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:
•
•
•
•
•
•
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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.
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©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!!
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©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.
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©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
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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
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©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
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©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
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©2015 McGraw-Hill Education (Malaysia) Sdn Bhd
END Chapter 1
©2015 McGraw-Hill Education (Malaysia) Sdn Bhd