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CHAPTER 4 - Coggle Diagram
CHAPTER 4
Internal audit function
One way in which the board can discharge their CG responsibilities
Assess & monitor IC policies & procedures
What is it
A function
Perform assurance
Perform consulting activities
Purpose
Evaluate & improve effectiveness
CG
IC Process
Risk management
Assessing the need for Internal audit
UK CG Code
Does not require all listed co. to have
If no internal audit
Code require board to consider
On an annual basis
The board should consider
Cost vs predicted benefits
Predicted savings
Since having own internal audit functions rather than outsourcing
Complexities & scale of activities and systems supporting those activities
Management's perceived need for
Assess risk
IC
Pressure from external stakeholders to establish IA function
Whether it is more cost effective to outsource
Nature & purpose of IA assignments
Function of IA
Provide independent assurance that risk management, CG, IC process are operating effectively
Examine & evaluate the quality
Report directly to audit committee
Look beyond FS
Consider wider issues
Co. reputation
Compliance with laws & regulations
Growth
Impact on environment
Employee satisfaction level
Scope
VFM
Efficiency
Using things as wisely as possible
Effectiveness
Doing the right thing
Meeting co's objectives
Economy
Buying things at cheapest price
Set objectives
Put control in place
Ensure objective is met
IT Audit
Relate to computer systems
Financial / Operational audit
Testing control operating centrally (at head office) or at branches
Inventory counting
Cash counting
Compliance audit
Specific to a country
Fraud investigations
Investigate specific instances of suspected fraud
Review & test control to prevent /detect fraud
Customer experience audit
Assess level of customer service
Phoning in
Visiting stores
Pretending to be customers
Outsourcing IA
Advantages
Gain expertise without permanent cost / time commitment
Increased independence
No requirement to train
Can buy in ad hoc services
Disadvantages
Impact on staff morale if redundancies made
Increased time requirement on other staff
May lack specific co. knowledge
Requirement to allow access to data
Cost
External vs Internal auditors
External
Statutory duty
Give opinion on whether FS are fairly presented
Conducted with ISA
Audit partner will be qualified & hold practicing cert.
Not all team members will be qualified
Internal
Assist the board in achieving it corporate objectives
No formal qualifications required
Responsibilities for fraud & error
External
No responsibilities on prevention
Responsibility on detection of fraud and error which has impact on FS
Responsibility to consider risk of material misstatement due to fraud and error
Provide reasonable assurance that FS are free from material misstatement
Internal
Directors are responsible for prevention & detection
Existence of IA may act as deterrence
Can detect by reporting suspicions
IA may be called on to investigate fraud
Can prevent by by assessing IC system
Link bet. IA & CG
Relationship bet.
Audit committee
Monitor management's responsive to IA findings & recommendations
Monitor & review effectiveness of IA
Approve appointment/ termination of Head of IA
Review & assess annual IA work plan
Meet Head of IA at least once a year without management present
IA (CG)
Regular report on results of IA work
Direct access to board chairman & Audit committee
Accountable to Audit committee
Board
Overall responsibilities for
Analysis of risk
Implementation of IC
Limitation of IA
Qualities
Independence
Independent of the activities they audit
Granted sufficient status to achieve independence
Their report should be considered appropriately & acted upon
Objectivity
Maintaining independent mental attitude
Consider facts in front of them without having pre-conceived ideas
Due skill & care
Wide-ranging skills
Multi-disciplinary
Need for ongoing training
Adherence to IA quality control manuals/ procedure
Work should be
Planned
Documented
Supervised
Reviewed
Using the work of IA
IA work may overlap with EA work
EA may rely on IA work
Guidance
Objectives
Determine whether the work can be used
Which areas
What nature & to what extend
Determine whether the work is appropriate for the purpose of audit
Direct assistance
Direct
Supervise
Review
May reduce work of EA
Can never eliminate them entirely
IA work ineffective
Still be useful to be aware of conclusions formed
Criteria that must be considered first
Objectivity supported by its status, policies & procedures
Consider status of IA
To whom it reports
Any conflicting responsibilities
Any contrainsts / restrictions
Whether TCWG oversee employment decisions regarding IA
Whether management acts on recommendations made
Whether IA are members of prof. bodies
Obliged to comply with their requirements for objectivity
Level of competence
Whether adequately resourced
Whether IA are members of relevant prof. bodies
Have adequate technical training & proficiency
Whether there are established policies for hiring & training
Whether IA possess the required knowledge of FR/ applicable financial reporting framework
Whether IA function applies systematic & displinary approach
Whether the function has appropriate quality control procedures
Whether it has audit manuals, work programmes & IA documentations
SODIT
Must also consider
Nature & scope
Relevance
Degree of judgement
Significant judgements
Use IA work less
Risk of misstatement is high
Direct assistance
Use IA to provide audit procedures
Under direct supervision, direction, review of EA
EA should consider
Amount of judgements in planning & perform audit procedures
Amount of judgements in evaluating audit evidence gathered
The assessed risk of material misstatement
Existence & significance of threats to objectivity
Level of competence of IA
Documentations
The evaluation of the existence & significance of threats to objectivity & level of competence of IA
Basis for decision regarding nature & extend of work perform by IA
Who review the work performed & date & extend of review
Prohibition
Involvement of significant judgements
Higher assessed risk of material misstatement
Relate to work IA has been involved
Relate to decisions EA makes regarding IA function