Nicodemus, Daena D.

A-331 AAPRINCIPLES

Journal 13: Internal Auditing (Auditing and Assurance Principles)

1. What is the Internal Audit function? Why is it necessary for an

organization?

According to the Institute of Chartered Accountants in England and Wales

(2004), an internal audit is an assurance activity that is also consulting in a way

in which it is independent and objective. Internal audits add value to the

operations of organizations while improving them. With audits, the objectives of

the organizations are accomplished as a disciplined and systematic approach is

brought in which it evaluates and improves the processes in the company’s

effectiveness such as control, risk management, and governance.

Internal audit has two roles according to the same organization in which

the first one is to provide assurance service in which this service is independent.

This assurance service would be focused on the effective of the governance, of

control, and the risk management of the entity. Internal audit also has the role of

providing advice to the management on the risks and controls such as but not

limited to the controls that must be applied when new business ventures are

undertaken.

Internal audit is necessary for an organization as it is where the

management learns about where it lacks and possible fraud being able to correct

these procedures before the external audit process for which the stakeholders

are involved. Internal audit is significant to the management in a way that it

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enhances control and provides assurance that the employees are working

towards achieving the goals of the management and not to their own accord.

2. Differentiate internal audit from external audit.

Internal audits are those audit engagements which evaluate the internal

controls, accounting processes, and corporate governance of a company. With

internal audit, the laws and regulations are ensured to be complied with. Internal

audits provide the necessary tools to the management in which these tools help it

obtain efficiency as problems are being identified and lapses are corrected

before they are even discovered in external audit (Tuovila, 2020).

Furthermore, according to Bragg (2019), internal audit is the examination

or the monitoring of the processes and controls of a company for them to be

deemed efficient in which this is conducted by a department that is located within

the business itself. Internal audits are necessary in large organizations as their

processes are more complex and control breaches as well as process failures

are more likely to occur. Internal audit is needed most especially in businesses

that are publicly held as the internal control need to be attested to with regard to

the robustness of the systems. In internal audit, what are attempted to be done

are internal control assessments, risk assessments, fraud detection, legal and

regulatory compliance, safeguarding of assets, and process assessmenets.

According to Bragg (2018), an independent accountant conducts an

examination called external audit in which this type of audit intends to certify the
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entity’s financial statements. This is required by investors and lenders and also

for all businesses that are publicly held. External audits are aimed at determining

the accounting records’ completeness and accuracy; whether the accounting

records of the client are prepared with accordance to the accounting framework

applicable; and whether the financial position of the client has been fairly

presented in the financial statements.

With regards to the differences of the two, Bragg (2019) gave several of

them discussing that internal audit includes auditors that are company

employees while in external audit, those that conduct the engagement work for

an audit firm outside the company. Internal auditors are hired while external

auditors are appointed. In internal auditing, the auditors do not have to be CPAs

unlike in external audit. The responsibilities of internal and external auditors differ

too, as internal auditors have responsibility to the management while external

auditors hold responsibility to the shareholders. The reports are also used

differently as internal audit reports are used by the management while investors

and creditors are the primary users of external audit reports. There may also be

several internal audits conducted throughout the year, and usually more than

external audits.

3. What are attribute standards and performance standards? Explain and

differentiate.
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In internal auditing, there are two standards, particularly Attribute

Standards and Performance Standards. Attribute Standards are those that

address the attributes of the individuals and the organizations that perform

internal audit. On the other hand, the Performance Standards are those

standards which are aimed at describing the nature of internal auditing. They

also provide quality criteria for which the performance of internal auditing

services are to be measured against. Both standards apply to all services that

are of internal audit in nature (Institute of International Accountants, 2017).

