Basics of Internal Audit

Unit VII

Meaning & Nature
• Review of operations & records within a business by specially assigned staff • Internal auditor appt by management • Statutory auditor appt by shareholders • Routine procedures in internal audit • Scope of internal audit is wide because internal auditor has to report to management on various matters

Definition
• An independent management function • which involves continuous & critical appraisal of the functioning of an entity • with a view to suggest improvements and add value to and strengthen the overall governance mechanism of the entity including the entity’s risk management and internal control system - ICAI

Internal control, Internal check & internal audit
• IC – policies & procedures set up by mgmt to achieve organizational goals • Int Check – check on day to day transactions as a part of routine system where the work of a person is independent or complementary to the work of another, object being prevention or early detection of error • IA – Review & appraisal of int control itself

Objectives of Internal audit
• To review acc system & related internal controls monitoring their operation & recommending improvements thereto • Specific enquiry into individual items including detailed testing of transactions, balances and procedures • Examine external economic conditions, efficiency & effectiveness of operations • Physical examination & condition of tangible assets

Protective Functions
• Scrutiny of acc & other records to assess reliability of information - Accuracy & authenticity - Adherence to Standards - Authority, validity to transactions - Compliance of laws, regulations & mgmt policies

Constructive Functions
• Appraisal & review of internal controls, policies & procedures • Helping to achieve optimum utilization of resources • Providing new ideas to mgmt • Providing training & education to lower & middle level mgmt

Effective Internal Audit
• • • • • Int audit dept should have independent status Dept should be free from executive functions Freedom to investigate from a financial view-point Clear understanding of objectives Due care in selection of int audit personnel which is vital for the success of the dept

Comparison
• • • • Int audit vs statutory audit Statutory audit mandatory not int audit Statutory auditor appt by shareholders int auditor by mgmt Fraud & error is to be detected by int auditor whereas detection of error is secondary in statutory audit Int audit continuous, st audit once a year

Continued…
• Value addition by internal audit but st audit is more of a compliance activity • Int audit is result-oriented & st audit rule oriented • No separate professional status exists for internal audit in many countries

Operational audit
• Audit of operational areas aimed at improving future business operations • Future oriented, independent & systematic evaluation performed by the int auditor for mgmt of organizational activities • Mostly of technical nature • Draws minute details through charts & diagrams • Discussion with the engineering personnel

Management audit
• A comprehensive & constructive examination of organizational structure such as a division, dept, its plans & policies, its methods of operations & its use of human resources • Primary objective is to motivate mgmt to take action for increased efficiency • An audit appraisal of mgmt efficiency

Internal audit & investigation
• An investigator is appt whenever any irregularity occurs • An auditor may not trace who is behind the fraud but may just state the effects of fraud • As a special assgnmt an internal auditor may take up investigation

Some duties of Investigator
• Planning & execution of investigation with care • Circumstances that allowed irregularities to happen to be investigated • Sufficient information & data to be collected • Recommendations should be made which if implemented prevent future recurrences

Legal status of Internal audit
• Acc to Companies act Statutory auditor of a company has to state whether internal audit system is commensurate with the size & nature of its business • General evaluation by external auditor will help in deciding how far he can rely on the work of internal auditor • Internal audit can be undertaken by an outside agency or by an internal audit dept

Continued…
• External auditor should ascertain that internal audit work is performed by persons having adequate technical training & proficiency • To ascertain whether audit work is properly planned, supervised, reviewed and documented

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