INTERNAL AUDITING

FUNCTIONS AND
ACTIVITIES
“There are two types of auditor in
the accounting world - those
whose opinion you can rely on,
and those whose opinion you
can't”

START
 a state of mind which allows When an audit report states
the individual to make that ‘the audit view is...’ this
judgements, based upon all should provide a comment
the available evidence relating on the state of internal
to the situation, in a state of controls. Where used to
emotional and psychological provide an advantage for
detachment from the situation the audit function, credibility
or decision is risked.

IMPARTIALITY VALID OPINION

OBJECTIVITY UNBIASED VIEWS

Objectivity may be seen Readers of audit reports
as not being influenced require the auditors to
by improper motives complete work to
while impartiality is not professional standards
taking sides with the audit opinion
properly derived from
this work.
 THREATS TO INDEPENDENCE

Self-Interest Threat
A self-interest threat exists if the auditor holds a direct or
indirect financial interest in the company or depends on
the client for a major fee outstanding.

Example
The audit team is preparing to conduct its 2020 audit for
ABC Company. However, the audit team has not received
its audit fees from ABC Company for their 2019 audit.

Issue
The audit team may issue a favorable report so that the
company is able to secure a loan to settle the fees
outstanding for their 2019 audit.
 THREATS TO INDEPENDENCE

Self-Review Threat
A self-review threat exists if the auditor is auditing his
or own work or work that is done by others in the
same firm.

Example
The auditor prepares the financial statements for
ABC Company while also serving as the auditor for
ABC Company.

Issue
By having the auditor review his or her own work, the
auditor would not be able to form an unbiased
opinion on the financial statements.
 THREATS TO INDEPENDENCE

Advocacy Threat
An advocacy threat exists if the auditor is involved in
promoting the client to the point in which their
objectivity is potentially compromised.

Example
The auditor is assisting in selling ABC Company while
also serving as the auditor for the company.

Issue
The auditor may issue a favorable report to increase
the sale price of ABC Company.
 THREATS TO INDEPENDENCE

Familiarity Threat
A familiarity threat exists if the auditor is either too
familiar with employees, officers, and directors, or
keeps a long-standing relationship with the client.

Example
ABC Company has been audited by the same
auditor for over 10 years.

Issue
By having audited the company for such a long
time, the auditor may become too familiar with its
client and lack objectivity in their work.
ICE BREAKER
 THREATS TO INDEPENDENCE

Intimidation Threat
An intimidation threat exists if the auditor is
intimidated by management or its directors to the
point that they are deterred from acting objectively.

Example
ABC Company is unhappy with the conclusion of the
audit report and threatens to switch auditors next year.
ABC Company is the biggest client of the auditor.

Issue
The auditor’s independence may be compromised as ABC
Company is the biggest client to the auditor and he/she may not
want to lose such a client. Therefore, the auditor may issue a report
that appeases ABC Company.
 IIA ATTRIBUTE STANDARDS

1100: the internal audit activity should be independent, and internal auditors
should be objective in performing their work.
1110: the internal audit activity should report to a level within the organization
that allows the internal audit activity to fulfil its responsibilities.
1110.A1: the internal audit activity should be free from interference in
determining the scope of internal auditing, performing work, and
communicating results.
1120:internal auditors should have an impartial, unbiased
attitude and avoid conflicts of interest.
1130: if independence or objectivity is impaired in fact
or appearance, the details of the impairment should be
disclosed to appropriate parties. The nature of the
disclosure will depend upon the impairment.
 IIA ATTRIBUTE STANDARDS

1130.A1:internal auditors should refrain from assessing specific operations for which they
were previously responsible. Objectivity is presumed to be impaired if an auditor
provides assurance services for an activity for which the auditor had responsibility within
the previous year.
1130.A2: assurance engagements for functions over which the CAE
has responsibility should be overseen by a party outside the internal
audit activity.
1130.C1: internal auditors may provide consulting services
relating to operations for which they had previous
responsibilities.
 MODELS

