Role of Internal Audit Function in promoting Corporate Governance Essay

An independent, nonsubjective confidence and consulting activity designed to add value and better an administration ‘s operations. It helps an organisation to carry through its aims by conveying a systematic, disciplined attack to measure and better the effectivity of hazard direction, control, and administration procedures.

The Chartered Institute of Public Finance and Accountancy, CIPFA ( 2008 ) besides portions a similar significance as the IIA for the definition of internal auditing. The above definition illustrates that internal audit is considered as one of the preliminary footing to efficaciously supervise and oversee the fiscal coverage line every bit good as organisational administration. The internal audit map is performed by employees who are extremely specialised and straight accountable to direction. The engagement or intercession of internal hearers can be of an assistance to organisations in accomplishing their aims. The internal audit map can efficaciously lend to organisational success as it works and by supplying direction with suggestions and guaranting that the house adopts good patterns.

We will write a custom essay sample on
Role of Internal Audit Function in promoting Corporate Governance Essay
or any similar topic only for you
Order now

On the other manus, The Malaysian Institute of Accountants, MIA ( 2008 ) defines internal auditing as

An independent assessment map established by the direction of an administration for the reappraisal of the internal control system as a service to the administration. It objectively examines, evaluates and studies on the adequateness of internal control as a part to the proper, economic and effectual usage of resources.

For MIA, the indispensable elements for internal auditing have been explicitly described and they are: independency ; staffing and preparation ; relationships ; due attention ; planning, commanding and entering ; rating of the internal control system ; and Reporting and follow ups.

2.1 The demand for Internal Audit

The traditional method of internal audit enables direction to command the full organisation. With the rapid enlargement in the concern universe entailed with rise in corporate frauds and failures, there is a serious demand for an internal audit map that can take up rivals of keeping control over the organisation. Such internal audit map can move as a control specializer for surveillance of direction controls model.

Deloitte and Touche ( 2005 ) references about the importance of internal audit to an organisation in this manner: “ the lucks of the company can be tied to internal audit ” . However, The Institute of Chartered Accountants in England and Wales, ICAEW ( 2004 ) provides that “ Having an internal audit map is non compulsory for listed companies ” . ICAEW argues that houses holding an internal audit map should put the position of the internal audit at the top of the organisation, that is, by the board and, audit commission.

The IIA ( 2006 ) believes that a house possessing an internal audit map is in a better place when equipped with to the full resourced and professionally qualified staffs that add values to services. This is of import for efficaciously and expeditiously pull offing the organisation.

2.2 Scope and Objectives of Internal Audit

A impression of the range and aims of the internal audit can be obtained through a papers issued by The Accountancy Foundation Limited ( 1995 ) . It point outs that the range and aims of internal audit differs in regard to the size and construction of an organisations. It besides considers direction ‘s and managers ‘ demands. The Internal Audit Charter ( 2010 ) declares that “ There are no limitations placed upon the range of the Internal Audit Department ‘s work ” .

In general, the range and aims of internal audit activities include, but non limited to the followers:

Review and measure the adequateness and effectivity of the accounting systems,

internal controls systems and hazard direction.

Measure the relevancy and dependability of direction, fiscal and operating informations, and means to place step, organize and history such information.

Analyze the systems established by direction to guarantee that the policies, audit programs, processs, Torahs and ordinances are in conformance.

Review ways in which assets are preserved within the organisation and verify their being suitably.

Measure the economic system in footings of effectivity and efficiency in connexion with the resources employed.

Review the consistence of consequences derived from operations or undertakings and whether they are performed as scheduled.

Maintain regular contact with all staffs of the organisation, cooperate with different divisions and audit squads and have the consciousness of the programs and schemes that may impact the audit activity.

2.3 Types of Internal Audit

Most organisations follow the Standards set by the IIA. A assortment of audits are performed by organisations and these audits include: fiscal audit, operational audit, direction audit, conformity audit, Information System ( IS ) or Information Technology ( IT ) audit, and probe audit. However, CatLady ( 2004 ) identifies merely four type of internal audit in connexion with the types of internal hearers and the work that they do. As such, the four types are fiscal, operational, conformity and IT hearers. By and large, more concern is given to fiscal, direction and conformity audit as compared to others.

