Internal Audit Flashcards
what matters must be considered by auditor / pre requisites before relying on the work of managements expert?
1) independence: must be unbiased
2) competence: relevant qualifications must be there
3) experience: how long have they been offering these services
4) documentation: work must be documented in form or reports
what are the advantages of outsourcing the internal audit department?
1- professional firms follow an ethical code of conduct and should therefore be independent of client
2- professional firms should have qualified, competent staff who recieve regular development and have broader range of expertise
3- specialist skills will be readily available therefore outsourcing can be used to overcome skills shortage
Flexibility- professional firms can be hired on flexible basis , eg. single engagement basis rather than full time, this can be more cost effective
Staffing:
-recruitment and employment costs of permanent staff are avoided
-risk of staff turnover is passed to outsourcing firm
7- professional firms are responsible for their activities and hold insurance
8- there is likely to be greater focus on cost and efficiency as this will affect profitability
9- the co will get access to new technologies without the costs (data analytical tools and audit software)
10- management time in registering an in house department will be reduced
disadvantages of outsourcing internal audit department?
1- professional firms lack the intimate knowledge and understanding of organisation that employees have, cud result in decreased quality
2- the decision may be based on cost with the effectiveness of function being reduced
3- fees charged by professional firms may be high
4- engagements with firms are constrained by contractual terms. flexibility and availabilty may not be as high as in house function
5-lack of control over the quality of service
6- ethical threat may arise if the service is offered by external audit firm (ACCA code of ethics prohibits the same company to offer external and internal services if it related to financial reporting system)
7- pressure on independence of firm, eg. if management threaten not to renew the contract
what is outsourcing
when a company uses an external service to perform it’s internal audit service instead of employing it’s own staff.
what are the limitations of the internal audit function?
-they may be employees of the company and not want to raise issues for fear of losing their job
-in small orgs, they may be managed as finance function, they will have to report on their dept effectiveness, and may be reluctant to say their department has deficiencies.
-if employees are old, there may be familarity threat as they will be auditing their colleagues and friends.
how can limitations of internal audit dept be overcome?
1- outsource to third party
2- their work shud be reviewed by independent managers under scrutiny
3- separate reporting channel from the management.
define internal audit?
independent, objective assurance and consulting activity.
purpose is to add value and improve company’s operations.
what factors influence the need for internal audit?
1- size and scale of activities
2- number of employees
3- complexity of operations
4- cost/benefit considerations
5- desire of assurance and advice from management
6- the control environment/ history of fraud
what are the operational activities/ scope of IA function?
-assess CORPORATE GOVERNANCE best practice
-test effectiveness of controls
-assess reliability of information
-evaluate risk assessment process
-VFM of operating activites
-compliance with laws
-giving recommendations on prevention an detection of fraud
what type of assignments are performed by internal audit department, and their purposes?
1- IT system reviews - to assess reliability of IT system
2- mystery shopper visits- pose as customers to ensure customer service is at reliable level.
3- fraud investigations: detect fraud, identify frauder, quantifying the loss of fraud
4- VALUE for money - to assess efficiency, effectiveness, economy
5- financial regulatory compliance - that co is following reporting standards.
how are internal audit reports made?
they dont have formal structure.
-before starting assignment, format is likely agreed with directors.
-reports r for internal use only
reports typically include:
-terms of reference : requiremnts of the assignment
-executive summary : risks and recommendations
-body of report: detailed description of work performed and results
-appendix: additional info that doesnt belong in body but relevant to assignment
how is VFM performed?
vfm is concerned with obtaining best possible combo of services for the least resources.
vfm is perfomed by assessing:
-economy: cost
-efficiency: maximum output with minimum input
-effectiveness: achievement of goals
diff between internal and external auditors
1) objectives r different
2) report to diff ppl
3) availability of report
4) appointment and removal one by..
5) independence
why do auditors rely on work of others?
when they lack technical knowledge to gather SAE.
eg. valuation of financial instruments like buildings, land, art
-estimation of oil and gas reserves
-tax and law interpretation issues
prerequisites before auditor gets an expert?
evaluate competence, capability, objectivity.
sources:
-personal experience
-discussions with expert
-discussions with other auditors
-check qualifications, memberships
-ask client if relationship
-obtain written rep from expert
-personal and financial interests of expert