THE RITTENBERG MODEL

THE WORKING MODEL

 Objectivity is an An audit department with
06 independent mental no formal audit plans can 08
attitude that internal never be said to be
auditors should maintain in independent. Not only are
Objectivity performing engagements. professional audit Planning
Internal auditors are not to work areas
standards being flouted but
subordinate their it also means that audit
judgement on audit responds to the pressures of
matters to that of others. the day

This is achieved through

recruitment, training and
“A CAE who allows this disastrous condition Competence development programs supported
to arise will be open to criticism.” by performance appraisal
schemes. Sound human resource
management practices are the
07 only means of ensuring that
competent staff are employed and
retained.
 POLICE OFFICER VS CONSULTANT

Internal auditors setting out to perform an ethics audit face both their own concerns about the often
uncharted territory of such tasks as well as the concerns of the colleagues and supervisors. Those
concerns, expert say can be alloyed once such an audit is fully developed be quantified, examined
and issues of appropriate against inappropriate behavior can be addressed successfully. May be a
police officer responsible to Examination, investigation, scrutiny, review& inspection way, in this
philosophy internal auditor job is like police officer.

EXAMINED SCRUTINY

INVESTIGATION
INSPECTION
REVIEW
Managing Expectations through Web Design

The internal audit website serves as an open

communications link between the
organizations and the outside world.

The internal audit website may be used to

establish the role of the function of managing
expectations from people who may have a
distorted perception of the audit role.
 FAQs
• What is internal audit?
• Provide a formal definition of internal auditing that makes sense and fits the
organization. Perhaps the IIA definition, then a short, user-friendly explanation of
some of the components.

• What is the difference between external and internal audit?

• Make clear these differences and explain that we try to coordinate efforts
wherever possible.. Make clear that internal audit is a high-level function that
also audits other review and compliance teams.

• What is the audit objective?

• This part will say what internal audit is trying to achieve and may be a mix of
consulting roles in helping management understand and manage their risks,
along with an assurance role of providing impartial assurances to the board
and audit committee that controls are in place and working.

• Why do we have internal audit?

• This provides an opportunity to note the benefits from internal auditing without
going over the top. Some measure the success of internal audit in terms of the
development of a sound control environment within the organization.
• How is internal audit independent?
• Outline the concept of independence (status and
objectivity) and that internal audit work can be relied on as
professional, impartial and reliable.

• What does internal audit do?

• List in more detail the services that are provided by internal
audit, including ongoing advice and assistance
Audit Competencies
• IIA standard 1200 deals with proficiency and due
professional care by stating that:

“Engagements must be performed with proficiency and

due professional care.”

• IIA standard 1210:

“Internal auditors must possess the knowledge, skills, and

other competencies needed to perform their individual
responsibilities. The internal audit activity collectively must
possess or obtain the knowledge, skills, and other
competencies needed to perform its responsibilities.”
What makes for Good Internal Auditors
• Proficiency in applying internal audit standards, procedures,
and techniques in performing engagements.
• Proficiency in accounting principles and techniques if internal
auditors work extensively with financial records and reports.
• Knowledge to identify the indicators of fraud.
• Knowledge of key information technology risks and controls
and available technology-based audit techniques.
• An understanding of management principles to recognize and
evaluate the materiality and significance of deviations from
good business practices.
• An appreciation of the fundamentals of business subjects such
as accounting, economics, commercial law, taxation, finance,
quantitative methods, information technology, risk
management, and fraud.
• Skills in dealing with people, understanding human relations,
and maintaining satisfactory relationships with engagement
clients.
 Competent Internal Auditor
• able to apply innovative and creative thinking;
• able to work to agreed timescales and account for time;
• able to add value to the organization;
• able to appreciate concerns of stakeholders and focus on needs of the customer;
• able to appreciate new ideas and embrace and encourage change;
• able to quickly build relationships but retain professional stance;
• able to work under pressure and set priorities;
• ambitious and confident without being overbearing;
• balance and common sense with an overall sense of fairness and diplomacy;
• committed to continuous learning and open to training and development;
• committed to working within set corporate policies and section procedures;
• communications skills, oral, public speaking, writing, report writing, effective listening, written
• good decision making and judgement with no special bias to self-interests.
Continuous Professional Development

• The IIA Attribute Standard 1230

“Internal auditors must enhance their knowledge, skills, and other

competencies through continuing professional development.”
Training and Development
• Training is an important aspect of developing
internal auditors, and has to be carefully planned in
line with a career developmental programme.

