Internal controls 3

Question 1

Definition of internal audit

Answer 1

Internal audit is an independent appraisal activity that sits within a company or organisation.

Many large companies have internal audit departments as it is a good example of governance and control. In line with the UK Corporate Governance code any listed companies who do not have one should reconsider this decision annually.

Question 2

Independence

Answer 2

Despite working within the organisations internal auditors must still adhere to independence and objectivity requirements. They must be independent of the company’s management.
They do this by:

• Not being involved in day to day activities of the organisation
• Reporting to high level management – often directly to the board.

Question 3

Roles of internal audit

Answer 3

Recommending improvements to internal controls
Recommending ways of improving risk management
Reviewing operational procedures
Monitoring corporate governance issues
Reviewing compliance with laws and regulations
Identifying problems within financial and operational areas

The existence of an internal audit function in a company suggests a good control environment exists

Question 4

Internal vs external audit

Answer 4

Internal Audit - no specific legal requirement. Strongly recommended by UK Corporate Governance Code for listed companies
External Audit - Companies Act 2006

Internal Audit - reports to board of directors/audit committee
External audit - reports to shareholders

Internal audit objectives - evaluate risk management and control procedures
External audit objectives - provide opinions on whether financial statements are: true & fair & properly prepared

Scope of internal audit - All aspects of the organisations operations as prescribed by management
Scope of external audit - Unlimited to fulfil statutory obligation including: Audit plan, Working papers, Questions for management, Outline of weaknesses

Internal Audit performed by employees, external accountancy firm or mixture
External audit is performed by external independent accountancy firm

Internal audit approach is risk based, adherence to internal policies, external laws and codes and regulations
External audit approach is risk based, adherence to accounting standards