4: Internal Audit

Question 1

What is the definition of Internal Audit? (3)

Answer 1

• An appraisal or monitoring activity
• Established by management and directors
• Review of the accounting and internal control systems

Question 2

What are the 6 factors affecting the need for internal audit?

Answer 2

▪ Nature of operations – the more diverse or complex the more there is to monitor
▪ Scale and size – more employees likely to undertake human error
▪ Cost / Benefit
▪ Internal / External change triggers – new markets / new products
▪ Problems with existing systems and controls
▪ Compliance requirements

Question 3

What are 4 advantages of internal audit?

Answer 3

✓ Reduces the risk of fraud and error
✓ Increases the confidence of the financial statements
✓ Deficiencies will be highlighted sooner and can be rectified to improve the systems
✓ Value for money audits can be initiated within the company

Question 4

What are 5 disadvantages of internal audit?

Answer 4

✓ The Internal audit department could be reviewing their own work
✓ Directors influencing the internal audit department, may direct attention away from problem areas
✓ The internal audit department may have to report directly to management who have been involved in fraud or issues
✓ Internal audit staff may have been in service for a considerable time and therefore loose professional scepticism
✓ Standard of internal audit departments could be variable

Question 5

Who is the role required by for External Audit?

Answer 5

It is a statue for limited companies

Question 6

Who is the role required by for Internal Audit?

Answer 6

Directors, usually in larger organisations

Question 7

Who are External Auditors appointed by?

Answer 7

External auditors are appointed by the company’s shareholders.

Question 8

Who are Internal Auditors appointed by?

Answer 8

Internal auditors are appointed by management.

Question 9

Who do External Auditors report to?

Answer 9

External auditors report to the shareholders or members of the company.

Question 10

Who do Internal Auditors report to?

Answer 10

Internal auditors normally report to management or those charged with governance.

Question 11

What do External Auditors report on?

Answer 11

The main objective of the external auditor is to express an opinion on the truth and fairness of the financial statements.

Question 12

What do Internal Auditors report on?

Answer 12

Improving a company’s operations, by reviewing the efficiency and effectiveness of the company’s internal controls.

Question 13

What do External Auditors give an opinion on?

Answer 13

The truth and fairness of the Financial Statements

Question 14

What do Internal Auditors give an opinion on?

Answer 14

Adequacy of the systems, and contributes to the effectiveness and efficiency of resources

Question 15

What is the scope of an External Audit?

Answer 15

To fulfil the statutory obligation

Question 16

What is the scope of an Internal Audit?

Answer 16

Determined by the requirements of management or those charged with governance.

Question 17

If you Outsource the internal audit, what do you have increased focus on?

Answer 17

Cost and efficiency of the internal audit function

Question 18

If you Outsource the internal audit, what can you do with staff?

Answer 18

Draw from a broader range of skills.

Question 19

If you Outsource the internal audit, what risk is passed onto the outsources company?

Answer 19

The risk of staff turnover

Question 20

If you Outsource the internal audit, what cost is avoided?

Answer 20

Cost of employing permanent staff

Question 21

If you Outsource the internal audit, what can be increased?

Answer 21

Independence

Question 22

If you Outsource the internal audit, what do you lack control over?

Answer 22

The standard of service

Question 23

If you Outsource the internal audit, what do you risk in terms of conflict of interest?

Answer 23

This can increase if they work in the day to day of the company

Question 24

What can directors do to the an outsourced internal audit team?

Answer 24

Reduce their independence by threatening not to renew contract at external audit.