Financial audit has every bit aim to organize an independent and adept sentiment on whether the fiscal statements have been prepared in a true or just mode. Such an sentiment is formulated based on a company ‘s position and after holding tested and analysed all its fiscal minutess. Raffa ( 2003 ) states that the range of the fiscal audit is chiefly on the fiscal dependability and unity, and, on occasion, runing information. However, Hermanson and Rittenberg ( 2003 ) argue that fiscal audit is used as a tool to carry through the function of hearers every bit good as for probe and consultative services.

Management audit trades with issues associating to concern and direction analysis. It besides considers the effectivity of controls through trials performed against processs, with a position to increase net income. The range of the direction audit is on internal applications. Arthur ( 2000 ) suggests that if direction audit is conducted decently, so it can move as a utile mechanism to convey alteration. This is because it provides sentiments and recommendations on of import concern issues. Such an sentiment is supported in a research conducted by Parial ( 2000 ) .

Conformity Audit is used in high hazards countries to guarantee that the activities performed in rigorous conformity with regulations and ordinances. Both Arthur ( 2000 ) and Parial ( 2000 ) reference that conformity audit trades with the scrutiny of written manuals, processs and work instructions that have been implemented. The application of conformity audit leads to in confidence and stableness that the concern is staying to all policies. Its range is on peculiar countries of operations.

2.4 Role of Internal Audit Function to advance Corporate Governance

An article by LeRoy ( 2002 ) emphasizes on the “ exceeding chance today ‘s professionals have to widen beyond their comfort zones and beef up the hearer ‘s function in administration procedures ” . The chief focal point of internal hearers, harmonizing to LeRoy ( 2002 ) , is on hazard and control for the soundness of the administration procedure. Similarly, the Turnbull Report ( 1999 ) is besides of the sentiment that internal audit map aims at measuring hazard and commanding the internal control system.

Harmonizing to Sobel ( 2005 ) the term “ Corporate Administration ” is defined as follows:

“ Corporate administration is the procedure carried out by the board of managers, and its related commission, on behalf of and for the benefit of the company ‘s stakeholders, to supply way, authorization, and inadvertences to direction ” .

Marks and Minow ( 2001 ) elaborate on the definition of corporate administration and province that it is a “ relationship among assorted participants in finding the way and public presentation of corporations ” . Corporate Governance, as said by MIA ( 2008 ) , is good developed in many states and those who are bestowed this duty have an active inadvertence function for measuring and monitoring hazard, internal control and consistence with the jurisprudence. Hearers must acknowledge that their oversight function and duty of differs from entity and state. Furthermore, the IIA ( 2006 ) states that the duty for corporate administration is widespread among assorted concern entities. The basis of effectual administration includes viz. Board of Directors, Executive Management, the Internal Auditors, and the External Hearers as illustrated in Figure 2 below.

Similarly, Chong ( 2009 ) advocates that “ The pillars that play their portion in keeping an effectual corporate administration model are the internal audit map, the board of managers, executive direction and external hearers ” .

The corporate dirts both in the Mauritanian context, including Air Mauritius and MCB Ltd, and the international context like Enron and WorldCom, Tyco and Xerox are perceived as a great catastrophe for accounting and scrutinizing profession. This has call for aid from internal hearers refering corporate issues on behalf of commissions and boards. More than of all time before, companies had to step out of traditional comfort zone and reenforce the function of internal scrutinizing in such domains. After such failures, hearers at all organisations should analyse such event and its cause with an in deep respect so that they can use this impression to their ain organisations. Consequently, it is has become imperative for internal hearers to concentrate on hazards and controls for the safety and soundness of fiscal coverage, administration, and internal audit systems.

Harmonizing to Barry ( 2008 ) , “ Good administration can non be imposed ; it must emerge from a changed societal civilization, taken down to the degree of the corporation by capable and committed managers and executives ” . Therefore, for good administration to win through there should be an effectual and collaborative working relationship between board of managers and supervisors. It takes strength, experience, and judgements to decide administration issues satisfactorily.

The profession of hearers is at present challenged but hearers are every bit capable of managing corporate administration issues by get the better ofing such a challenge whenever a opportunity is presented to do their profession becomes a flexible joint for effectual corporate administration.

