12 Internal audit Flashcards
What is an internal audit?
Internal audit is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations
What is the objective of an external audit?
Express an opinion on the truth and fairness of the financial statements in a written report
What is the objective of an internal audit?
Improve the company’s operations by reviewing the efficiency and effectiveness of internal controls
Who is reported to in an external audit?
Reports to shareholders
Who is reported to in an internal audit?
Reports to management or those charged with governance.
What is the scope of work in an external audit?
Verifying the truth and fairness of the financial statements
What is the scope of work in an internal audit?
Wide in scope and dependent on management’s requirements
Who appoints and removes auditors in an external audit?
By the shareholders of the company
Who appoints and removes in an internal audit?
By the audit committee or board of directors
What kind of relationship to the auditors is required in an external audit?
Must be independent of the company.
What kind of relationship to the auditors is required in an internal audit?
May be employees (which limits independence) or an outsourced function (which enhances independence)
What are some qualities of an effective internal audit function?
- Sufficiently resourced (financially and staff)
- Well organised
- Independent and objective
- Chief internal auditor appointed by the audit committee
- No operational responsibilities
- Work plan agreed by the committee
- No limitation on the scope of their work
What are the limitations of an internal audit?
- Internal auditors may be employees and may not to wish issues
- Familiarity threat
What are some advantages of outsourcing the internal audit function?
- Professional firms follow the ethical code of conduct
- Professional firms should have qualified competent staff
- Overcome a skills shortage
- Can be employed on a flexible basis
- Costs of employing permanent staff are avoided
- The risk of staff turnover is passed to the outsourcing firm
- They hold insurance
- Greater focus on cost and efficiency
- Access to the new market place technologies
- Reduce management time
What are some disadvantages of outsourcing an internal audit?
1: Professional firms lack intimate knowledge and understanding of the the organisation
2. Engagements with professional firms and constrained by contractual terms
3. High fees
4. Possible conflict of interest if provided by the external auditors
5. Pressure on the independence of the outsourced function
6. Lack of control over the standard of service
