Implementation Recommendation
INTERNAL AND EXTERNAL AUDITS
Internal and external audits processes
The Internal Audit Introduction
The internal audit utilizes the organization resources in carrying out the exercise. There are four main stages of internal audit
Audit Planning
Audit Fieldwork
Audit Reporting
Audit follow-up review
Every successful audit is based on sound planning and an atmosphere of constructive involvement and communication between the client and the auditor. The four audit stages are conducted in that order as shown in the slide. The above is what generally happens to our organization.
2
The Internal Audit Planning
Audit notification distribution
Conducting a Pre-Audit meeting
Interviewing departmental personnel
Reviewing procedures and policies
Documenting and understanding the business processes
Performing Risk assessment
Preparing audit program that is detailed
Audit budget preparation
Selection of auditing samples (Edds,1981)
During the planning portion of the audit, the auditor notifies the client of the audit(the departments to be audited within the organization), discusses the scope and objectives of the examination in a formal meeting with organization .management, gathers information on important processes, evaluates existing controls, and plans the remaining audit steps.
3
The Internal Audit Fieldwork
Reviewing of support document
Conducting Analysis
Interviewing departmental personnel again to get detail
Identifying exceptions
Identifying Improvement recommendations
Preparation of audit findings and comments
Department writes a response and a proposed corrective action
The fieldwork concentrates on transaction testing and informal communications. It is during this phase that the auditor determines whether the controls identified during the preliminary review are operating properly and in the manner described by the client. The fieldwork stage concludes with a list of significant findings from which the auditor will prepare a draft of the audit report.
4
The Internal Audit Reporting
Draft report issuing
Discussion of the draft report with the concerned department
Final report issuing
The report is precise, factual, concise, clear and presented with the right tone
The final report distribution to all the relevant organization top management.
Our principal product is the final report in which we express our opinions, present the audit findings, and discuss recommendations for improvements. To facilitate communication and ensure that the recommendations presented in the final report are practical, Internal Audit discusses the rough draft with the client prior to issuing the final report.
5
External Audit Introduction
External refers to the periodic audits conducted by an independent firm or a person to determine the true position of the organization financially
The organization makes sure that audit firm or person has no connection whatsoever with any stakeholder of the organization.( Felix & Gramling, 2001).
An external auditor is an independent, third party professional who performs an impartial review of the financial records of a certain organization. He or she typically reports to an audit committee composed of company executives. He is responsible for evaluating payroll, accounting, and purchasing records. He also looks at the organisation’s loans and financial investments to identify any irregularities.
6
The External Audit
Auditor appointment
Project acceptance
Program of the audit
Gathering of evidence
Audit Reporting
The findings of an external audit can strongly influence the reputation of the company. There can be serious consequences if the conclusions about debts, assets, tax responsibilities, and payments do not match the organisation’s own statements. External auditors will rate the client depending on their review. An unfavourable rating and this can influence if they can stay in business.
7
Difference between External and Internal Audit
Internal Audit
They are the employees of the organization
Need to be checked keenly as they are aware of the organization system (Al-Twaijry, & Gwilliam, 2004).
External Audit
They are sourced outside the organization and not the employees of the organization
They are not aware of the systems and no need of scrutiny
The main difference between an internal and external auditor is the one that employs them. An independent auditor works for an organization but he is not employed by it. Usually, an organization will appoint external auditor and will work on a per project basis although some organization will retain the services of external editors that they’ve used in the past. On the other hand, an internal auditor works for the organization that he reviews.
8
Auditing Value addition
Comes with many disciplinary skills
Brings about effective alignment in the organization
Effective data analysis and insight
Control, governance and effective risk management
The value of the Internal Audit function is becoming increasingly critical to the strong corporate governance, risk management, effective internal control, and efficient operations of any organization. A good auditor will come equipped with cross-disciplinary skills, allowing him/her to add tangible value out of the audit work. Top class audit departments are no longer carrying out their audits using manual processes. Auditors are able to improve the business processes around Risk Management, Control and Governance processes by using their quantitative skills and risk knowledge.
9
References
Edds, J. A. (1981). Internal and External Audit. In State Audit (pp. 164-182). Palgrave Macmillan, London.
Felix Jr, W. L., & Gramling, A. A. (2001). The contribution of internal audit as a determinant of external audit fees and factors influencing this contribution. Journal of Accounting Research, 39(3), 513-534.
Al-Twaijry, A. A., Brierley, J. A., & Gwilliam, D. R. (2004). An examination of the relationship between internal and external audit in the Saudi Arabian corporate sector. Managerial Auditing Journal, 19(7), 929-944.