Best practice for Internal Audit

NotesVideoQuizObjective Test

Internal Audit is a department within the company which oversees internal control systems and ensures that procedures are in place to ensure good corporate governance

What does the Internal Audit department do?

Internal Audit provides assurance to the board by:

  1. Reporting on and monitoring the effectiveness of internal controls.

  2. Assisting with implementation of required accounting standards.

  3. Ensuring that laid down procedures are being followed.

  4. Liaising with external auditor to reduce time and expense of external audit.

  5. Ensures compliance with OECD Principles.

Who does it report to?

  • Internal Audit reports their findings to the Audit Committee (or Board if no Audit Committee).

Is it Independent?

  • The Internal Audit function will need to be professionally competent, sufficiently resourced and well organised in order to carry out its’ function effectively.

  • One of the key concepts surrounding internal audit is the independence of internal audit from management.

  • Although the internal audit department is paid for and part of the company, care must be taken to keep it objective and independent.

How is the Independence maintained?

Ways to keep internal audit independent are to:

  • Have them report to an independent committee i.e. the Audit Committee.

  • Ensure that the internal audit function is well regarded by other departments.

  • Have a ‘whistle blowing’ function for internal audit to report serious misconduct when found.

Remember that there is no legal requirement for an internal audit function and therefore the scope of the internal audit function will be set by the company

A question regarding Internal Audit on the exam may well focus on the independence of internal audit, so remember:

  • Internal Audit should report to the Audit Committee.

  • Scope of Internal Audit work should be determined by Audit Committee or chief internal auditor.

  • Controls should be established to avoid self review by internal auditors.

  • Staff should be rotated into different areas of work.

  • The head of internal audit should be sufficiently experienced and professionally qualified.

NotesVideoQuizObjective Test