How does internal auditing maintain its independence and obj

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BALASUBRAMANYA B N

CCI STUDENT....

44687 Points Joined January 2009

ndependence & Objectivity

"The internal auditor occupies a unique position he or she is employed by the management but is also expected to review the conduct of management which can create significant tension since the internal auditor's independence from management is necessary for the auditor to objectively assess the management s action, but the internal auditor's dependence on the management for employment is very clear."

Therefore, the internal audit activity should have a mandate through a written audit charter that establishes its purpose, authority, and responsibility to support its independence and objectivity within an organization.

Internal auditors are independent when they render impartial and unbiased judgment in the conduct of their engagement. To ensure this independence, best practices suggest the CAE should report directly to the audit committee or its equivalent. For day to day administrative purposes, the CAE should report to the most senior executive (i.e., the chief executive officer [CEO]) of the organization. The CAE should have direct communication with the audit committee which reinforces the organizational status of internal auditing, enables full support and unrestricted access to organizational resources, and ensures that there is no impairment to independence. This provides sufficient authority to ensure broad audit coverage, adequate consideration of engagement communications, and appropriate action on recommendations. Independence is further enhanced if the CAE reports to the board through its audit committee on the planning, execution, and results of audit activities. The audit committee is also responsible for the appointment, removal, and fixation of compensation of the CAE. The committee should safeguard the independence by approving the internal audit charter and mandate periodically.

Objectivity is a mental attitude which internal auditors should maintain while performing engagements. The internal auditor should have an impartial, un-biased attitude and avoid conflict of interest situations, as that would prejudice his/her ability to perform the duties objectively. The results of internal audit work should be reviewed before they are released in order to provide a reasonable assurance that the work has been performed objectively.

Internal auditors should not assume any operational responsibility. Objectivity can be presumed to be impaired when internal auditors perform an assurance review of any activity for which they had any authority or responsibility within the past year or a period significant enough to influence their judgment or opinion. Internal auditors should not accept gifts or favors from others such as employees, clients or business associates.

The internal auditors should adopt a policy that endorses their commitment to abiding by the Code of Ethics, avoiding conflicts of interest, disclosing any activity that could result in a possible conflict of interests. Staff assignment of internal auditors should be rotated periodically whenever it is practicable.

Replies (2)

BALASUBRAMANYA B N

CCI STUDENT....

44687 Points Joined January 2009

How do internal and external auditors differ and how should they relate?

Internal and external auditors have mutual interests regarding the effectiveness of internal financial controls. Both professions adhere to codes of ethics and professional standards set by their respective professional associations. There are, however, major differences with regard to their relationships to the organization, and to their scope of work and objectives.

The internal auditors' are part of the organization. Their objectives are determined by professional standards, the board, and management. Their primary clients are management and the board. External auditors are not part of the organization, but are engaged by it. Their objectives are set primarily by statute and their primary client - the board of directors.

The internal auditors scope of work is comprehensive. It serves the organization by helping it accomplish its objectives, and improving operations, risk management, internal controls, and governance processes. Concerned with all aspects of the organization - both financial and non-financial - the internal auditors focus on future events as a result of their continuous review and evaluation of controls and processes. They also are concerned with the prevention of fraud in any form.

The primary mission of the external auditors is to provide an independent opinion on the organization's financial statements, annually. Their approach is historical in nature, as they assess whether the statements conform with generally accepted accounting principles, whether they fairly present the financial position of the organization, whether the results of operations for a given period of time are accurately represented, and whether the financial statements have been materially affected.

The internal and external auditors should meet periodically to discuss common interests; benefit from their complementary skills, areas of expertise, and perspectives; gain understanding of each other's scope of work and methods; discuss audit coverage and scheduling to minimize redundancies; provide access to reports, programs and working papers; and jointly assess areas of risk. In fulfilling its oversight responsibilities for assurance, the board should require coordination of internal and external audit work to increase economy, efficiency, and effectiveness of the overall audit process.

BALASUBRAMANYA B N

CCI STUDENT....

44687 Points Joined January 2009

Is it mandatory to have an internal audit activity?

Whether an organization is required to have an internal audit activity or not depends on the respective regulatory requirements that govern the organization. In the United States, the New York Stock Exchange (NYSE) requires publicly traded companies to "maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company's risk management processes and system of internal controls." This requirement was effective October 31, 2004. Stock exchanges throughout the world have their own norms governing such companies, and some have implemented requirements similar to those of the NYSE.

Although private companies - those not publicly listed - are not required to have internal auditing, many of them have established an internal audit activity as one of its core organizational governance elements.

A well functioning, adequately resourced internal audit activity that works collaboratively with management and the board is a key resource in identifying risks and recommending improvements to an organization's governance, risk management, internal controls, and operations. The internal auditors' unique perspective of independence and objectivity, knowledge of the organization, and understanding and application of sound consulting and audit principles make them ideal for this role.