Internal Audit - Role of Management and Internal Auditor in its successful and effective execution
WHAT IS INTERNAL AUDIT?
Internal Audit as the name implies is an audit which is got carried out by the internal management. Generally internal audit is carried out by the employees of the organisation who reports to the Finance head/board /Audit Committee. Now many of the organisations are getting the Internal Audit done by outside experts who are hired out by the management. Here one important thing is that Internal Audit is carried out on behalf of management who wants to know whether the operation of the organisation are being carried out as per the set principles/guidelines of management and whether the compliances as required by statues are being made timely or not.
Internal Audit has been defined by Institute of Internal Auditor (IIA) as- 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.
On analysis of above definition we bring out following characteristics of Internal Audit.
1. Internal Audit is to be done Independently
Internal Audit is an independent function which is being carried out on behalf of management for some specific objective. It is always preferred that Internal audit function should report directly to the board/audit committee so that independence of internal audit function is maintained and it may carry out the internal audit function effectively.
2. Internal Audit is done objectively.
It is very important that internal audit exercise is done with objective approach. An internal auditor should work without an prejudice approach and he should brings out his observations and evidences in an objective mode so that management may got some worth considering insight from the report.
3. An Internal Auditor works as a consultant and not as an executor.
It is a worth mentioning insight from the above listed definition that Internal Auditor works as a consultant to the organisation. His role is to show the path and accordingly management is to review his recommendations and take necessary actions on the areas of improvement suggested in Internal Auditor. An internal auditor should not be held responsible for failure of an action at management’s end.
4. Internal Audit is carried out to add value to the organisation and improve its operations
The objective of internal audit is not to find faults but to improve the operations of the organization. An internal auditors sits with the management representative and review out the actual result with the desired result. The internal auditor suggest out the areas of improvement to the management,
5. Internal Audit improves the effectiveness of risk management, control and governance processes.
Internal control, risk management and governance processes are applied in the organisation by the management for the smooth and successful operation. Internal Control, governance process and risk management practices effectiveness can be maintained only if these practices are being reviewed on a periodic basis. Internal Audit is the activity which assists the management in reviewing internal control, risk management and governance practices.
ROLE OF MANAGEMENT IN INTERNAL AUDIT
Management needs to play a very significant and pivot role in meaningful execution of Internal Audit. An internal Auditor needs to work very closely with the management representative to get the internal audit done. Generally, people do not treat an internal auditor favourably. Management of an organisation and Internal auditor should take various steps to make internal audit, a happy event for all. Here, some of the steps which may be taken by Management and Internal Auditor are listed below;
1. To declare/exhibit that Internal Audit is the Mandate of Top Management
To assist an internal auditor in achieving the objective, Management should show their commitment for the internal audit. It should be known to all employees that Internal audit is the mandate of Top management and all employee/associates are expected to give their full co-operation for the internal Audit.
2. To give the orientation of Internal Audit, Internal Control, Risk management and governance to the management
For smooth and successful execution of internal audit, it is necessary that all the management personals should be made aware about the importance of Internal Audit, Internal Control, Risk management and governance practices. They should also be made aware that internal audit is carried out to make their life easy and to identify the deviations from statutory laws and company policies and procedures.
3. To review out the internal Auditor report and recommendations and take necessary actions.
For smooth and successful execution of internal audit, it is necessary that the management should review out the internal auditor report and recommendation on periodic basis. Internal auditor report should be discussed not only at the board room or Audit committee meeting but it should also be acted upon at ground level.
ROLE OF INTERNAL AUDITOR
There are certain steps which should be taken by internal auditor as well for making the internal audit activity smooth and effective. Few of them are as listed below
Meeting with the Auditee
Before starting the internal audit, Internal Auditor should have a meeting with the auditee where he should explain the objectives of Internal audit. He should also discuss the internal audit plan with the auditee and get their consent for the schedule. Internal Auditor should be in constant touch of the auditee and if he found something grave, he should take management representation before reporting it out to the top management. Before finalizing his report, it is important for an internal auditor to discuss all his findings with the concerned auditee and take their representation on the findings.
Study of Company system, Policies, Procedures, processes, techniques
For carrying out the internal audit assignment in a meaningful manner, it is necessary for the internal auditor to study the company policies, procedures and processes. He should make thorough study about the company Internal Control system, risk management practices and policies. This will give him a insight about company’s policies, procedures and possible ares of improvements.
Support the findings with objective and conclusive evidences
It is very important for an auditor to be objective in his approach. An internal auditor should collect objective and corroborative evidences for supporting his findings.
Be polite, cooperative and humble
A successful Internal Auditor is one who is popular among the auditee. It is very necessary for an internal auditor to have good interpersonal skills. While dealing with auditee he should be humble, polite and co-operative. Here it is important aspect that being humble does not mean that he is to surrender his independency and objectivity; he needs to be humble while maintaining the two.
Internal Auditor and Management both are the two wheels of a mill. Internal audit is successful in achieving its objectively only when both of them work in tandem. The management of the organisation should show its high commitment towards its successful execution and Internal auditor too carry out the Internal audit assignment objectively.