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Chapter No.4 Ok

Internal audit is an independent, objective assurance and consulting activity that helps organizations accomplish their objectives. It evaluates risk management, control and governance processes to improve their effectiveness. The objectives of internal audit include evaluating business controls, ensuring compliance with policies and procedures, safeguarding assets, and assessing the reliability of management information systems. Statutory auditors can rely on the work of internal auditors after assessing their competence, independence, and objectivity, and coordinating their work to avoid unnecessary duplication. While internal and statutory audits have different scopes and responsibilities, cooperation between the two can improve audit quality.

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69 views5 pages

Chapter No.4 Ok

Internal audit is an independent, objective assurance and consulting activity that helps organizations accomplish their objectives. It evaluates risk management, control and governance processes to improve their effectiveness. The objectives of internal audit include evaluating business controls, ensuring compliance with policies and procedures, safeguarding assets, and assessing the reliability of management information systems. Statutory auditors can rely on the work of internal auditors after assessing their competence, independence, and objectivity, and coordinating their work to avoid unnecessary duplication. While internal and statutory audits have different scopes and responsibilities, cooperation between the two can improve audit quality.

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Chapter - 4 Internal Audit

1. Meaning

The Institute of Internal Auditors (IIA) defines internal audit as follows:


“Internal Audit is an independent, objective assurance and consulting activity
designed to add value and improve an organization‟s operations. It helps an
organization accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management, control
and governance processes.”
The above definition leads us towards the following elements:
1. Internal audit is an independent activity.
2. It provides assurance and consulting services.
3. It helps the organization to achieve its objectives.
4. It enhances the effectiveness of processes related to internal control and risk
management.
5. It is a systematic and disciplined approach

2. Basic Principles of Establishing Internal Audit

1 High organizational status: Whether internal audit is undertaken by an


outside audit firm or by an internal audit department of the company itself,
the organizational status of the internal auditor must be high. In an ideal
situation, he should report to the highest authority of the company. He
should have the liberty to directly communicate with the external auditor.
2 Independence: Internal auditor must have the full independence of work.
There should not be any constraints or restrictions placed upon his work.
Independence facilitates internal auditors to render the impartial and
unbiased opinion essential to the proper conduct of audits.
3 Technical competence: The internal audit team should be professionally
qualified and adequately trained. The number of staffs should appropriate.
4 Due professional care: The internal auditor should exercise due
professional care in fulfilling his responsibilities. Examples of the exercise
of due professional care by the internal auditor are the existence of adequate
audit manuals, audit programmes and working papers.
5 Reporting and follow-up: The internal auditor should ensure that his
findings with recommendations should reach to the appropriate authority of
the management. He should also ensure that proper follow up actions have
been taken by the management based on his reports.

3. Objectives

The significance of internal audit is growing day by day. Historically, internal


audit was mostly confine to ensure that the accounting and allied records have been
properly maintained, the assets management system is in place in order to
safeguard the assets and also to see whether standing policies and procedures are
duly complied with. But with the passage of time, the objectives of internal audit
have been significantly changed. Now cost benefit analysis, resources utilization
and their proper deployment, effectiveness of management decisions etc. are also
being reviewed by the internal auditor.
Briefly, the objects of internal audit may be described as follows:
1. Evaluation of business control system: Internal audit is concerned with
ensuring effective and efficient system of accounting control, standard cost control,
budgetary control and other functional control.
2. Compliance with standard policies and procedures: Reporting to management
about the compliance of standard policies and procedures is an important objective
of internal audit.
For example, suppose company‟s standing policy is that any purchase order worth
more than Rs. 4, 00,000/- cannot be awarded without asking quotation from at least
three parties. If internal auditor found that this has not been strictly followed then
he must report those cases to the management.