2.5 Effectiveness and Efficiency of Internal Audit Function

Harmonizing to Deloitte ( 2004 ) , “ the internal audit map best serves an organisation when it operates in conformity with the professional criterions and regulations of behavior issued by the IIA ” . If internal auditing is efficaciously put into operation, it can turn out as the most critical component of quality direction system ( Strouse, 2010 ) . Similarly, The International Register of Certified Auditors, IRCA ( 2006 ) is of the sentiment that organisations should favor the pattern of internal audits to hold appropriate and effectual quality direction systems that ensures proper operation. However, KPMG ( 2008 ) is of a different sentiment that internal audit map is of premier concern in that it assist the board of managers from its administration duties.

The ICAEW ( 2004 ) provides that “ internal audit activities play an of import portion in the effectual administration and hazard and control model of an organisation ” . The internal audit has every bit function to supply independent confidence service to the board, audit commission and direction. Such service should stress on reexamining the effectivity of procedures such as administration, hazard direction and control established by direction. Hence, certain of import facets must be considered which have an impact on the effectivity and efficiency of internal audit map. They are: Objectivity and independency, Audit Committee, External Audit, and hazard direction and control.

2.5.1 Objectivity and Independence of Internal Audit

ICAEW ( 2004 ) states that “ Internal audit is a beginning of independent and nonsubjective confidence ” . The internal audit map must be independent of the activities being audited and must besides be independent from mundane internal procedures ( KPMG, 2008 ) . Internal Auditors need to keep an impartial attitude that does non overrule their objectiveness and does non stand for vested involvements while carry oning their internal audit map. The more internal hearers are free from any involvement which might be regarded as incompatible with their objectiveness and unity, the better they can exert with due accomplishment, attention, diligence and dispatch. The internal hearers must hold the accomplishment set and expertness to independently and objectively assess the internal controls in topographic point to guarantee it is equal to extenuate hazards and administration procedures are effectual and efficient ( Chong, 2009 ) . Chong anterior concern is towards independency and objectiveness of an internal hearer in regard of his responsibilities. His statements are based on inquiries and happening relevant replies to these inquiries. The ICAEW ( 2004 ) finds that “ Internal audit ‘s function is separate and independent from direction ” .

2.5.2 Internal Audit and Audit Committee

Internal audit is the effectual monitoring and supervision of operations, accounting and regulative conformance of companies. The internal audit map together with direction and external hearers, have to describe such internal control conformity to the audit commission.

An Audit Committee ( AC ) is established to function as a channel of communicating every bit good as maintain effectual relationship between Board of Directors, direction, internal hearers and external hearers. With respects to the good working relationship in association to corporate administration, fiscal coverage model and internal controls, internal hearer should besides keep a good coverage line with senior direction degree on these affairs. William ( 2001 ) states that “ choice fiscal accounting and describing consequence merely from effectual interrelatednesss ” .

In general, the optimal figure of members that forms an AC should be a lower limit of five and a upper limit of seven members ( Gauthier, 1997 ) . Such members should possess all the needed accomplishments and cognition in the field of accounting and scrutinizing to run efficaciously and recognize the aims set by the commission.

AC should hold equal authorization to look into on issues found in the understanding and should hold full entree to relevant information in position of continuing the unity and fiscal revelations demands. Harmonizing to the IIA, this is possible with the aid of the internal hearer who must supply the AC with sufficient audit coverage in footings of findings and recommendations. The commission will so chiefly make recommendations to the board for its blessing or concluding determination and non execute any direction maps or presume any direction duties. For case, it may urge about the assignment of external hearers every bit good as buttocks his/her public presentation.

The boards of managers along with their commissions should go proactive, informed, fact-finding and accountable in pursuit that these qualities will take to good administration. The audit commission is more focussed and better on the same wavelength with administration than any other commission of the board.

