Chapter 9 - Internal Audit

Question 1

What is internal audit?

Answer 1

an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations

Question 2

An internal audit department can be costly to set up therefore the need for one pay depend on what?

Answer 2

• size/no. of employees
• complexity of business
• costs of poor internal controls
• attitude of management

Question 3

What are the main differences between internal and external auditors?

Answer 3

• objective - what are they trying to achieve
• who they are appointed by and report to
• what the work involves
• what happens to their reports
• their relationship with the company

Question 4

What is the objective of an external audit?

Answer 4

express an opinion on the truth and fairness of the FS in a written report

Question 5

What is the objective of an internal audit?

Answer 5

Improve the company’s operations by reviewing the efficiency and effectiveness of internal controls

Question 6

who do external auditors report to?

Answer 6

to shareholders

Question 7

who do internal auditors report to?

Answer 7

report to management or those charged with governance

Question 8

what is the availability of an external auditor report?

Answer 8

publicly available

Question 9

what is the availability of an internal auditor report?

Answer 9

not publicly available. usually only seen by management or those charged with governance

Question 10

what is the scope of work with an internal audit?

Answer 10

Wide in scope and dependent on management’s requirements

Question 10

what is the scope of work with an external audit?

Answer 10

verifying the truth and fairness of the FS

Question 11

who appoints and removes external auditors?

Answer 11

the shareholders

Question 12

who appoints and removes internal auditors?

Answer 12

those charged with governance - the audit committee if there is one

Question 13

what is the relationship between the external auditors and the company?

Answer 13

must be independent of the company

Question 14

what is the relationship between the internal auditors and the company?

Answer 14

may be employees

Question 15

What are the different internal audit assignments?

Answer 15

• value for money (3 E’s)
• operational audit
• Effectiveness of controls
• fraud investigation
• compliance with laws and regulations
• Audit of IT systems
• corporate governance
• risk identification
• financial audit

Question 16

What are the three things the internal audit will consider with IT systems?

Answer 16

• the company is getting value for money
• the procurement process for the IT system was effective
• the ongoing management of the system is adequate and appropriate

Question 17

The financial audit will ensure mechanisms are in place for the early identification of financial risk such as what?

Answer 17

• adverse currency fluctuations
• adverse interest rate fluctuations
• cost price inflation

Question 18

What does a good internal audit function need to be?

Answer 18

• well staffed, with competent people
• independent from any operating responsibilities/relationships
• appointed by an reporting to the audit committee
• able to access all areas of the business

Question 19

What are some advantages of of an outsourced internal audit function?

Answer 19

• fewer independence issues
• access to a wide pool of people
• access to modern audit methodologies
• potentially cheaper
• no staff management issues

Question 20

What are some disadvantages of of an outsourced internal audit function?

Answer 20

• lack of business knowledge
• potential self review and self interest threats
• potentially costly
• hard to bring back in house
• loss of control for client

Question 21

Does the internal audit report have formal reporting structure?

Answer 21

no

Question 22

What will a typical internal audit report include?

Answer 22

• Terms of reference
• executive summary
• body of the report
• appendix

Question 23

What are the terms of reference?

Answer 23

the requirements of the assignment

Question 24

what is in the executive summary?

Answer 24

the key risks and recommendations that are described more fully in the body of the report

Question 25

what is in the body of the report?

Answer 25

• a detailed description of the work performed and the results of that work

Question 26

what is in the appendix of the report>?

Answer 26

containing any additional information that doesn’t belong in the body of the report but is relevant to the assignment