Basics of Internal Audit

Unit VII
 Meaning & Nature
• Review of operations & records within a
business by specially assigned staff
• Internal auditor appt by management
• Statutory auditor appt by shareholders
• Routine procedures in internal audit
• Scope of internal audit is wide because internal
auditor has to report to management on various
matters
 Definition
• An independent management function
• which involves continuous & critical appraisal of the
functioning of an entity
• with a view to suggest improvements and add value
to and strengthen the overall governance
mechanism of the entity including the entity’s risk
management and internal control system

- ICAI
 Internal control, Internal check &
internal audit
• IC – policies & procedures set up by mgmt to
achieve organizational goals
• Int Check – check on day to day transactions
as a part of routine system where the work of
a person is independent or complementary to
the work of another, object being prevention
or early detection of error
• IA – Review & appraisal of int control itself
 Objectives of Internal audit
• To review acc system & related internal
controls monitoring their operation &
recommending improvements thereto
• Specific enquiry into individual items
including detailed testing of transactions,
balances and procedures
• Examine external economic conditions,
efficiency & effectiveness of operations
• Physical examination & condition of tangible
assets
 Protective Functions
• Scrutiny of acc & other records to assess
reliability of information
- Accuracy & authenticity
- Adherence to Standards
- Authority, validity to transactions
- Compliance of laws, regulations & mgmt
policies
 Constructive Functions
• Appraisal & review of internal controls,
policies & procedures
• Helping to achieve optimum utilization of
resources
• Providing new ideas to mgmt
• Providing training & education to lower &
middle level mgmt
 Effective Internal Audit
• Int audit dept should have independent status
• Dept should be free from executive functions
• Freedom to investigate from a financial view-point
• Clear understanding of objectives
• Due care in selection of int audit personnel which is
vital for the success of the dept
 Comparison
• Int audit vs statutory audit
• Statutory audit mandatory not int audit
• Statutory auditor appt by shareholders int
auditor by mgmt
• Fraud & error is to be detected by int
auditor whereas detection of error is
secondary in statutory audit
• Int audit continuous, st audit once a year
 Continued…
• Value addition by internal audit but st audit
is more of a compliance activity
• Int audit is result-oriented & st audit rule
oriented
• No separate professional status exists for
internal audit in many countries
 Operational audit
• Audit of operational areas aimed at
improving future business operations
• Future oriented, independent & systematic
evaluation performed by the int auditor for
mgmt of organizational activities
• Mostly of technical nature
• Draws minute details through charts &
diagrams
• Discussion with the engineering personnel
 Management audit
• A comprehensive & constructive examination
of organizational structure such as a division,
dept, its plans & policies, its methods of
operations & its use of human resources
• Primary objective is to motivate mgmt to take
action for increased efficiency
• An audit appraisal of mgmt efficiency
 Internal audit & investigation
• An investigator is appt whenever any
irregularity occurs
• An auditor may not trace who is behind the
fraud but may just state the effects of fraud
• As a special assgnmt an internal auditor may
take up investigation
 Some duties of Investigator
• Planning & execution of investigation with
care
• Circumstances that allowed irregularities to
happen to be investigated
• Sufficient information & data to be collected
• Recommendations should be made which if
implemented prevent future recurrences
 Legal status of Internal audit
• Acc to Companies act Statutory auditor of a
company has to state whether internal audit
system is commensurate with the size &
nature of its business
• General evaluation by external auditor will
help in deciding how far he can rely on the
work of internal auditor
• Internal audit can be undertaken by an
outside agency or by an internal audit dept
 Continued…
• External auditor should ascertain that
internal audit work is performed by persons
having adequate technical training &
proficiency
• To ascertain whether audit work is properly
planned, supervised, reviewed and
documented