ACCT 044

AUDITING

Session 6 –INTERNAL AUDITING AND

CONTROL

College of Education
School of Continuing and Distance Education
2016/2017
 Session Overview
• Management has a fundamental responsibility to develop and
maintain effective internal control. They are designed to
provide reasonable assurance regarding the achievement of
objectives. To achieve these objectives, internal controls
demands proper attention on a continuous basis; internal
auditors are mostly charged by management to be
responsible for the well-functioning of internal controls. This
session seeks to expose students to internal auditing and
internal controls.

Mr. Donkor Slide 2

 Learning Objectives
• At the end of the session, the student will able to
– Discuss the concept of internal audit and controls
– Outline the scope and benefits of internal auditing
– Enumerate and explain the components of internal
controls
– Design a system of internal controls

Mr. Donkor Slide 3

 Session Outline
• This session covers the following topics
– Internal Audits and Internal Auditor
– Role of Internal Auditor
– Scope and Objectives of Internal Auditor
– Internal Control
– COSO Framework
– Component of Internal Control
– Principles of Effective Internal Control
– Quality Control
– Elements of Quality Control

Mr. Donkor Slide 4

 Reading List
• Read Chapter 11 and 12 of Bedi, I. (2009). Auditing &
Assurance Services in Ghana. Accra: Voyage Publishing Ltd.,
Accra

• Session Slides

• Other Auditing and Assurance text books available to students

Mr. Donkor Slide 5

 Internal Audit
• Internal audit is an appraisal or monitoring activity
established by management and board of directors
(BOD).

• It seeks to review accounting and internal control

systems as a service to the entity

• It examines, evaluates and reports the adequacy and

effectiveness of the accounting and control systems to
management and the BOD.
Mr. Donkor Slide 6
 An Internal Auditor
• They are normally employees of the company.
• They could be certified;
• public accountants,
• internal auditors,
• fraud examiners and
• information system auditors
• However, in UK and elsewhere in the world, an
increased trend is towards the outsourcing of
internal audit , either wholly or in part.

Mr. Donkor Slide 7

 Role of Internal Auditors
• Undertake risk based auditing.
• Thus, they focus on risk of occurrences that could prevent the
company from achieving its goals
- There are many types of risk – fraud, improper reporting,
ineffective or inefficient use of resources, credibility loss, etc.
- Focus on areas with high risk and high probability that
controls are not in place or are weak
• Find better ways and best practices
• Partner with you to find solutions
• Prevent problems

Mr. Donkor Slide 8

 Scope and Objective of Internal Audit

• The scope and objective of internal audit

varies from one organization to another. Key
objectives are;
• Identify opportunities to improve the system
• Verify effectiveness of processes in the system
• Verify conformance to documented procedures
• Verify conformance to applicable standards

Mr. Donkor Slide 9

 Internal Auditors Report
• Internal auditors report to the audit
committee of the board of directors.
This;
• Ensures independence
• Elevate issues to a level where they can be
corrected
• Keeps the company board informed

Mr. Donkor Slide 10

 Relationship Between Internal and External
Auditor
Differences Internal auditor External auditor
/similarities

Scope of audit work Determined by the audit committee Determined by statute. To

and management. To review report on the truth and
efficiency and effectiveness of fairness of the financial
internal control system statement.

appointment Appointed by management Appointed by shareholders

Reporting line To audit committee To shareholders

qualification Need not be professionally qualified Must be professionally

qualified as a chartered
accountant
Methods and employs test of controls (enquiry, Also employs test of controls,
techniques used in flowchart and questionnaire) to substantive test and
audit assess risk analytical procedures
Mr. Donkor Slide 11
 Assessing the Role and Scope of Internal
Audit
• The external auditor relies on some aspect of the
internal auditor’s work.
• Where this is effective, the external auditor reduces the
extent of audit test to carry out.
• The external auditor will assess the internal auditor in
the following areas;
• Organizational status and reporting line
• Scope of internal audit work
• Technical competence
• Due professional care
Mr. Donkor Slide 12
 Internal Controls

Mr. Donkor Slide 13

 Internal Control
Internal control is a process, effected by an entity’s board of
directors, management, and other personnel, which is designed to
provide reasonable assurance regarding the achievement of objectives
in one or more categories:
• Effectiveness
Operations • Efficiency
• Safeguarding assets
• Reliability
Reporting • Timeliness
• Transparency

Compliance • With regulatory environment

Management has a fundamental responsibility to develop and maintain effective

internal control.
14
 COSO Framework
Committee of sponsoring organization of the Treadway commission. (COSO)
The original COSO framework was outlined in a document: 1992 COSO Report:
Internal Control – An Integrated Framework.
• This document identifies what the commission believed to be the fundamental and essential
objectives of any business or government entity
• The purpose of the framework;
– Outlines a unified approach for evaluating internal control systems that management has
designed to:
• provide reasonable assurance of achieving corporate mission, objectives, goals and desired
outcome,
• while adhering to laws and regulations and
• allow the company to accurately report successes and outcomes to the public and interested
third parties.
– serves as a common basis for managements, directors, regulators, academics and others to
better understand enterprise risk management, its benefits and limitations, and to effectively
communicate about enterprise risk management Slide 15
Mr. Donkor
 Components of Internal Control
• According to COSO, internal controls consist of five
integrated components;
– the control environment.
– the entity’s risk assessment process.
– the information system, including the related business
processes, relevant to financial reporting, and
communication.
– the control activities.
– Monitoring of controls.

Mr. Donkor Slide 16

 Principles of Effective Internal Control

Mr. Donkor Slide 17

 Audit of Internal Control
• Planning the scope of the work
• Obtaining an understanding of internal control
• Evaluating the design & effectiveness of internal control
• Testing the operating effectiveness of internal control
• Assessing internal control deficiencies and reporting on
overall effectiveness
• Integrating the audit of internal control with the audit
of the entity’s financial statements

Mr. Donkor Slide 18

 Quality Control
• Quality control refers to the maintenance of standards of
quality of goods and services

• A system to provide reasonable assurance that

– the auditor complies with applicable professional standards and
regulatory and legal requirements; and
– reports and other deliverables issued by the auditor is appropriate in
the circumstances

• International Standard on Quality Control (ISQC) 1

Mr. Donkor Slide 19

 Elements of a System of Quality Control

• Leadership Responsibilities for Quality within the Firm

• Ethical Requirements
• Acceptance and Continuance of Client Relationships and
Specific Engagements
• Human Resources
• Assignment of Engagement Teams
• Engagement Performance
• Engagement Quality Control Review
• Monitoring
• Documentation
Mr. Donkor Slide 20