In the International Standards for the Professional Practice of Internal

Auditing by the Institure of Internal Auditors Australia (n.d.), Attribute Standards

cover the following:

1000 – Purpose, Authority, and Responsibility;

1100 – Independence and Objectivity;

1110 – Organisational Independence;

1120 – Indvidual Objectivity;

1130 – Impairments to Independence or Objectivity;

1200 – Proficiency and Due Professional Care;

1210 – Proficiency;

1220 – Due Professional Care;

1230 – Continuing Professional Development;

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1300 – Quality Assurance and Improvement Program;

1310 – Quality Program Assessments;

1311 – Internal Assessmenets;

1312 – External Assessments;

1320 – Reporting on the Quality Program;

1330 – Use of “Conducted in Accordance with the Standards”; and

1340 – Disclosure of Noncompliance

On the other hand, Performance Standards cover the following:

2000 – Managing the Internal Audit Activity;

2010 – Planning;

2020 – Communication and Approval;

2030 – Resource Management;

2040 – Policies and Procedures;

2050 – Coordination;

2060 – Reporting to the Board and Senior Management;

2100 – Nature of Work;

2110 – Risk Management;

2120 – Control;
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2130 – Governance;

2200 – Engagement Planning;

2201 – Planning Considerations;

2210 – Engagement Objectives;

2220 – Engagement Scope;

2230 – Engagement Resource Allocation;

2240 – Engagement Work Program;

2300 – Performing the Engagement;

2310 – Identifying Information;

2320 – Analysis and Evaluation;

2330 – Recording Information;

2340 – Engagement Supervision;

2400 – Communicating Results;

2410 – Criteria for Communiating;

2420 – Quality of Communications;

2421 – Errors and Omissions;

2430 – Engagement Disclosure of Noncompliance with the Standards;

2440 – Disseminating Results;

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2500 – Monitoring Process; and

2600 – Resolution of Management’s Acceptance of Risks

4. How can an internal audit activity be independent of the company? What

are the measures to assure such?

According to the Institute of Internal Auditors North America (n.d.), there

must be Independence and Objectivity in internal auditing. Independence in this

case means that there must be a certain degree of independence in the audit

activity in order that the auditor effectively carries out his responsibilities. On the

other hand, objectivity is also needed as this is the attitude of the auditors that

are unbiased in which it allows them to work in a way that they believe in their

work product and that there are no compromises in the quality that are made.

With objectivity, the auditors do not subordinate their judgment to others when it

comes to audit matters.

With internal audit activity being independent, it means that the auditors

work as a team but as their own department and not associate themselves into

the work of the other departments in the company and vice versa. Although they

are employees of the company, they do their jobs objectively and with

accordance to their task description and not to their personal gain or accord and
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not to the accord of other employees working in the firm to have the best

conclusions and resolutions for the company’s management.

References

Bragg, S. (2018, November 15). External Audit. AccountingTools.

https://www.accountingtools.com/articles/2017/5/6/external-audit#:~:text=An

%20external%20audit%20is%20an,for%20all%20publicly%2Dheld

%20businesses.

Bragg, S. (2019, February 7). Internal Audit. AccountingTools.

https://www.accountingtools.com/articles/2017/9/27/internal-audit

Bragg, S. (2019, July 9). The difference between internal and external audits.

AccountingTools. https://www.accountingtools.com/articles/the-difference-

between-internal-and-external-audits.html#:~:text=Internal%20auditors%20will

%20examine%20issues,conduct%20a%20single%20annual%20audit.

Institute of Chartered Accountants in England and Wales. (2004). Guidance for audit

committees: The internal audit function.

https://www.icaew.com/-/media/corporate/files/technical/audit-and-

assurance/audit/guidance-for-audit-committees/the-internal-audit-function.ashx
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Institute of Internal Auditors Australia. (n.d.). International Standards for the

Professional Practice of Internal Auditing. https://assets.hcca-

info.org/Portals/0/PDFs/Resources/Conference_Handouts/Audit%20&

%20Compliance%20Committee%20Conference/207handout.pdf

Institute of Internal Auditors North America. (2017). Introduction to Standards.

https://na.theiia.org/standards-guidance/mandatory-guidance/Pages/Standards-

With-Introduction.aspx#:~:text=Attribute%20Standards%20address%20the

%20attributes,these%20services%20can%20be%20measured.

Institute of Internal Auditors North America. (n.d.). Independence and Objectivity.

https://na.theiia.org/standards-guidance/topics/Pages/Independence-and-

Objectivity.aspx

Tuovila, A. (2020, July 27). Internal Audit. Investopedia.

https://www.investopedia.com/terms/i/internalaudit.asp