The Blue Ribbon Committee, BCR ( 1999 ) is created to better the effectivity of corporate AC. It magnifies the importance of internal audit map as follows: in the internal control system ; as an assistance to the audit commission to supervise competency of the internal control procedure ; and the grade to which direction stick to the control procedures. The IIA expresses its sentiment on the findings of BCR by adverting that “ the receiver of an appraisal of internal control is a important measure in bettering AC effectivity ” . The AC is extremely reliant on information provided by the internal hearer and in order to successfully obtain the needed information, support and counsel, it is necessary for the internal hearer to confer with the audit commission in private. The BCR besides recommended that the audit commission should keep separate meeting with direction, internal hearers and external hearers.

The Combined Code on Corporate Governance ( 2003 ) states that audit commission is required to supervise and reexamine the effectivity of the internal audit map. AC serves as a usher and feedback for internal audit. The internal audit studies is a agency by which AC can measure the quality of internal audit ‘s plants during the class of the twelvemonth. With the coaction of both the audit commission and the internal hearers within companies, a better monitoring and supervising of the fiscal coverage procedure may ensue. This can add more credibleness to companies as higher degree of watchfulness and objectiveness are maintained. Similarly, internal controls are strengthened with watchfulness which can finally add value to stockholders.

2.5.3 External Audited account

In the words of ICAEW ( 2004 ) :

“ It is of import for both internal and external hearers to collaborate, communicate and portion their ratings and the consequences of their audit work when relevant and capable to any confidentiality demands. This duologue should take topographic point on a regular basis throughout the twelvemonth ” .

Mango ( 2005 ) defines external audit as being “ an independent scrutiny of the fiscal statements prepared by the organisation. It is normally conducted for statutory intents ( because the jurisprudence requires it ) . It can besides be for fact-finding intents ( e.g. to look for a fraud ) ” . In other words, it is an external hearer as person outside the organisation who takes up the duty of carry oning the external audit. The Companies Act 2001 requires the information in the Financial Statements to be authenticated by an independent person- the external hearer for it to look believable and therefore considered to the full dependable for decision-making intents. This is applicable to all limited companies incorporated under such act in Mauritius. It is deserving observing that it is critical that the internal hearer performs his work efficaciously so that the external hearer can trust upon his work.

2.5.4 Risk Management and Control

In the sentiment of the IIA, “ Hazard is the chance that an event or action, or inactivity may adversely impact the organisation or activity under reappraisal ” . The IIA discusses on the function of internal hearers in Enterprise Risk Management ( ERM ) and their part to add value, in a place paper. Hazard is built-in in the determinations that an organisation takes to pull off and run its concern and in the concern processes established to help in the accomplishment of its concern aims ( ICAEW, 2004 ) .

Internal audit plays an indispensable function in hazard direction and control, and this has made organisations to put high outlooks and trust on it. Internal audit activity consists of helping the organisation to keep controls and measure them in pursuit that they promote changeless betterment ( Armoogum, 2009 ) . It can supply effectual parts to independent confidence, hazard direction and control, and corporate administration processes.

The Committee of Sponsoring Organizations of the Treadway committee, COSO ( 1992 ) defines internal control

as a procedure, effected by an entity ‘s board of managers, direction and other forces. This procedure is designed to supply sensible confidence sing the accomplishment of aims in effectivity and efficiency of operations, dependability of fiscal coverage, and conformity with applicable Torahs and ordinances.

Corporate administration and hazard direction include the preparation of scheme, monitoring of operations to do certain that the scheme is being attained, and identifying, measuring, and extenuating hazards to the accomplishment of scheme ( Tanya, 2007 ) . In 2002 the IIA in understanding with the COSO Enterprise Risk Management – Integrated Framework ( 1994 ) and IIA ( Uk and Ireland ) province that “ Internal hearers should supply advice, and challenge or support direction ‘s determinations on hazard, as opposed to doing risk direction determinations ” .

From the Executive Summary ( 2004 ) of the COSO, Enterprise Risk Management embraces hazards and chances and is defined as follows:

“ Enterprise hazard direction is a procedure, effected by an entity ‘s board of managers, direction and other forces, applied in scheme scene and across the endeavor, designed to place possible events that may impact the entity, and manage hazard to be within its hazard appetency, to supply sensible confidence sing the accomplishment of entity aims ” .

