Chapter Introduction to Internal

1 Auditing

Faculty of Economics and Business - Accounting Undergraduate Program

 LearningObjective
Learning Objective1:
1:
ObtainBasic
Obtain BasicUnderstanding
Understandingof ofInternal
InternalAuditing
Auditing
&& The
TheInternal
InternalAudit
AuditProcess
Process

Faculty of Economics and Business - Accounting Undergraduate Program

 Internal Auditing (IA): Definition

IA is an independent, objective assurance and

consulting activity designed to add value and
improve an organizations operations. It helps
an organization accomplish its objectives by bringing
a systematic, disciplined approach to evaluate and
improve the effectiveness of risk management,
control, and governance process ( The Institute of
Internal Auditor (IIA))

Faculty of Economics and Business - Accounting Undergraduate Program

 Key points of IA definition
helps an organization accomplish its objectives

Evaluate and improve the effectiveness of risk management,

control, and governance process

Aassurance and consulting activity designed to add value

and improve an organizations operations

Independence and objectivity activity

A systematic and disciplined approach

Faculty of Economics and Business - Accounting Undergraduate Program

 Organizations Objectives
( Committee of Sponsoring Organizations of the Treadway Commission ( COSO)

The value creation choices management

Strategic makes on behalf of the organizations
Objectives stakeholder

Operations The effectiveness and efficiency of the

Objectives organizations operations

The reliability of internal and external

Reporting reporting of financial and nonfinancial
Objectives information

Compliance Adherence to applicable laws and

Objectives regulations

Faculty of Economics and Business - Accounting Undergraduate Program

 IA & Organizations Objectives

Organizati
on Strategic
objectives
Operational
objectives
Reporting
objectives
Compliance
objectives
IA

Faculty of Economics and Business - Accounting Undergraduate Program

 Governance, Risk Management & Control

Governance is the process conducted by the board of directors

to authorize, direct, and oversee management toward the
achievement of the organizations objectives
Risk management is the process conducted by management to
understand and deal with uncertainties ( risk and opportunities)
that could affect the organizations ability to achieve its
objectives

Control is the process conducted by management to mitigate

risk to acceptable levels

Faculty of Economics and Business - Accounting Undergraduate Program

Faculty of Economics and Business - Accounting Undergraduate Program
 IA, Governance, Risk Management
Control & Organizations Objectives
Governan
ce

Strategic
objectives
Operational
IA
Risk objectives
Evaluating
& Managem Reporting
ent objectives
Improving
Compliance
objectives

Control

Faculty of Economics and Business - Accounting Undergraduate Program

 Ilustrative Internal Audit engagement
objectives

Audit engagement
Business Objectives
Objectives
Ensure that information for
Grow market share by acquistion
Business Objectives

Strategic other company

acquisition purpose is accurate,
complete and valid

Operations Ship all orders no later than 48
hours after receiving orders
Record only valid sales
Reporting transaction
Complianc Comply with government
e regulations
Finding facts that order is shipped
within 48 hours
Verify the design adequacy and
operating effectiveness of control
activities
Determine that policies and
procedures established

Faculty of Economics and Business - Accounting Undergraduate Program

IA as Assurance & Consulting Activity
The primary purpose of internal assurance
service is to assess evidence relevant to subject
matter of interest to someone and provide
conclusions regarding the subject matter

Primary purpose of internal consulting

services is to provide advice and other assistance,
generally at the spesific request of engagement
customers

Faculty of Economics and Business - Accounting Undergraduate Program

 Independence of IA

Independence refers to the organizational status of

the internal audit function.

Chief Audit Executive (CAE) ideally report

functionally to the boards of directors and
Administratively to the organizations CEO

Faculty of Economics and Business - Accounting Undergraduate Program

 Objectivity of Internal Auditor
Objectivity refers to the mental attitude of individual
internal auditors
Objectivity means that an auditor is able to make
impartial, unbiased judgment

To ensure objectivity, IA should NOT:

Involve in day-to-day operations
Makes management decisions
Involves in situations that results in actual or potential
conflicts of interest

Faculty of Economics and Business - Accounting Undergraduate Program

IA : Systematic and Disciplined Approach

Internal assurance and consulting engagement must

be performed in a systematic and disciplined manner

Three fundamental phases in the Internal Auditing

engagement process are:
Planning engagement
Performing engagement
Comunicating engagement

Faculty of Economics and Business - Accounting Undergraduate Program

 The Engagement Process of IA

Planning the engagement

Obtaining an understanding of the auditee or customer
Setting the engagement objectives
Determining the required evidence
Deciding the nature, timing, and extent of the audit test
Performing the engagement
Making inquiries
Observing operations
Inspecting documents
Analyzing information
Communicating engagement outcomes
Faculty of Economics and Business - Accounting Undergraduate Program
Concept Check Questions

Faculty of Economics and Business - Accounting Undergraduate Program

 LearningObjective
Learning Objective2:
2:
UnderstandThe
Understand TheRelationship
RelationshipBetween
Between
Auditingand
Auditing andAccounting
Accounting

Faculty of Economics and Business - Accounting Undergraduate Program

 Nature of Internal Auditing

Internal assurance and consulting services are

analytical and investigative
Internal auditors use logic when they reach
conclusions or formulate advice based on evidence
they gather and evaluate
The quality of internal auditors conclusions or
advice depends on their ability to gather and
evaluate sufficient appropriate evidence

