Chapter 9 Internal audit

Question 1

1.1 Introduction to internal audit

Answer 1

Internal audit is an independent appraisal activity within an organisation, usually done in large companies. The UK corporate governance code applies to listed companies and stresses the need for good internal control. Listed companies should consider the need for an annual internal audit.

Question 2

1.2 Organisational structure

Answer 2

In large companies the internal audit function will be a separate department. In small companies it might be the responsibility of individuals to perform specific tasks despite not being a full time position. Some companies outsource their internal audit function.

Question 3

1.3 Auditor independence

Answer 3

An internal audit department cannot be completely independent of management. Internal auditors can retain objectivity by having no involvement in the operational activities of the company and reporting to an appropriate level of management such as the audit committee or board of directors.

Question 4

2.1 Function of internal audit

Answer 4

Internal audit plays a key role in organisational risk management, the activities they perform involve the following roles:
- Monitoring internal control systems
- Examining financial and operating information
- Special investigations such as into suspected fraud
- Reviewing compliance with laws and other external regulations
- Reviewing the economy, efficiency, and effectiveness of operations
- Monitoring the overall risk management policy for effectiveness

Question 5

3.1 Comparison of external and internal audit

Answer 5

External audit focuses of the accounts, making sure the financial statements are true and fair. Internal audit is broader in scope, covering the company’s operations.
- Required by external audit by company law and internal audit by the board of directors and audit committee
- Appointed by external audit by shareholders or board of directors and internal audit by the board of directors or audit committee
- Reports to external audit the shareholders and internal audit to the board of directors and audit committee
- Reports on external audit on if the accounts are true and fair and properly prepared. Internal audit on the adequacy of internal controls
- Scope of assignment: external audit is unlimited, to fulfil statutory obligations. Internal audit prescribed by management.