What is internal auditing

By Laurie Scott,2014-05-19 01:30
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What is internal auditing

ATG 457 Spring 2001 - Chapter 23 - Internal and Operational Auditing, Page 1

    Updated View of Internal Auditing

Internal auditing has updated some definitions found in our text. Which of the following are the old and new


What is internal auditing?

    Internal auditing is an independent appraisal Internal auditing is an independent, objective function established within an organization to assurance and consulting activity designed to add examine and evaluate its activities as a service to value and improve an organization's operations. It the organization. The objective of internal auditing helps an organization accomplish its objectives by is to assist members of the organization in the bringing a systematic, disciplined approach to effective discharge of their responsibilities evaluate and improve the effectiveness of risk

    management, control, and governance processes.

What do internal auditors do?

    ? Review reliability and integrity of financial and ? Identify risk factors and assess their

    operating information.... significance. ? Review the systems established to insure ? Keep their organizations informed of all

    compliance with the policies, plans, procedures, discoveries and research observations made

    laws, and regulations... during the audit process.

    ? Review the means of safe guarding assets... ? Review operations to determine if they are

    helping to achieve corporate objectives. ? Appraise the economy and efficiency or

    resource employment. ? Review compliance with laws and regulations

    and ensure that the structure is in place to ? Review operations or programs to ascertain

    remain compliant. whether results are consistent with established

    objectives and goals ? Evaluate the efficiency and effectiveness of

    controls to achieve objectives.

    ? Reviewing the means used by the organization

    to protect its assets.

Certification for Internal Auditors

CIA exam

Four-part, two day, exam offered in May and November. Each part is 80 multiple choice questions.

1) Part I - Internal Audit Process

    a) Auditing 65 - 75%

    b) Professionalism 10 - 20%

    c) Fraud 10 - 20%

2) Part II - Internal Audit Skills

    a) Problem Solving & Evaluating Audit Evidence 4560%

    b) Data Gathering, Documentation, & Reporting 2540%

    c) Sampling and Mathematics 1020%

ATG 457 Spring 2001 - Chapter 23 - Internal and Operational Auditing, Page 2

3) Part III - Management Control and Information Technology

    a) Management Control 3040%

    b) Operations Management 1020%

    c) Information Technology 4555%

4) Part IV - The Audit Environment (Eligible for Professional Recognition Credit)

    a) Financial Accounting 3040%

    b) Finance 2030%

    c) Managerial Accounting 2030%

    d) Regulatory Environment 1020%

    The IIA offers two other certifications:

    ? Certification In Control Self-Assessment

    ? identifies the skill sets needed by successful practitioners of CSA, and

    ? measures understanding of CSA

    ? Certified Government Auditing Professional

    ? Explores candidates' comprehension of government auditing practice, methodologies, and

    environment, as well as related standards and control/risk models.

For more information about these IIA certifications:

Code of Ethics

The IIA adopted a new code of ethics in June 2000. It can be found at:

    frame.cfm?doc_id=604 In summary, the new code has two parts:

     Principles: (1) Integrity, (2) Objectivity, (3) Confidentiality, (4) Competency

     Rules: Behaviors to implement the 4 principles mentioned above.

     Match the Principle to the Rule.

    _____ Shall engage only in those services for which they have the necessary knowledge, skills, and


    _____ Shall be prudent in the use and protection of information acquired in the course of their duties.

    _____ Shall not accept anything that may impair or be presumed to impair their professional judgment.

    _____ Shall perform their work with honesty, diligence, and responsibility.

    _____ Shall not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the

    profession of internal auditing or to the organization.

    _____ Shall not participate in any activity or relationship that may impair or be presumed to impair their

    unbiased assessment.

    _____ Shall not use information for any personal gain or in any manner that would be contrary to the law

    or detrimental to the legitimate and ethical objectives of the organization.

    _____ Shall continually improve their proficiency and the effectiveness and quality of their services.

ATG 457 Spring 2001 - Chapter 23 - Internal and Operational Auditing, Page 3

    Current Standards.

    (These can be found at Also known as the Red Book: The IIA has adopted new standards which go into effect January 1, 2002. These can be found at

This is not a complete list. Selected standards are listed below to provide an illustration of how internal auditing

    standards differ from those applicable to independent auditors.

100 - Independence - must be able to render impartial and unbiased judgments. Achieved through:

    110 - Organizational Status - sufficient to accomplish audit objectives. What would indicate appropriate

    organizational status?

    120 - Objectivity - a mental attitude. What would indicate an impairment of objectivity?

200 - Professional Proficiency - persons assigned to each audit collectively possess the necessary knowledge, skills,

    and disciplines to conduct the audit properly.

     The Internal Audit Department

    230 Supervision - The director of internal auditing should ensure that internal audits are properly

    supervised. What is included in supervision?

    The Internal Auditor

    270 Continuing Education - Internal auditors should maintain their technical competence through

    continuing education. What types of subjects should continuing education cover?

