Integrity and Reliability
What is an internal audit? Internal Audit is among the fastest-growing but also most misunderstood professions in the world. Internal auditors assess the integrity and reliability of internal operating and financial information; systems designed to ensure compliance with those policies, plans, rules, regulations, and practices; and the means of protecting assets. Auditors are accountable for detecting and correcting problems, which may result from misappropriation, fraudulent activity, failure to report, and ineffective management of the organization’s financial resources. The audit function has broad responsibilities in a wide variety of organizations, not only in the UK.
Auditors are charged with assessing the effectiveness and appropriateness of accounting policies and practices. They must determine the cause of any anomalies they uncover and provide management with recommendations for correcting problems. They must document their findings and take action in a timely fashion. Auditors must comply with all of the applicable laws, including Regulation 4(a) Business Practices Act 1994 that authorizes them to undertake examinations and tests related to accounting matters and the Companies Act 1997 that authorize them to create reports concerning proceedings relating to the Company.
Most internal auditors are required to have knowledge of the activities of external auditors as well. The degree of interaction between the internal auditors and the external auditors will vary depending on the nature of their work and the size of the organization. Generally, internal auditors report directly to the company CPA or controller and the external auditors report to the organization’s chief accounting officer. In small companies, the CPA or controller may conduct the audit under their supervision. In larger companies, the accounting firm that is retained to perform the audit is responsible for conducting the audit.
Internal auditors do not write the accounting policy or the procedures; however, they often play an important role in drafting the principles of the code of accounting and in advising management regarding the effectiveness of their accounting policies. In addition, they will typically be responsible for collecting and interpreting the information necessary to support the content of the internal controls and procedures. In some instances, internal audits will be conducted on a periodic basis and at random. On the other hand, the majority of internal audits are performed at least once a year.
Process of Internal Auditing
There are two major components to the process of internal auditing. The first is the selection of an individual to conduct the review. A CPA with a Master Certified Financial Analyst (MCA) designation is the best candidate for this part of the process. Having a CPA with an accounting MBA (Master of Science in Accounting) also provides an added benefit of practical application experience to the independent review. The accountant will have a great deal of in-depth experience with the material covered under the various sections of the accounting standards and procedures, including control measures, reporting, management reporting, preventive management, regulatory reporting, risk management, international standards, internal controls, and audit management procedures.
The second step in internal audit is to interview the individuals that will be reviewed. Interviewing is a key element in internal auditing because it allows the professionals to gain a full understanding of the person(s) being interviewed. Individuals who conduct interviews are also considered candidates for what is called “fringe benefits,” which are rewards that internal auditors receive for their work. Therefore, organizations must take special care when considering whether or not to hire internal auditors and the specific duties they will perform.
The final step is the independent review of the audit functions and the activities of internal auditors. In the U.S., the IRS requires that these functions and activities are documented as part of an individual’s income tax return. This documentation becomes a part of the Federal Tax Lien List, and the agency is responsible for enforcing its tax obligations. The GDP principle also states that organizations must ensure that all of their audit functions are carried out in accordance with the requirements and guidelines established by the IRS. Because the services of internal auditors are required to work closely with and under the supervision of the IRS, they are very important to the overall performance of an organization.
There are many more factors that determine whether a particular internal audit function is required to be included in the annual examination process of an organization. In most cases, however, the principle that what is internal auditing is the most practical application is satisfied. An accurate assessment of an organization’s internal audit function, taking into consideration the factors related to the independence of the auditor, is the best way to establish what is not an appropriate internal audit function for any given company.