INTERNAL AUDITING

Chapter 1
OVERVIEW OF INTERNAL AUDITING

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Learning Objectives
After going through this chapter, you should be
able to:
∙ Provide a professional overview of internal auditing.
∙ Differentiate internal auditors and external auditors.
∙ Learn the different types of internal audits.
∙ Describe the evolution and development of internal audit practices.
∙ Understand the roles of the Institute of Internal Auditors of Malaysia
(IIAM).
∙ Describe factors that enhance the image of the internal audit
profession.

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Defining Internal Auditing
An independent appraisal function established within an organization to
examine and evaluate its activities as a service to the organization. The
objective of internal auditing is to assist members of the organization in the
effective discharge of their responsibilities. Internal auditing furnishes them with
analyses, appraisals, recommendations, counsel, and information concerning
the activities reviewed. The audit objective includes promoting effective control
at a reasonable cost.

Institute of Internal Auditors (IIA)’s Board of Directors have

redefined internal auditing:

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.
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The Keywords
⚫ Independence and objectivity
⚫ Assurance and consulting activity
⚫ Systematic and disciplined approach
⚫ Add value
⚫ Risk management
⚫ Control
⚫ Governance

Every keyword has its significance in internal

audit – LEARN THEM!!

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 Evolution of Internal Audit in Malaysia
⚫ In 1970, Ministry of Defence set up its internal audit unit.

⚫ In 1979, the Federal Government issued a circular expanding the

establishment of IA to other ministries with a broader role which include
operational audit.

⚫ In 1993, the Ministry of Finance requested all government-owned

organizations to set up an audit committee:

❑ To protect the government interest as a shareholder

❑ To oversee the internal audit function in these organizations.

⚫ Internal auditing in private sector

❑ Mainly focus on evaluating the efficiency and effectiveness of internal control systems
and compliance
❑ Since 1993, it was mandatory for all public listed organizations to establish audit
committee to monitor accountability, governance, independence and objectivity of the
internal audit department.
❑ Bursa Malaysia Listing Requirements, amended in 2008, mandated public listed
organizations to set up internal audit function.

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The Rise of Internal Audit Profession
THEN NOW
Concentrates on attesting to Provides services that include
the accuracy of financial examination and appraisal of
matters. control and performance of an
organization.

Functions as junior sibling to Establishes itself as a

independent accounting distinctive discipline.
profession.

Once acted as auditee’s Guides to improve operations;

adversary. seeking to maintain a
cooperative working
relationship with clients and
auditees.

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Internal Auditor Vs. External Auditor
INTERNAL AUDITOR
Reporting Reports to audit committee/board
responsibility of directors
In general, part of an
Status organization’s employees (at
times, it can be outsourced)
Serves needs of an organization
Stakeholder
Is independent of the activities
Independent audited, but is ready to respond to
the needs and desires of all
status
elements of management.
Is directly involved with the
prevention and detection of fraud
Responsibility in any form or extent in any
activity reviewed.
towards fraud
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EXTERNAL AUDITOR
Reports to shareholders
Is an independent contractor, a
third party
Serves third party needing reliable
financial performance report
Is independent of management
and the board of directors, both in
fact and mental attitude.
Is incidentally concerned with the
prevention and detection of fraud
in general, but is directly
concerned when financial
statements may be materially
affected.
Internal Auditor Vs. External Auditor (cont.)
INTERNAL AUDITOR
Evaluate governance, control and
risk management processes to
assure the accomplishment of
Scope of work
entity goals and objectives.
Reviews activities continually by
focusing on future events.
Timing and
frequency of audit
Not necessary, but may acquire a
Certified Internal Auditor (CIA).
Professional
qualification
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EXTERNAL AUDITOR
Reviews the financial statements
to ensure that the statements are
free from material misstatements
and express opinion whether the
financial statements present a true
and fair view.
Reviews records supporting
financial statements periodically
(usually once a year) and focuses
on the accuracy and
understandability of historical
events as expressed in financial
statements.
Must be a member of Malaysian
Institute of Accountants (MIA) and
be granted audit license by the
Ministry of Finance (MoF) before
being recognized as a Chartered
Accountant (CA).
Types of Internal Audit
⚫ Financial Audit
⚫ Operational Audit
⚫ Management Audit
⚫ Compliance Audit
⚫ Information System/Information Technology Audit
⚫ Fraud/Forensic Audit

These are not all,

but should cover
most of the
internal audit
activities
undertaken by the
internal auditors

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Roles of IIAM
⚫ Affiliated to The Institute of Internal Auditors Inc. (USA)

⚫ Services provided:
❑ Certification – offering certification for Certified Internal Auditors (CIA), Certification
in Control Self-Assessment (CCSA), Certified Financial Services Auditor (CFSA),
Certified Government Auditing Professional (CGAP)
❑ Professional development – providing quality and "value for money" internal audit
training
❑ Guidance and advisory – providing research, technical advisory and responding to
technical enquiries
❑ Surveys – conducting surveys on various topics in collaboration with, among
others, Bursa Malaysia, MICG, KPMG and Ernst & Young.
❑ Quality assurance services – providing assistance and expertise for Quality
Assurance and Improvement Program (QAIP)

⚫ IIA Research Foundation

❑ Research arm of the Institute of Internal Auditors Inc. (USA)
❑ Conducting research related to IA
❑ Disseminate information to internal auditors in Malaysia – to keep abreast with latest
news, best practices and development of IA in Malaysia and internationally
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END Chapter 1

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