Evolution of Internal Audit – Core
Role
• Unchanging Purpose
– 📄 Internal audit provides independent, objective
assurance and consulting services.
– 📊 Its goal is to improve organizational operations
and add value.
• Changing Methods
– 🔄 While the role stays consistent, the way it is
executed has evolved significantly over time.
Foundation of Modern Internal
Audit
• Birth of the Profession
– ⚖️ Institute of Internal Auditors (IIA) founded in
1941.
– 🎓 Marked the start of internal audit as a formal
profession.
• Influence of Industrial-Era Thinking
– 🏛️ Adopted organization theories focused on
centralization, hierarchy, rules, and division of
labor.
Rise of Standardization
• Audit Methodology
– 🔢 Internal audit adopted rigid, standardized
methods to align with industrial models.
– 🖊️ Checklists, audit programs, and repetitive
document reviews were common.
• Purpose of Standardization
– ✅ Focused on validating structure, control
effectiveness, and consistency in processes.
Hidden Risks of Standardization
• Loss of Creativity
– ️ Standardization limited auditors' creativity and
adaptability.
– ❌ The profession became unattractive to creative
thinkers.
• Over-Isolation
– ️ To preserve independence, auditors became
detached and avoided offering recommendations.
Organizational Change vs Auditor
Stagnation
• Business Transformation
– 🌐 Globalization, technology, and decentralization
reshaped business operations.
– 📈 ERP systems replaced manual controls;
decisions moved closer to local operations.
• Auditor Inflexibility
– ⛔ Many auditors failed to adapt, sticking to
outdated checklists and practices.
Loss of Relevance and Trust
• Perception Gap
– 💬 Audit continued focusing on outdated models,
ignoring real organizational needs.
– ️ Management saw internal audit as ineffective
and out-of-touch.
• Compliance Over Relevance
– 🔒 Auditors focused more on rules than strategic
or operational value.
Redundancy with External Audit
• Overlap with External Audit
– 📃 Internal audit mimicked external audit,
focusing on accounting and financial processes.
– ️ Efforts were seen as redundant given external
audit coverage.
• Materiality Gap
– 💸 Internal audit used lower materiality
thresholds, but often duplicated work already paid
for.
Turning Point – 1990s Onward
• Trigger Events
– ⚡ Dot-com bust and Sarbanes-Oxley Act (2002)
reshaped audit expectations.
– 🔵 Corporate governance and stakeholder needs
gained priority.
• Transformation Begins
– 🚀 Audit begins aligning more closely with
organizational strategy and stakeholder needs.
Modern Internal Audit
• Broadened Focus
– 🔍 Now addresses operations, compliance,
reporting, IT, fraud, and strategic risks.
– 🔢 Considers long-term implications and emerging
trends.
• Expanded Skillset
– ️💼 Needs professionals with business acumen,
communication skills, and tech proficiency.
Present-Day Challenges
• Lagging Progress
– ️ Many audit departments still focus on process
assurance, not strategic risk.
– ⚠️ Shift toward qualitative assessment is slow.
• Talent Shortage
– 💼 Lack of skilled internal auditors for the evolving
role limits progress.
The Path Forward
• Risk-Based Auditing
– 📊 Internal audit must align with organizational
goals using a risk-based approach.
– 🌟 This enhances audit relevance and impact.
• Integrated Auditing
– 🔹 Combines operational, financial, and IT
elements for a more complete evaluation.
– 🔎 Still underutilized, despite decades of
advocacy.
The Role of Standards
• Professional Practice Standards
– 🔲 IIA Standards provide a framework for internal
audit practices.
• Strategic Application
– ️ Standards must be applied with awareness of
broader organizational dynamics for maximum
impact.