CHAPTER 5

MANAGEMENT OF
INTERNAL AUDIT ACTIVITY
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 Learning objectives
Upon the completion of this chapter, you should be able to:
1. Understand the importance of managing the internal audit function
2. Identify areas that affects the internal audit function
3. Relate the relevant practice standards on managing the internal function
4. Comprehend the issues in managing internal audit conflicts
5. Understand the different ways of outsourcing the internal audit function

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 Introduction
• Internal audit is part of an organisation’s component and can be divided into three
main functions:
✓ Staffing
✓ Managing internal audit conflicts
✓ Outsourcing.
• These functions are important and necessary to ensure that an internal auditor
✓ functions effectively and efficiently and
✓ serves as an added value to the organisation

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 Internal audit charter
• Staffing requirements
✓ competent and skilled
✓ adequate number
• Elements affecting staffing requirements
✓ staffing strategies,
✓ understanding customer needs,
✓ adding value,
✓ addressing risks and
✓ use of audit tools
• Consequence of inadequate staffing
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 Internal audit charter
• The importance:
✓ Act as a formal written agreement.
✓ Prepare and periodically review by CAE, that define the authority for the scope of work,
right of access and reporting structure, both administrative and functional; Table at BOD’s
meeting, then approve by BOD.
✓ Facilitate periodic assessment.
✓ Support quality assurance, a process oriented to guaranteeing that the work of internal audit
services meets the predetermined standards promulgated by the IIA.
✓ Example: IA Charter Top Glove Corporation Berhad
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Related standards

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 Attribute standards
• Attribute Standard 1210: Proficiency
✓ Internal auditors must possess the knowledge, skills and other competencies needed to
perform their individual responsibilities.

• Attribute Standard 1230: Continuing Professional Development

✓ Internal auditors must enhance their knowledge, skills and other competencies through
continuing professional development.

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Continuing Professional Education (CPE)

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 Performance standards
• Performance Standard 2000: Managing the Internal Audit Activity
✓ The CAE must effectively manage the internal audit activity to ensure it adds value to the organisation

• Performance Standard 2030: Resource Management

✓ The CAE must ensure that internal audit resources are appropriate, sufficient and effectively deployed to
achieve the approved plan.

• Performance Standard 2230-1: Engagement Resource Allocation

✓ Internal auditors must determine appropriate and sufficient resources to achieve engagement objectives based
on an evaluation of the nature and complexity of each engagement, time constraints and available resources

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 Body of Knowledge and Character

The knowledge and skills that internal auditors should possess include:

• Proficiency in applying internal auditing standards, procedures and techniques to

perform effective and efficient internal audits.

• Adequate knowledge on accounting principles and techniques, management

principles as well as, fundamentals of law, economics, taxation, finance and other
related subject matters

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IIA Common Body of Knowledge (CBOK)

• Internal auditors should focus on risk areas that pose the greatest threat to the
organisation.

• Maintain good relationship with governance parties, especially the audit committee
and executive management

• Evaluate the internal audit processes and to continuously improve the performance.

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Staffing of internal
auditor

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 Selection of staff
• An appropriate process for hiring to ensure that only candidates with the
appropriate qualification and experience are selected
• Process can include:
✓ written test – IQ perhaps
✓ presentation – communication skill
✓ Interview – face-to-face
✓ orientation - adaptability

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 Internal audit hierarchy
(position and responsibilities)
Chief Audit Executive

Audit Manager

Supervisor

Team leader

Auditor
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 For continuous improvements of
internal audit performance

The purpose of the training is to enhance

Training and upgrade knowledge, skill and
competencies of internal auditors

and
use of key performance indicators
promotion (KPIs) for evaluation procedures

Examples:
https://www.iiam.com.my/events/list/
KL02_25-28 March.pdf
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Risk-Based Internal Audit Plan
Resource Management

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 Conflicts
• Can arise between:
✓ internal and external auditors and
✓ internal auditors and other employees

• Consequences:
✓ adverse effect on reputation
✓ efficacy of work
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 Circumstances resulting in conflict
• Lack of understanding due to ambiguity and uncertainty.

• Failure to think strategically and systematically.

• Lack of understanding on the importance of and challenges facing the

profession.

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Related standards

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 Performance standards
• Performance Standard 2020: Communication and Approval
✓ The CAE must communication timely the activity’s plan, resources and limitations
• Performance Standard 2040: Policies and Procedures
✓ The CAE must establish policies and procedures to guide the internal audit activity
• Performance Standard 2060: Reporting to the Board and Senior
Management
✓ The CAE must report periodically to the board and senior management regarding
significant risk exposures, control issues and other issues as needed and requested.
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 Types of conflicts
• Inherent conflicts
✓ caused by lack of communication in the organization
✓ misconceptions of audit function
✓ lack of cooperation from auditees

• Avoidable conflicts
✓ Conflicts within the internal audit department and process
✓ examples
✓ can be avoided with proper audit guidance

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 Recommended practices for avoidable
conflicts
• Develop trust
• Be a salesperson
• Educate the auditees
• Be objective and factual

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 How to deal with conflicts
• Consider positive aspect of conflict
• Compromise on more responsive and important findings
• Appreciate and anticipate all potential sources of conflicts
• Seek support from higher level management
• Be professional

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OUTSOURCING

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 Introduction
• a great impact to the business world
• involves independent parties to perform functions within an organization
• opted because no large capital investment required
• ready-made staff with the necessary skills and competencies
• Reasons for outsourcing:
✓ scarcity or unavailability of internal audit resources
✓ to acquire timely and professional internal audit services
✓ cost advantage

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Related standards

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 Attribute standard
• Attribute standard 1210 A1
✓ The CAE must obtain competent advice and assistance if the internal audit staff lacks
knowledge, skills or other competencies needed to perform all or part of the
engagement

✓ The CAE must review the work performed by the external provider and report
accordingly to those charged with governance

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 Outsourcing arrangements
• Full outsourcing
✓ a full-scope and risk focused external provider
• Partial outsourcing
✓ partial execution of audit plan by external provider
• Co-sourcing
✓ shared execution of the audit plan
• Sub-contracting
✓ specific engagement perform by external provider – job basis
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 Outsourcing benefits
• Focus on core competencies
• Costs minimisation
• Business efficiency
• Enhancement of external audit
• Increase business geographical locations coverage
• Future expectations for in-house auditor
• Increase credibility

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 Outsourcing limitations
• Allegiance of in-house vs external provider
• Organisation culture hindering external provider’s performance
• Statutory requirement – Sarbanes-Oxley Act 2002
• Increasing costs in the long term
• External provider lack of knowledge
• Succession plan affected
• Lack long-range development

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THE END

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