Faculty of Economics and Business - Accounting Undergraduate Program

 The relationship between Auditing and
Accounting
Accounting Auditing
Detail The collection, Classification, Analytical, critical,
Activity Summarization, Communication investigative, concerned with
financial data basis for accounting
measurements, and assertion
Task to reduce a tremendous mass of To review the measurements
detail information to manageable and communications of
and understandable proportions accounting propriety

Emphasis Providing Financial statement Proof support for financial

information statements and data

Auditing principle is not in Accounting, but to conduct Audit activities, an

Auditor absolutely must understand Accounting Principles

Faculty of Economics and Business - Accounting Undergraduate Program

Concept Check Questions

Faculty of Economics and Business - Accounting Undergraduate Program

Learning Objective 3:
Distinguish Between Financial Reporting Assurance By
Internal Auditors and External Auditors

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 External Financial Assurance Vs Internal
Financial Assurance

External Financial Internal Financial

Assurance
( External Auditor)
Basic Issuing a written attestation
report that express an
opinion about wheter the
financial statement are fairly
stated in accordance with
GAAP
Assurance
(Internal Auditor)
Certifying the
companys financial
statements as part of
quarterly and annual
filling
Assessing and reporting
on the effectiveness of
Internal control over
Financial
Faculty of Economics andReporting
Business - Accounting Undergraduate Program
Concept Check Questions

Faculty of Economics and Business - Accounting Undergraduate Program

Learning Objective 4:
Internal Audit profession and The Institute of Internal Auditors (IIA)

Faculty of Economics and Business - Accounting Undergraduate Program

 The need of IA: Backgrounds

Business world is changing dramatically

Globalization
Complex corporate structures
E-commerce
Technological adnaces
Global economic downturn
Devastating corporate scandals
Enron, worldcom,

Faculty of Economics and Business - Accounting Undergraduate Program

 The Nature and Scope of IA
Operational effectiveness and efficiency of business
process
Reliability of Informations systems and the quality
of the decision making information produced by
those systems
Safeguarding assets againts loss
Compliance with organization policies, contract,
laws and regulations

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The Institute of Internal Auditor (IIA)

The IIA is internal audit professions global voice,

standdar setter, and resource for professional
development and certification
Headquartered in Altamonte Springs, Florida USA
Members : 165 countries

Faculty of Economics and Business - Accounting Undergraduate Program

Concept Check Questions

Faculty of Economics and Business - Accounting Undergraduate Program

Learning Objective 5:
Understand The Competencies Needed to Excel as An Internal Auditor

Faculty of Economics and Business - Accounting Undergraduate Program

 I keep Six Honest Serving Men and Internal
Auditor

I keep six honest serving men

( They taught me all I knew)
Their names are What and Why and When and How and
Where and Who *

By Rudyard Kipling from The elepahants Child

Morale lesson from I keep Six Honest Serving Men for

Internal Auditor are they must continue to learn and
always ask questions

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 Inherent Personal Qualities needed as
Internal Auditor

Integrity tustworthy

having deep interest in and intense enthusiasm for

Passion their work
Get the right things done, the right way, at the right
Work Ethic time
Need to ask more probing questions to gain the necessary
Curiosity understanding

Creativity must be creative and think outside the box

Initiative Voluntarily seek out and pursue opportunities to add value

Flexibility Adapting quickly to new situations and challenges

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 Interpersonal Skills as IA
Influence
Communication
Management
Leadership
Change catalyst
Conflict management
Collaboration and cooperation

Faculty of Economics and Business - Accounting Undergraduate Program

 Tools and Techniques needed as IA
Operational and management research
Forecasting
Project management
Business Process analysis
Balanced Scorecard
Risk and Control Assessment techniques
Governance, risk and control tools and techniques
Data collection and analysis tools and techniques
Problem solving tools and techniques
Computer Assisted Auditing Techniques (CAATs)
Faculty of Economics and Business - Accounting Undergraduate Program
IA Standards, Theory and Methodology

Definition of IA
Code of Ethics
International standards fro professional practice of IA

Faculty of Economics and Business - Accounting Undergraduate Program

 Knowledge Areas
Financial accounting and finance
Managerial accounting
Regulatory, legal and economics
Quality: understanding of the quality framework
Ethics and Fraud
Information Technology
Governance, Risk and Control
Organizational theory and behavior
Industry knowledge
Faculty of Economics and Business - Accounting Undergraduate Program
The IIA Global Internal Audit Competency Framework

Faculty of Economics and Business - Accounting Undergraduate Program

 Ten core competencies
1. Professional ethics: Promotes and applies professional ethics
2. Internal audit management: Develops and manages the internal audit
function
3. IPPF: Applies the International Professional Practices Framework (IPPF)
4. Governance, risk and control: Applies a thorough understanding of
governance, risk and control appropriate to the organization
5. Business acumen: Maintains expertise of the business environment,
industry practices and specific organizational factors
6. Communication : Communicates with impact
7. Persuasion and collaboration: Persuades and motivates others through
collaboration and cooperation
8. Critical thinking: Applies process analysis, business intelligence and
problem solving techniques
9. Internal audit delivery: Delivers internal audit engagements
10.Improvement and innovation: Embraces change and drives improvement
and innovation
Faculty of Economics and Business - Accounting Undergraduate Program
Concept Check Questions

Faculty of Economics and Business - Accounting Undergraduate Program

End of Chapter

Faculty of Economics and Business - Accounting Undergraduate Program