3. Safeguarding and adequate utilization of business assets: Internal audit has to


ensure that all assets of the company are properly recorded. It has to verify assets
utilization report and determine whether fixed targets have been achieved or not.
For example, suppose internal auditor found that valuable scrap are not being
properly recorded in the books, he should include this observation in his audit
report.
4. Reliability of Management Information System (MIS): Internal Audit
ascertains the reliability of financial and operating reports prepared throughout the
organization. The management relies on the reports of internal auditors as they
provide an assurance as to validity of records and transactions of the enterprise.
5. Suggesting improvements: The ultimate objective of internal audit is to assist
management in the effective discharge of their responsibilities by furnishing them
with proper suggestions for improvements.
4. Evaluation of Internal Audit by Statutory Auditor

In spite of the various dissimilarities between two, there are ample scope of a
gainful cooperation and coordination between external auditor and internal auditor.
Due to his professional standing, the external auditor acquires a wide area of
experiences, whereas internal auditor has an in-depth experience of the
organization. If they work in tandem, the quality of audit will improve
tremendously.
Unnecessary duplications of work can also be avoided by proper audit plan. The
work load of external auditor can be reduced significantly as we know that inherent
objectives and approaches of both the audit are same.
In order to determine, whether and to what extent the external auditor will depend
and rely on the work of an internal auditor is given by SA 610, relying upon the
work of an internal auditor, issued by the Institute of Chartered Accountants of
India (ICAI). The important points of the standards are summarized below:
1. Assessing the work of internal auditor: The external auditor should assess the
quality of work done by internal auditor before relying upon the work of the latter.
He should essentially consider factors such as:
(a) Competence
(b) Independence and
(c) Objectivity of the internal auditor while evaluating his work.
2. Co-ordination: It can be achieved by:
(a) Meetings with internal auditor
(b) Access to relevant audit reports and
(c) Communication by the internal auditor of any significant information, which
may affect his work.
3. Relying upon specific internal audit work: If as a result of his evaluation and
appropriate interaction with internal auditor, the external auditor intends to rely
upon specific internal audit work, he should take into account the factors such as:
(a) Scope of internal auditor‟s work and adequacy of related audit programmes
used by him;
(b) Examine whether the work of assistants was properly supervised, reviewed and
documented;
(c) Examine whether sufficient and appropriate evidence was obtained.
Thus, the degree of reliance that is placed by the external auditor on such work is a
matter of professional judgment. It may be noted that the report of the external
auditor is his sole responsibility and he cannot shove off this responsibility on
internal auditor by relying upon his work.

4.2
1. Internal Check and Internal Audit

The main points of distinction between internal check and internal audit are as
follows:
1. Definition: Internal check is an arrangement of jobs in such a manner that the
work of each employee is checked by another and no employee is in charge of any
work completely from beginning to end. Internal audit is a specific appraisal
activity of operations, financial or otherwise and related records thereof.
2. Purpose: The main purpose of internal check is the prevention of errors and
frauds. The main purpose of internal audit to find errors and frauds.
3. Personnel: As internal check is an inbuilt process of internal control no separate
personnel are required for the job. Whereas for internal audit separate staffs are
required to conduct the job.
4. Timing: Internal check is a continuous process. It begins the moment a
transaction start and finishes after all aspects are recorded.
Internal Audit is a post mortem appraisal system and starts after the completion of
recording of transactions.

2. Relationship or differences between internal audit and statutory audit:-

Difference between two audits is explain below:

1. The extent of the work undertaken by the internal auditor is determined


by the management whereas that of the external audit arises from the
responsibilities placed on him by the statutes.
2. The internal audit approach is with a view to satisfy that the accounting
system is efficient, so that the accounting information presented to the
management is accurate and discloses material facts.
3. The internal responsibility is to management whereas the statutory audit
is responsible directly to the shareholders. It follows from this that the
internal auditor being an employee of the company does not have the
same independence of status which is enjoyed by the external auditor.
Even the maintaining of an independent approach is necessary for the
internal auditor to be useful to the enterprise employing.

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