Dada Adefolami

By Dada Adefolami

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes

Internal Auditor Responsibilities. Include: Performing the full audit cycle including risk management and control management over operations’ effectiveness, financial reliability and compliance with all applicable directives and regulations. Determining internal audit scope and developing annual plans.

Internal audit may be defined as an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization.

Internal audit supports management in the effective discharge of their responsibilities. To this end, internal audit furnishes management with analyses, appraisals, recommendations, counsel and information concerning the activities reviewed.

The importance of internal audit was highlighted by the Turnbull Report. It states that listed public companies that do not have an internal audit function should review the need to have such a function at least annually. Turnbull goes on to state that listed public companies that do have an internal audit function should review the scope, authority and resources of this function at least annually.

Turnbull suggests that the need for the internal audit function will depend on several factors. These include:
1. The scale, diversity and complexity of the organization’s activities
2. The number of employees – the need for an internal audit function increases as the number of employees increases, or if employee interrelationships become more complex
3. Where the benefits of such a function will outweigh the costs of implementation and operation
4. When changes occur over time in the organization’s structures, reporting processes or underlying information systems
5. The nature of risks, changes to risks and emerging risks
6. Problems and issues arising with internal control systems, both actual and perceived
7. The occurrence of an increasing number of unexplained or unacceptable events.

International Standard on Auditing (ISA) 610, Using the Work of Internal Auditors has been revised and published in 2013. This standard focuses on whether the external auditor can use the work of the internal audit function for purposes of audit, and the revised version of the standard, clarifies whether the internal auditors can be used to provide direct assistance to the external auditor. The material pertaining to direct assistance is effective for audits of financial statements for periods ended on or after 15 December 2014.

External and Internal Auditors
An external auditor performs an audit, in accordance with specific laws or rules, of the financial statements of a company, government entity, other legal entity, or organization, and is independent of the entity being audited.

The main difference between internal audit and external audit is that internal audit is restricted to the organization’s governance, management controls over organization’s operations and risk management while the scope of external audit is wider than internal audit as it involves the auditing of both financial and non-financial areas as well.

One need to familiarize themselves with this revision to the standard as they are expected to be able to discuss the extent to which external auditors are able to rely on the work of internal auditors

Much of the work performed by a company’s internal audit function can overlap with the work conducted by the external auditor, specifically in areas dealing with the assessment of control processes. It is likely that in carrying out detailed work evaluating and reviewing the company’s internal control framework internal audit perform procedures on financial controls relevant to the external audit. As such, the external auditor, rather than duplicating these procedures, may be able to place reliance on the work carried out by the internal auditor. The International Standards on Auditing (ISAs) now highlight three ways in which internal auditors may be utilized by the external auditor in the audit of financial statements:

Focuses on the provision of direct assistance by the internal auditors, which to date has been a very controversial issue. Internal auditors are the employees of the entity, which could result in threats to independence either in fact or perceived if direct assistance is provided by the internal auditors. On the other hand, the following benefits relating to provision of direct assistance by the internal auditors cannot be ignored:

1. There will be a strengthened relationship between the external and internal auditors through a more effective dialogue
2. With the knowledge of the internal auditors, the external auditor can gain additional insights into the entity
3. The external auditor can use internal auditors who may have relevant expertise in particular areas, and
4. The external audit team can focus on the more significant audit issues.

The IAASB released ISA 610 (Revised 2013), which includes new requirements and guidance addressing the external auditor’s use of internal auditors to provide direct assistance. Where such use is not prohibited by law or regulation, the ISA provides a robust framework to ensure that direct assistance is obtained only in appropriate circumstances, that the external auditor considers the relevant limitations and safeguards, and that the auditor’s responsibilities are clearly set out. Accounting auditors. Accountants also perform the role of auditor, with internal, external, or government auditing responsibilities. Internal auditors report to their own firm’s board of directors or corporate officers. They are primarily responsible for checking for fraud, waste, and financial mismanagement
can Internal auditors be Used to Provide Direct Assistance

The formal objectives of internal audit may include some or all of the following:
1. Review of accounting and internal control systems
2. examination of financial and operating information
3. review of the ‘three E’s (economy, efficiency and effectiveness)
4. review of compliance with laws and regulations
5. review of arrangements for the safeguarding of assets
6. review of implementation of corporate goals and objectives
7. identification of significant risks to the organisation, and monitoring risk management policy and risk management strategies
8. special investigations as required.

The external auditor, in the course of discharging their responsibilities must decide if it is appropriate in the circumstances to use internal audit to provide direct assistance. The ISA identifies a number of steps that the external auditor should work through when determining to what extent, if any, direct assistance can be provided.

1: Prohibition by law or regulation
The external auditor may be prohibited by law or regulation from obtaining direct assistance from internal auditors; therefore, the first task is to understand the law or regulation of the jurisdiction in which the auditor is operating. In the United Kingdom for example, the Financial Reporting Council (FRC) prohibits external auditors from using internal auditors as ‘direct assistance’ members of the audit team in order to enhance the principle of auditor independence. Consequently, the guidelines in relation to direct assistance are irrelevant to audits conducted in accordance with ISAs (UK and Ireland).

2A: Evaluation of the existence and significance of threats to objectivity of the internal auditors
This is considered as an important element in the external auditor’s judgment as to whether internal auditors can provide direct assistance. Objectivity is regarded as the ability to perform the tasks without allowing bias, conflict of interest or undue influence of others to override professional judgment. The following factors are relevant to the external auditor’s evaluation of objectivity:

It should be noted that the main purpose here is to evaluate threats to objectivity. Take the first factor as an example – if evidence shows that the internal audit function’s organizational status supports the objectivity of the internal auditors, the external auditor will feel more comfortable using direct assistance from the internal auditors. The following situations are likely to support the objectivity of the internal auditors:

1. The internal audit function reports to those charged with governance e.g. the audit committee rather than solely to management e.g. the chief finance officer
2. The internal audit function does not have managerial or operational duties that are outside of the internal audit function
3. The internal auditors are members of relevant professional bodies obligating their compliance with relevant professional standards relating to objectivity.