Corporate Governance and

Internal Audit
Objective, relevance & importance of CG
CG set of policies & procedures
Objectives
 To align interests of an organisation with
those of its shareholders
 To direct & control activities of
organisation
 To ensure effectiveness, efficiency &
ethics
of organisation as a whole
Need for auditor to communicate with those charged with governance
which determine how an organisation functions
Importance
 Builds investor & shareholder confidence.
 Organisation commits to being ethical, efficient &
effective.
 Helps BOD, executives & management to take
ethical decisions.
 Provides a system of checks & balances.

‘Audit matters of governance interest arising from the audit of financial statements’ that
need to be communicated with those charged with governance include:
 general approach, scope & limitation of audit
 any changes made to the accounting policies & practices
 any potential risk or exposures which need to be included in the statements
 any material risks relating to going concern status of entity
Manager pays personal
 any weakness in internal control system
bills from his corporate
 any occurrences of fraud
credit card (fraud).
 any material disagreements with management on FS
Limitations of audit committee
 Does not have authority to appoint or dismiss auditors.
 Does not have as much technical expertise & knowledge as the auditors.
 Does not have thorough knowledge of the organisation’s operations & functioning as executive directors
would have.
 Adds to the cost incurred by the organisation.
 The board may feel that the audit committee has been formed to curtail its powers and allow
outsiders (NEDs) to run the company.
Importance of internal control & risk management
Importance of internal control & risk management
 Allows organisation to proactively identify & quickly respond to business risks.
 Allows organisation to safeguard both its tangible & intangible assets.
 Forces organisation to maintain records to ensure accurate & timely financial reporting.
 Helps organisation to comply with all relevant laws & regulations.
Responsibilities for an internal control system (ICS)

Management: Auditors: Board of Directors: ensure that

 Design & implement  Review & report on the  ICS is monitored.
effective ICS. effectiveness of the ICS.  ICS is reviewed by auditors.
 Ensure the system is  Recommend improvements  Recommendations made by
effectively working on a to the system. auditors are implemented.
continuous basis.
Internal Audit
Factors to be considered when assessing the need for internal audit

Internal audit : assurance is provided of the reliability & effectiveness of an organisation’s risk
management, internal control & CG

All organisations need to identify:

 their long-term objectives; Internal audit examines
 activities to achieve these objectives; and tests the efficiency and
 risks involved in conducting these activities; and functioning of these systems
 establish internal control system to mitigate these risks.

Main objectives of internal auditing

 Assess whether management has met its responsibilities.

 Determine whether organisation complies with all laws & regulations.
 Determine whether all prescribed internal control policies & procedures are being complied with.
 Report unidentified risks & internal control weaknesses.
 Recommend any improvements to / changes in internal control system.
 Internal audit
Benefits of effective internal audit function
Identifies weaknesses & areas for improvement
Feedback mechanism, independent assessment of
departments / processes
An objective evaluation of all potential risks
Regular examination & evaluation of internal
control system
Reviews of operational & financial performance
Effective internal audit systems have:
 internal auditors reporting directly to
organisation’s BOD / audit committee.
 qualified personnel with good working
knowledge.
 sufficient staff to carry out effective internal
audits.
 detailed procedures & polices.
 regular reporting on periodic basis.
 periodic reviews of auditors’ work .
Internal audit function assists the BOD by:
 Working in close co-ordination with external
auditors to avoid duplication.
 Providing advice on the implementation of
new standards & accounting practices.
 Auditing the reports reviewed by the
board.
 Audit committee must also:
 monitor the internal audit function.
 conduct an annual review for internal audit
function.
 explain its absence in the annual report in
case of no internal audit function.
Factors to be assessed before implementing
an internal auditing function:
 scale, diversity & complexity of organisation’s
activities
 whether any departments have a history of
problems
 probability or possibility of fraud &
corruption
 costs versus benefits
 role of corporate governance
Internal Audit vs External Audit
Role of internal and external auditor in audit planning
Audit Objective
Timing of audit work
Extent of audit coverage
Materiality Levels
Review of internal audit reports
Review of internal control
systems
Internal Auditor (IA)
Evaluation of internal controls
Takes place continuously /
periodically
Detailed audit procedures, &
determining nature, timing &
extent of EA procedures
Substantially high to minimise
audit risk, conducting the audit
in greater detail.
N.A.
Determines effectiveness of the
entire internal control system
External Auditor (EA)
Truth and fairness of the
financial statements
Takes place at annual intervals
Test checking of books &
documents as well as enquiries
into scope & approach of IA.
Comparatively low as well as
subject to modification & can
rely upon work of IA.
Helps EA in devising audit
procedures so as to reduce
audit risk at acceptably low
levels.
Evaluates effectiveness of those
internal controls on which they
want to rely
Role of internal and external auditor in collecting audit evidence

Internal auditor (IA) External auditor (EA)

Extent of audit Carries out relatively extensive procedures to obtain Reviews effectiveness of internal audit and then
procedures used to audit evidence of reliability and effectiveness of the decides the extent of audit procedures required i.e.
gather audit evidence whole operating system conducts audit on test basis

Reliance on work of Can rely on the work of experts, needs to evaluate the Can use the findings and audit evidence gathered by
others effectiveness and appropriateness of this work, as far the internal auditor as well as rely upon work of
as practicable experts

Ascertains the truthfulness and fairness of the FS;

Operating matters Concerned with operations of the entity; & audit is
& audit is risk based.
procedure based

Scope of work Checks effectiveness of internal audit Determines if financial statements are free from
material misstatements

Observations, inspection of records,

Sources of evidence assets, procedures, inquiry, analytical procedures Includes evidence from internal and external sources
such as bank reports
Scope & limitations of internal audit function

Refers to audit procedures deemed appropriate in the circumstances

Scope of auditing
to achieve objectives of audit.

Scope of internal audit includes:

 examination & evaluation of the adequacy & effectiveness of the internal control
system.
 review of reliability, integrity, adequacy & timeliness of the financial & operating
information.
 review of the system established for compliance with laws, regulations and
management policies.
 safeguarding the assets of the entity against various losses.
 determination of the effectiveness, efficiency and also the economy of the
operations of the entity.

 risk management Important for achieving objectives of

Internal auditor also
has to give  internal control organisation. It includes identifying & assessing
suggestions for processes
corporate all relevant risks.
improvements in:
governance
 The GRN and the
cheque is signed by the Sometimes, a person
same person who is not an ACA,
ACCA, CPA is appointed

Attitude of management
poses a limitation on the IA
function

Bad internal
control system!!!

S
c
o
Limitations of p
internal e
Difficult to maintain independence as influenced by senior level management
audit
function n
oNo uniformity & no provision for internal audit given by IAS
t
A relatively new profession
d
e
f
i
n
e
d
Discussion on audit committees
• Defination
• Composition
• Responsibilities
• Limitations