INTERNAL AUDIT AND FINANCIAL CONTROLS
Internal Audit and Financial Controls
It is the ethical and professional responsibility of the auditing firm to maintain the high level of assurance and maintain an acceptable level of objectivity and independence as per the applicable codes of the auditing and assurance. Therefore, during or before performing audits, internal and external, the auditors must avoid any threat towards their independence and objectivity. However, in most of the cases, the auditors reduce the level of threats to assure that their reviews are objective and free from bias. ("Internal Audit's Relationship With External Audit")
When the audit firm is providing the services of internal and external audits to the same client, then there are certain safeguards to be followed to assure the independence and the objectivity of the auditors. According to the codes in different auditing standards, the best safeguard is to decline the offer when there is any possibility of the impairment of the independence and objectivity. However, earning revenue is another objective of the audit firm and by using the safeguards; any audit firm can mitigate this risk. The first safeguard or ethical implication from the auditing firm is to make sure that the audit company is capable of performing both assignments according to the auditing standards. The risk or threat is the number of staff needed to perform both audits and the quality and the experience of the audit staff is another issue. In these circumstances, the ethical implication will be to decline the offer of internal audit or external audit. ("Internal Audit's Relationship With External Audit")
It is the ethical responsibility of the audit firm to employ the different teams for the internal audit and external audit to make sure that the risk of ‘self review’ is minimized. It is obvious that the external auditors use the workings and the reports of the internal audit department as the basic tool at the initial stages of the audit. Therefore, it is the ethical duty of the audit firm to make sure that the team of internal audit and external audit are different and have no relation with each other. For example, the large audit firm can appoint external auditors from other city branches to increase the objectivity and the independence of the audit. ("Internal Audit's Relationship With External Audit")
The reporting of internal audit department is one of the most important elements of the internal auditing. In general, the responsibilities and the functions of the internal audit department suggest that the internal audit department must report to the audit committee, and if there is no audit committee, then the internal audit reports must be presented to the non executive directors (NED’s) appointed on the board of directors. (Asic.gov.au, 2016)
The internal audit department should not report to the finance director. The main reason is that the finance director is the individual who is directing the company and have the control of the funds of the shareholders. Therefore, it is highly probable that if the findings of the internal audit department are against the finance director, then it is highly probable that the finance director will manipulate the reports of the internal department. Moreover, the finance director is in the position to restrict the movement or the approach of the audit department. Therefore, in case of unfavorable reporting, the audit department may lose the approach to the important data of the company and most importantly the funding of the internal audit department. (Asic.gov.au, 2016)
The Board of Directors:
In the absence of the audit committee, the internal audit department can report to the board of directors. However, according to the code of ethics and corporate governance rules, the board of directors must have equal numbers of executive directors and non executive directors. The non executive directors are the directors appointed by the shareholders of the company and they are the real advocates and the voice of the shareholders of the company. If the company is not listed, then the internal audit department can report to the board of director or any other director who is relevant to the findings of the audit report. (Asic.gov.au, 2016)
Audit Committee:
The ideal place to report the findings of the internal audit department is the audit committee. The head of the audit committee is two or three non executive directors who are independent and reports to the chairman of the board. The chairman of the board is also a non executive director appointed by the shareholders of the business. In large public listed companies, there is always an audit committee which communicates with the internal auditors and the external auditors. Moreover, the audit committee resolves the disputes between the internal audit team and the managers of the business. Therefore, the best possible option for an internal audit department is to report to the audit committee. (Asic.gov.au, 2016)
The main function or the responsibility of the internal audit is to monitor and test the internal controls installed or deployed by the executive directors and the managers. This function of the internal audit assists the audit department to identify any weakness or the possibility of the frauds in the organizations. For example, the attendance machine in the organization use cards for the attendance. There is a risk that the employees use fake identity to collect extra wages. (Thomas)
