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Chapter 5 - Internal Audit, Internal audit assignments, AUDIT COMMITTEE…
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AUDIT COMMITTEE requires to:
-monitor and review effectiveness of internal audit activities
-if there is no internal audit function, consider annually where there is need for one and make recommendation to the board
-if there is no internal audit function, explain this absence in the annual report
ASSESSING THE NEED for Internal audit :
-cost of setting up vs predicted benefits
-predicted savings in external fees
-complexity and scale of organisation's activities
-ability of existing managers and employees carry out internal audit
-management's perceived need for assessing risk and internal control
-whether it's more cost effective than outsource
-the pressure from external stakeholder
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often employees of the organisations, although sometimes outsourced
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-no material set
-may be procedural, rather than risk-based
-evidence mainly from interviewing staff & inspecting of docs (not external)
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prevention of fraud is management's responsibility. But IA should alert the risks and exposures that could allow fraud
not primarily EA's responsibility, however, if detected any suspicious fraud should gather evidence and report
:star:OUTSOURCING is the use of external suppliers as a source of finished products, components of services
ADVANTAGES
:check:Greater focus on cost and efficiency of the internal audit function.
:check:Staff may be drawn from a broader range of expertise.(quality staff)
:check:Risk of staff turnover is passed to the outsourcing firm.
:check:Specialist skills may be more readily available.(immediate team)
:check:Costs of employing permanent staff are avoided. (appointed for appropriate timescale)
:May improve independence.
:check:Access to new market place technologies, e.g. audit methodology software without associated costs.
:check:Reduced management time in administering an in-house department (used short term basis)
DISADVANTAGES
:red_cross:Possible conflict of interest if provided by the external auditors (In some jurisdictions e.g. the UK, the ethics rules specifically prohibit the external auditors from providing internal audit services).(self review, intimidation threat)
:red_cross:Pressure on the independence of the outsourced function due to, e.g. threat by management not to renew contract.
:red_cross:Confidentiality issues, client data may be available to 3rd party
:red_cross:Risk of lack of knowledge and understanding of the organisations objectives, culture or business.
:red_cross:The decision may be based on cost with the effectiveness of the function being reduced.
:red_cross:Flexibility and availability may not be as high as with an in-house function.
:red_cross: Lack of control over standard of service.
:red_cross: cost may be too high
Economy- obtaining the best quality of resources for the minimum cost.
Eg: not economical if overstaffing or fail to purchase material of requisite quality at the lowest price
Efficiency- obtaining the maximum departmental/organisational outputs with the minimum use of resources (input)
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-performance measures in terms of cost and areas of business is reviewed and investigated
-ensuring appropriate audit methodology (working papers) is maintained
-reviewing of working papers on a sample basis to ensure internal guidelines are met
-agreeing internal audit work plans in advance
-if external auditor from same firm, ensure firm has safeguards to maintain independence and objectivity
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-performance framework introduced intol local authorities, by UK Gov
-they are require to publish annual best value performance plans and review all their functions over a 5 year period
-as part of best value, authorities are required to strive for continuous improvement by complementing the 4c's
Challenge -how & why service is provided
Compare -to other authorities/private sector
Consult -Targets set & consultation with tax
payers in setting performance target
Compete -fair competition to secure efficient & effective service
Procedures of audit:
-obtain written copies of the policies in the area to be audited
-read them and asess whether they are adequate to meet objectives
-discuss the policies with auditors of the dept to ensure understanding is correct
-examine effectiveness of controls by observing them in operations and testing them
-reporting to management on adequacy and effectiveness, giving suggestions for improvement in both areas where