Topic 12 - Internal Audit

Question 1

Purpose

Answer 1

An apprasial or monitoring activity established by management/directors review of:
- Accounting
- Control Systems
- Examining
- Evaluating
- Reporting to Directors on effectivness of components of FS make up.
- Assess for best practice
- Evaluation risk
- Testing Controls
- Assessing FS
- Assessing economy (value)
- Provide recomendations
- Fraud Investigations
- IT System review
- Mystery shopper
- Asset verification.

Question 2

External vs Internal Auditors:

Answer 2

External Audit
Required by - Statute for limited companies.
Appointed by - Shareholders – independent.
Reports to - Shareholders – public.
Objective - Express an opinion of the truth and fairness of the FS.
Opinion on - Truth and fairness of the FS.
Scope - Per auditing standards – limited scope.

    Internal Audit Required by	- Directors. Appointed by - Management – employees. Reports to - Management – not public. Objective - Improve a company’s operations by reviewing the efficiency of internal controls. Opinion on - Adequacy of Internal Control Systems and efficiency of resources. Scope - Wide scope – determined by management.

Question 3

Advantages and disadvantages of Internal Audits:

Answer 3

Advantages
- Reduces risk of fraud and error.
- Increases confidence of the FS.
- Deficiencies will be highlighted sooner.
- Value for money audits can be initiated.

Disadvantages
- Internal Audit department potential of self-review.
- Directors influencing the Internal Audit.
- IA dep. have to report to management who may have bee involved in fraud or issues.
- IA staff may have been in service for a long time and lose professional scepticism.
- Standard of IA departments could be variable.

Question 4

Advantages and disadvantages of outsourcing Internal Audit:

Answer 4

Advantages
- Greater focus on cost and efficiency of IA function.
- Staff broad range of expertise.
- No risk of staff turnover.
- Specialist skills more readily available.
- Eliminates costs of employment.
- Improves independence.
- New market of technologies.
- Reduced management time.

Disadvantages
- Conflict of interest if provided by EA.
- Pressure on the independence if threat to not renew contract.
- Lack of knowledge and understanding of entity.
- Decision may be based on cost.
- Flexibility and availability may not be as high.
- Lack of control over standards of service.
- Rick of blurring roles between IA and EA, losing credibility of both.