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CHAPTER 1
INTRODUCTION TO INTERNAL AUDITING

LEARNING OBJECTIVES:
1. To obtain a basic understanding of Internal Auditing and Internal Audit
Process.
2. To differentiate auditing from accounting
3. To differentiate the financial reporting assurance provided by the external
auditor with the internal auditor.
4. What competencies that are needed to excel as an internal auditor
5. What are various career waiting for Internal Audit graduate?
PRELUDE:
To understand fully well what is Internal Auditing all about, let us first
define and know the detailed meaning of Internal Auditing
What pops into your mind if you hear Internal Auditing?
In layman words, what is the term mean to you?
Many think that Internal auditing is a boring branch of accounting
Some think that internal auditor does a police function in the
organization, where they check the others work and report their
mistakes
They are all wrong because Internal Auditing is very exciting job and
demand is very high nowadays.
Most of promotions in the corporate world come from the Internal
Audit Department.
What do you think are the reasons?
Because Internal Auditors are trained to be objective and independent.
They are molded to be honest in their work and think about the
company more than their self interest.
They are also expert in all aspect of business and finance matters.

The key components of Internal Auditing meaning:


independent and objective assurance and consulting activity
purpose is to add value and improve an organizational 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 processes

What is the meaning of independence and objectivity?


These are the two important ethical values that the Internal Auditors
must have in carrying out their duties?
1. Independence
The internal audit activity should be independent
Internal auditors should be free from influence or interference to allow them to
render impartial or unbiased opinion
should be functionally reporting to the Board of Directors and/or audit
committee
This is done not to threaten objectivity
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2. Objectivity
auditor must be able to make impartial and unbiased mental attitude in
performing their task
quality of job must not be compromised .
should not be involved in the day to day operation or put themselves in
situation when theres conflict of interest
RULES : logically, if an auditor is transferred to another department, he
should audit that department for 1 year REASON : hes auditing his own
work

What measures should the management do in order to protect the independence


of Internal Auditors?
Non-involvement in the activities or system that they audit
Direct access, report directly and be accountable to the audit committee
Appointment and termination of the CAE by the Audit Committee
Periodic rotation of staff assignment of Internal Auditors.

What are the two types of services that the Internal Auditors are catering?
1. ASSURANCE
to assess evidence relevant to subject matter of interest
to provide conclusion based on study of the evidences.

2. CONSULTING
giving advice and other assistance the management may seek

How internal audit helps to accomplish its organizational objectives?


by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance.

Who works for the governance processes and who works for the risk
management and control?
Governance is the task of the board of directors they authorize, direct, and
oversee management team toward the achievement of the companys objective
Risk management and control are tasks assigned to Management Team
Risk Management how to deal with uncertainties that could affect the
attainment of objectives
Control how to mitigate, lessen, and diminish the risks to acceptable level.

What is meant by organizations objectives?


refers to what the company wants to achieve
the success of company is measured when these objectives are accomplished
MISSION what the company wants to achieve today
VISION what the company wants to achieve in the future.
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How these objectives are categorized according to the book?

1. STRATEGIC
how the management plan to achieve certain objective
Strategies are approaches, tactics, policies, and actions how they will carry out
their plans.
Example: Objective is how to increase market share?

2. OPERATIONAL
refers to the efficiency and effectiveness of the operations
this includes the performance and profitability goals
also pertains to how resources be safeguarded from loss
Example: Objective is how to shoot up profit from 20M to 50M this year

3. REPORTING
refers to the reliability of internal and external reporting FS
report is the basis of decision that the management will carry out for their
objectives.
Hence, reports should be dependable, trustworthy, and timely.
Example: Daily Cash Report

4. COMPLIANCE
refers to adherence to applicable laws and regulations
Management and its staff must abide and act in accordance with the provisions
( SOP ) set by the TOP management.
Example: Remitting SSS and other governmental compliance

How the engagement process is done?


must be systematic, structured, organized and disciplined manner
The three fundamental phases in Internal Audit engagement are : Planning,
performing, and communicating.
These phases are tackled in later chapter of the book
PLANNING Gathering information about the auditee, setting engagement
objective, obtaining sufficient evidence, deciding the nature, timing, and
extent of the audit tests.
PERFORMING application of audit procedures, making inquiries,
inspecting documents, observation of operations, and analysis of documents.
Evaluation of evidence is important to arrive for opinion.
COMMUNICATING - giving recommendations by giving an audit report,
must be accurate, objective, clear, concise, constructive, complete, and timely.
MONITORING The internal audit task is not complete the
recommendations take place and ensure process to follow up actions is in
place.

THE INTERNAL AUDIT PROFESSION / THE IIA


auditing in general, and internal auditing in particular, is an ancient profession
Internal auditing history is traced since B.C.
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Modern auditing was formally established by 24 IIAs ( Institute of Internal


Auditors ) members in 1941
In 1973, CIA program is established
Since then, internal auditing evolves fast and now IIA membership exceeds to
120,000, 165 countries globally
Headquarter is in Altamonte Spring, Florida, USA
This recognized around the world as the IAs global voice, standard setters,
resource for professional development
Continue developing and issuing new professional practices, reportorial
standards, and professional guidance for internal auditing

THE CERTIFIED INTERNAL AUDITOR


the only globally accepted certification for internal auditors
there are four parts of examinations:
1. Internal Audit Activitys Role in Governance, Risk and Control
2. Conducting the Internal Audit Engagement
3. Business Analysis and Information Technology
4. Business Management Skills
Aside from passing the CIA examination, candidates must have 2 years
internal audit experience or its equivalent to become CIA
IIA also sponsors three specialty certification programs:
1. Certification in Control Self Assessment
2. Certified Government Auditing Professional
3. Certified Financial Services Auditors

WHAT ARE COMPETENCIES NEEDED TO EXCEL AS


INTERNAL AUDITOR?
1. They should have inherent personal qualities for Internal Auditors
2. Knowledge and skills that can be learned and develop.

What are the common traits of successful internal auditors?


1. Integrity - this is not an option but imperative quality for internal auditor.
Auditor must be trustworthy and stakeholders must have trust in him

2. Passion he must have deep interest in what he does. Intense enthusiasm is


necessary to achieve long term success.

3. Work ethic Work smart and work hard to get things done

4. Curiosity be adventurous or keep on asking to have full understanding of


what you want to achieve.

5. Creativity must be creative or think outside the box to generate more


valuable ideas.

6. Initiative seek out and be resourceful

7. Flexibility embraces change and adapt quickly to new situation and changes.
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KNOWLEDGE, SKILLS AND CREDENTIAL NEEDED BY


INTERNAL AUDITORS
Nobody becomes expert once they graduate from college
On-the-Job experiences are necessary
Knowledge in more than one area is essentially beneficial, like with
knowledge in Information System, Financial Accounting and Finance,
Managerial Accounting, Economics, and Industry Knowledge.
Hands-on experience with audit-related software such as flowcharting,
spreadsheet , and database

WHAT ARE INTERNAL AUDIT CAREER PATHS?


Normally they start in public accounting or as Financial Statement Auditors
Then they move into internal audit position
Internal Audit, because of its intense learning in governance, risk
management, and control, becomes a pre-requisite to moving upward into
management.
Internal audit becomes the stepping stone for them to become financial
managers, financial consultants, and economic advisors when they go out from
Internal Audit career.
However, when they opted to stay in the Internal Audit, the ultimate
destination is to become Chief Audit Executive ( CAE ).
CAE interacts with the highest level of senior management and to BOD
In overall, an Internal Auditor who develops a wide range of skills and
experience will be in good position to pursue a wide variety of career options.