ACCA AA Syllabus C. Internal Control - Is there a need for Internal audit? - Notes ^{1 / 3}

This is where Internal Audit is useful

However...

It is not necessary in all situations e.g. Small, owner managed businesses

The need therefore depends on

1. Scale, diversity and complexity of the business

2. Number of Employees

3. Desire for risk control

If one is deemed necessary, but doesn’t currently exist, then the audit committee should make a recommendation to the board

The reason for the absence of an internal audit function should also be explained in the annual report

Reasons to have an IA department

• Value for money (VFM) audits

  • Internal audit may be able to offer VFM services or review potential upgrades systems

• Accounting system

  • While not complex, accounting systems must provide accurate information. Internal audit can audit these systems in detail ensuring that fee calculations, for example, are correct.

• Computer systems

  • Maintenance of computer systems is critical

    Internal audit could review the effectiveness of backup and disaster recovery arrangements

• Internal control systems

  • Internal audit could check whether basic control systems are needed, recommending implementation of controls where appropriate

• Effect on audit fee

  • Provision of internal audit may decrease the audit fee where external auditors can place reliance on the work of internal audit.

    This is unlikely to happen during the first year of internal audit due to lack of experience.

• Corporate governance

  • Internal audit could still recommend policies for good corporate governance

• Compliance with regulations

  • An internal audit department could help ensure compliance with regulations

• Assistance to financial accountant

  • Internal audit could therefore provide assistance in compliance with financial reporting standards, etc as well as recommending control systems

Against establishing of internal audit department

1. No statutory requirement

   • As there is no statutory requirement, the directors may see internal audit as a waste of time and money and therefore not consider establishing the department

2. Accounting systems

   • Many accounting systems are not necessarily complex so the directors may not see the need for another department to review their operations, check integrity, etc.

3. Family business

   • There is therefore not the need to provide assurance to other shareholders on the effectiveness of controls, accuracy of financial accounting systems, etc.

4. Potential cost

   • There would be a cost of establishing and maintaining the internal audit department

5. Review threat

   • Some directors may feel challenged by an internal audit department reviewing their work (especially the financial accountant).

     They are likely therefore not to want to establish an internal audit department.