• IIA.UK&Ireland Syllabus
• 2002, the introduction of a new syllabus for the IIA. UK &
Ireland
• sought a wider coverage of the audit world and related
areas. This now provides two levels of qualification, the
practitioner level and the more advanced professional
level.

• More recently, the IIA. UK & Ireland have developed a

certificate in Corporate Governance and Risk
Management.
Benefits of Training
• Increase in the quantity of work done by auditors
• There should be an increased efficiency in the way audit work is
carried out which is then translated into increased output.
• Better quality of work
• Audit training should achieve a higher standard of quality from
auditors. Training may have a firm objective to produce
excellence. There should be a direct link between the level of
training and the increasing ability to audit at higher managerial
levels.
• Better standard of report writing
• Some argue that the report is the ‘window’ to the audit
department as a formally published item widely read. There
is no short-cut to performing good audit work and this
should be the main concern of audit management. Audit
training will certainly include report writing, and
inconsistencies between individual auditors will arise.
• Better quality of working papers
• Whatever the scenario, there is a need to ensure that
auditors are preparing suitable working papers. It is
frustrating to review a report that is well presented and
based on sound evidence but the underlying evidence
cannot be readily gleaned from the working paper file.
• Less audit staff required in the long term
• One useful model is to employ a smaller number of auditors,
working to higher standards. Training facilitates this process
as skills are spread, greater efficiency is encouraged and
the training process itself may be used to filter out those
staff who are not able to readily transfer to these higher
standards.
• Smaller training gap in terms of skills shortages
• This will be designed to promote efficiency and
effectiveness and so help guarantee the future of internal
audit.. A skills gap exists when auditors are not able to meet
management’s expectations and again if this is the case,
the audit manual may fail.
• Greater degree of professionalism
• Better motivated workforce with career
development programmes
• Whenever a course is organized, the impact on
motivation should be considered and catered for
in the course wherever possible. Motivated staff
are more likely to stay with the audit team for
longer .
Training Auditor
• Professional training
• This may be based on passing examinations of a
defined professional body such as the IIA, which is
a completely different form of training from skills-
based courses.
• The audit review
• The audit review process enables audit managers and
team leaders to direct the work of junior staff and also
provides experience in staff management. The process
should form part of the training programme by building in
the concept of staff development.
The Role of the Institute of Internal Auditors

• Professional examinations
• These ensure the student has covered a defined series of subjects, and
has shown competence in relevant examinations.
• Conferences
• The IIA organizes seminars and conferences. This provides an avenue
for meeting people in the auditing arena and allows open exchange
of views.
• Periodicals
• We may subscribe to all relevant periodicals that contribute to the
audit database of relevant information.
• Research publications
• The IIA publishes specialist research papers that may be used by the
CAE to develop audit practice.
• District societies
• The IIA.UK&Ireland is organized geographically into district
societies with each member being located in one. They
meet regularly and organize events and seminars that may
be used in developing the audit function.
• Committee meetings
• A more proactive approach is applied where one is
actively involved in the various committees and working
groups that help shape the overall direction of the
profession of internal auditing.
• Journals and articles
• We may keep up with topical debates by reading the latest
articles from the IIA journal. Technical updates are vitally
important to audit management as they may impact on
the current audit strategy.
The Link into Development

• Training is part of the managerial process and as such forms only

one constituent of the overall system of human resource
management. Training must be set clearly within a formal auditor-
development programme that tracks the progress of each auditor
throughout their career with the organization.