ATG 457 Spring 2001 - Chapter 23 - Internal and Operational Auditing, Page 4

    300 Scope Of Work - The scope of internal auditing should encompass the examination and evaluation of the

    adequacy and effectiveness of the organization’s system of internal control and the quality of performance in

    carrying out assigned responsibilities.

    340 Economical and Efficient Use of Resources - Internal auditors should appraise the economy and

    efficiency with which resources are employed. What are some examples of inefficient or uneconomical use

    of resources?

    350 Accomplishment of Established Objectives and Goals for Operations or Programs - Internal

    auditors should review operations or programs to ascertain whether results are consistent with established

    objectives and goals and whether the operations or programs are being carried out as planned. Who is

    responsible for setting goals and objectives? What if there are no goals and objectives for a program?

400 Performance Of Audit Work - Audit work should include planning the audit, examining and evaluating

    information, communicating results, and following up.

    410 Planning the Audit - Internal auditors should plan each audit. What steps should be followed during

    internal audit planning?

    430 Communicating Results - Internal auditors should report the results of their audit work. What is

    included in a well-written report?

ATG 457 Spring 2001 - Chapter 23 - Internal and Operational Auditing, Page 5

    500.Management Of the Internal Auditing Department - The director of internal auditing should properly

    manage the internal auditing department.

    520 Planning - The director of internal auditing should establish plans to carry out the responsibilities of

    the internal auditing department. What is typically included in the annual plan for an internal audit


    550 External Auditors - The director of internal auditing should coordinate internal and external audit

    efforts. What should be done to coordinate the work of internal and external auditors?

Operational Audits

In order to illustrate the differences between financial and operational audits, review this example of an operational

    audit program for the human resource function. How is it similar to / different from a financial audit program for



Audit Procedures

Audit Area: Human Resources

Objectives - Define the intended accomplishments.

    1. Review and evaluate corporate human resource policies and

    departmental internal control procedures.

    2. Document the extent of compliance with policies and procedures.

    Verify personnel additions, terminations, and adjustments are handled

    accurately, properly, and promptly.

    3. Evaluate departmental effectiveness and efficiency.

    4. Evaluate management reports for effectiveness and reliability.

General Prep.

    1. Research audit manuals and internet for program information.

    2. Make audit announcement and request selected documentation be


    ATG 457 Spring 2001 - Chapter 23 - Internal and Operational Auditing, Page 6

    3. From preliminary audit program, determine what documentation will be

    needed to perform audit.

4. Develop audit questionnaire. Request audit questionnaire be completed.

5. Meet with auditee for opening audit conference.

    Objective 1A -Evaluate management administration and determine if standards

    have been established.

1. Review applicable corporate and department policy and procedure


2. Review the departments general philosophy and approach to personnel


3. Determine if management of human resources is assisted by outside

    organizations - employment agencies, consultants, etc.

    * Review for possible relationship patterns

4. If applicable, review data (surveys, reports, etc.) provided by

    outside organizations.

5. Inquire about trends in exit interview data.

    Objective 1B - Compare corporate and department policies to industry wide data.

1. Compare corporate policies to industry wide data.

2. Obtain and review management summaries of employee surveys.

    Objective 2 - Test compliance with documented operating procedures.

1. Interview department personnel.

2. Select a sample of personnel files and test for adequate

    documentation supporting corporate policy with respect to:

    * recruitment - background reviews, applicant screening, interview

    procedures, drug screen, philosophy, applicants are treated

    identically, wage negotiations

    * applicant rejections - pattern of rejections

    * transfers and promotions - qualifications verified, compliance

    with CAP program

    * terminations/disciplinary actions - history documented

    * performance evaluations - merit increase limitations, documented

    * compensation - data supporting grade structure, factors

    considered when grade established, wage structure is competitive,

    ATG 457 Spring 2001 - Chapter 23 - Internal and Operational Auditing, Page 7

    updating data, verify salary in personnel file agrees to payroll


    3. Verify quality of records is acceptable

    4. Verify maintenance of records in accordance with legal requirements

    5. Verify personnel policies are applied fairly to all employees

    * Verify salaries and wage adjustments of employees in personnel

    department correspond to corporate policy.

    * Review internal controls in H/R preventing inappropriate salary

    levels, benefits, or adjustments.

    * Review coordination between H/R and payroll

    6. Review any pending legal cases

    7. Review board minutes of Compensation Committee for H/R policy and

    related compensation issues

Objective 3 - Perform comparative analysis of corporate data with benchmarking


    1. Review turnover statistics, staffing statistics, cost per hire,

    advertising costs, human resource inventory, payscales and benefit


Objective 4 - Obtain and review management reports. Verify report data and

    assess quality of report.

    1. Document what data related to human resources is reported. For

    example: manpower analysis, turnover ratios, cost per employee of

    personnel programs, absenteeism, employment statistics, etc.

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