Much consideration is given to enterprise-wide hazard direction as it makes an organisation ‘s administration processes get better. Management should pull off the hazard direction model on behalf of the board while the internal audit should supply confidence through ERM on the effectivity of the hazard direction procedure to direction and the board. One of the undertakings dealt with by the IAF is the designation and monitoring of hazards ( Tanya, 2007 ) . Similarly, The MIA ( 2008 ) suggests that “ The internal audit map should regularly study to the board of managers and direction on the public presentation of the internal control and hazard direction systems and on the accomplishment of the internal audit map ‘s aims ” .

2.6 Internal Audit Charter

The Internal Audit Charter ( 2010 ) of Buffalo City perceives that “ The intent of this charter is to put out the nature, function, duty, position and authorization of the Internal Audit Department and to sketch the range of their work ” . This charter besides includes the authorization and duty bestowed by direction. The Internal Audit Charter is depicted as follows:

The Practice Advisory 1000-1: Internal Audit Charter province that “ The intent, authorization and duty of the internal audit activity should be officially defined in a charter, consistent with the Standards and approved by the board. ” An internal audit charter requires that internal hearers consider suggestions. The charter must:

( a ) ” set up the internal audit activity ‘s place within the organisation

( B ) authorise entree to records, forces, and physical belongingss relevant to the public presentation of battles ; and

( degree Celsius ) define the range of internal audit activities ” .

It is required for the internal audit to be in composing to supply direction with formal communicating for reappraisal and blessing intents. A written internal audit charter is an assistance in periodic appraisal of the adequateness of the internal audit activity in footings of intent, authorization and duty. The Chief Audit Executive should execute periodic appraisal and pass on the consequences to senior direction and the board.

2.7 Reporting Line

The coverage line or communicating of consequences has a important value in the internal audit. The internal hearer must be able to describe his findings and of import issues to the right individual at the right clip. Failure to make so can be damaging to the internal hearer himself, to his section and finally to his organisation as a whole.

Internal hearers are recommended to describe on a regular basis and internally to the board, the audit commission and direction. This is what is described in the IIA ‘s Performance Standard ( 2004 ) refering to pass oning consequences.

As already reference earlier in Section 2.5.3, it is every bit of import that there is cooperation, communicating and sharing of thoughts between internal and external hearers associating to their audit plants.

When internal hearers study to senior direction of the organisation, they still have to objectively reexamine the effectivity and behavior of direction. This is the belief of KPMG ( 2008 ) and “ The lone satisfactory solution to this job is for internal audit to describe chiefly and straight to the board and its audit commissions instead than to senior direction ” . KPMG ( 2008 ) besides:

“ believes that the internal audit map should describe functionally to the president of the audit commission, acknowledging that on a daily footing it should describe administratively to the CEO of the organisation ” .

IIA ( 2002 ) has summarized a list of cardinal steps and the of import 1s have been highlighted below:

The coverage line should refer from person who has adequate powers to supply the internal audit with equal support for its day-to-day activities.

There should be private meeting held between caput of internal audit and board or audit commission. This must except direction in order to beef up independency and direct nature of the coverage relationship.

The coverage line should be in such a manner to render unfastened and direct communications much better with CEO, senior executive group and line direction.

2.6 Benefits of Internal Audit Department

The Dublin Institute of Technology, DIT ( 1988 ) and The Maryland-National Capital Park and Planning Commission ( 2009 ) have identified six possible benefits of internal audit. These have been summarized, simplified and presented as follows:

It provides a sensible degree of confidence with respects to the adequateness and effectivity of internal controls in different sections.

It helps place ways to better organisations and ensures effectual and efficient controls of operations. It besides facilitates treatments among caput of sections.

It ensures that all facets of a concern are running swimmingly in conformity with the organisation ‘s policies and processs.

It assists direction to place and forestall hazards such as fraud, waste and maltreatment associated with their activity. In making so, the strengths and failings within sections can easy be determined for recommendations on disciplinary action.

It acts as a usher for implementing the appropriate controls for a new system or undertaking. Consequently, utile analysis, advice and information are provided to direction.

This section consists of professionals and knowledge-based staffs hence, these staffs make maximal usage of their expertness in the audit activities and achieve organisational ends. These staffs are in a better place and have a better apprehension of the organisation compared to other employees.

×

Hi there, would you like to get such a paper? How about receiving a customized one? Check it out