the internal audit and whether management follows the internal auditor’s recommendations.
  
  c. Technical Competence: Assess the professional skills of the internal auditor.
  
  d. Due Professional Care: Ensure the internal audit work is properly planned, supervised, reviewed, and documented.

• To gather the necessary information for evaluating internal controls, auditors can use the following tools:
  
  a. Narrative Record: A detailed description of the system as observed by the auditor. It is useful when there is no formal control system, particularly in small businesses. It helps understand the system, identify weaknesses, and suggest changes.
  

  b. Check List: A series of instructions or questions that the auditing staff must follow and answer. For example, questions about the purchasing function might include whether purchases are the responsibility of the purchasing department and if they require written orders.
  
  c. Internal Control Questionnaire: A comprehensive set of questions about internal controls. This method is commonly used for large enterprises as it saves time by eliminating the need to prepare a new program for each audit. The questions can usually be answered with “yes,” “no,” or “not applicable.”
  
  d. Flow Chart: A visual representation of the company’s internal control system. It is an efficient way to record the auditor’s review and provides an overview of the system.
  
  It is important to note that these techniques are effective only if the auditor understands the client’s business.

• Our skilled professional auditors use a risk-based approach focused on our clients’ goals and constraints.
• Our services are consistent with global internal audit practices.
• We add tangible value beyond traditional basics.
• We aim to make internal audits a useful and productive tool in today’s corporate governance environment.
• We have expertise in specialized areas such as fraud investigations, project monitoring, system implementation, revenue assurance, and IT.
• Our team serves clients in various industries, including Manufacturing, Financial Services, Telecommunications, IT, Healthcare, Media & Entertainment, and Consumer Business.
• Our internal audit services provide practical solutions and a disciplined approach, helping you and your counsel effectively.
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