Another role of the internal audit is to monitor the operational and the managerial performance of the business. The internal auditors collect the budgets and the previous year documents and compare with the current year progress. In case of any noticeable difference, they reports to the audit committee. Moreover, the progress of the market is also analyzed by the internal audit to compare the progress with the competitors. (Thomas)
The internal audit department keeps an eye on the non financial elements relevant to the business to inform the executive directors about those elements which were neglected at the time of the planning. The executive directors, such as finance director and production directors are too busy in their routine work that they don’t focus on the interest rates, fluctuation in the market and other non financial elements. Therefore, in these circumstances, the internal audit department assists the executive directors to account for the non financial elements on the timely basis. Another responsibility of the internal audit is to perform a special task assigned by the managers, for example, the suspected fraud. (Thomas)
The effective and independent internal audit department reduces the fee of the external auditors. If the findings of the internal audit are similar to the external auditors, then the external auditors will rely on the reports of the internal auditors and overall time on the external audit will be reduced. (Thomas)
The information technology impacted the auditing techniques by providing the great deal of ease and new methods to test the controls and the substantive testing. The Computer Assisted Accounting Techniques (CAAT’s) enable the auditors to use their own computers in the auditing to maximize the objectivity and the independence of the audit work. (Senft and Gallegos, 2012)
In case of the internal auditing, the CAAT’s can assist the internal auditors to perform their testing easily and quickly. For example, the test of controls performed by the auditor on his own computer will be stronger evidence in making any judgment. Similarly, if the company has a certain limit of the credit, then the auditor can use the CAAT’s technique, to place an order above the credit limit. If the information system accepts the order, then the system is corrupt. (Senft and Gallegos, 2012)
The biggest impact of information technology on internal auditing is that the auditing software provides the facility to the auditor to investigate the large amounts of the transactions in the shortest time. There are certain levels of materiality in auditing due to the numbers of the transactions. Therefore, with the help of information technology, the internal auditors can reduce the materiality level and investigate more transactions to increase the objectivity and the independence of the auditing. (Senft and Gallegos, 2012)
The information technology provides the vital financial information such as financial ratios, comparing the current and past results and the price elasticity. The calculation of the financial information can be difficult and time consuming. Therefore, the use of information technology calculates the financial information quickly for the internal auditors and performs the analytical procedure as per the needs of the internal auditors. (Senft and Gallegos, 2012)
The initial installment of the auditing software is expensive for the organization which increases the training costs as well. In these circumstances, before the implementation of the auditing software, the organization must prepare a long term plan for the use of auditing software to maximize the profitability. (Senft and Gallegos, 2012)
Conclusion:
The internal auditing department increases the transparency of the operations of the business and increase the profitability of the business. The roles of internal auditors and the techniques of CAAT’s, enhances the reliability of the internal controls and reduces the chances of frauds and errors. Similarly, the responsibilities and the auditing standards regarding the internal auditing ensure the objectivity and the independence of the audit reports.
References
Chartered Institute of Internal Auditors | iia.org.uk. (2016). Internal audit's relationship with
external audit. [online] Available at: https://iia.org.uk/policy/publications/internal-audits-relationship-with-external-audit/ [Accessed 31 Jul. 2016].
Asic.gov.au. (2016). Audit quality - The role of directors and audit committees | ASIC –
Australian Securities and Investments Commission. [online] Available at: http://asic.gov.au/regulatory-resources/financial-reporting-and-audit/auditors/audit-quality-the-role-of-directors-and-audit-committees/ [Accessed 31 Jul. 2016].
Thomas, J. The Importance of the Internal Audit Function in a Company. [online]
Smallbusiness.chron.com. Available at: http://smallbusiness.chron.com/importance-internal-audit-function-company-21496.html [Accessed 31 Jul. 2016].
Senft, S. and Gallegos, F. (2012). Why Are Information Technology Controls and Audit
Important?. [online] Ittoday.info. Available at: http://www.ittoday.info/Articles/IT_Controls_and_Audit.htm [Accessed 31 Jul. 2016].
