INTERNAL AUDITING Chapter 1 OVERVIEW OF INTERNAL AUDITING ©2015 McGraw-Hill Education (Malaysia) Sdn Bhd Learning Objectives After going through this chapter, you should be able to: • • • • • • 2 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. ©2015 McGraw-Hill Education (Malaysia) Sdn Bhd 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. 3 ©2015 McGraw-Hill Education (Malaysia) Sdn Bhd 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!! 4 ©2015 McGraw-Hill Education (Malaysia) Sdn Bhd 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. 5 ©2015 McGraw-Hill Education (Malaysia) Sdn Bhd 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 independent accounting distinctive discipline. profession. Once acted adversary. 6 as as a auditee’s Guides to improve operations; seeking to maintain a cooperative working relationship with clients and auditees. ©2015 McGraw-Hill Education (Malaysia) Sdn Bhd Internal Auditor Vs. External Auditor INTERNAL AUDITOR Reporting responsibility Status Stakeholder Independent status Responsibility towards fraud 7 EXTERNAL AUDITOR Reports to audit committee/board of directors Reports to shareholders In general, part of an organization’s employees (at times, it can be outsourced) Is an independent contractor, a third party Serves needs of an organization Serves third party needing reliable financial performance report Is independent of the activities audited, but is ready to respond to the needs and desires of all elements of management. Is independent of management and the board of directors, both in fact and mental attitude. Is directly involved with the prevention and detection of fraud in any form or extent in any activity reviewed. Is incidentally concerned with the prevention and detection of fraud in general, but is directly concerned when financial statements may be materially affected. ©2015 McGraw-Hill Education (Malaysia) Sdn Bhd Internal Auditor Vs. External Auditor (cont.) Scope of work INTERNAL AUDITOR EXTERNAL AUDITOR Evaluate governance, control and risk management processes to assure the accomplishment of entity goals and objectives. 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 activities continually by focusing on future events. 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. Not necessary, but may acquire a Certified Internal Auditor (CIA). 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). Timing and frequency of audit Professional qualification 8 ©2015 McGraw-Hill Education (Malaysia) Sdn Bhd 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 9 ©2015 McGraw-Hill Education (Malaysia) Sdn Bhd 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 10 ©2015 McGraw-Hill Education (Malaysia) Sdn Bhd END Chapter 1 ©2015 McGraw-Hill Education (Malaysia) Sdn Bhd