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Internal Auditing: Assurance & Advisory Services

4th edition

Introduction to Internal Auditing

Chapter 1

Chapter 1: Introduction to Internal Auditing

Learning objectives

Understand the value proposition that stakeholders expect from the internal audit function.

Obtain a basic understanding of internal auditing and the internal audit process.

Understand the relationship between auditing and accounting.

Distinguish between financial reporting assurance services provided by internal auditors and those provided by independent outside auditors.

Become familiar with the internal audit profession and The IIA.

Understand the competencies needed to excel as an internal auditor.

Be aware of the various internal audit career opportunities it is possible to pursue.

Chapter 1: Introduction to Internal Auditing

The value proposition

Assurance = Governance, Risk, & Control

Insight = Catalyst, Analyses, & Assessments

Objectivity = Integrity, Accountability, & Independence

Chapter 1: Introduction to Internal Auditing

Definition of internal Auditing

Internal auditing is 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.

The IIA’s Definition of Internal Auditing states the fundamental purposes, nature, and scope of internal auditing:

Helping the organization accomplish its objectives.

Evaluating and improving the effectiveness of risk management, control, and governance processes.

Assurance and consulting activity designed to add value and improve operations.

Independence and objectivity.

A systematic and disciplined approach (specifically, the engagement process).

Chapter 1: Introduction to Internal Auditing

Objectives

An organization’s objectives define what the organization wants to achieve, and its ongoing success depends on the accomplishment of its objectives.

Strategic objectives are those goals that management sets specifically related to stakeholder interests. Throughout this textbook, the term objectives will be used when discussing what an organization wants to achieve and the term strategy when discussing the way management intends to achieve those objectives.

Operations objectives pertain to the effectiveness and efficiency of the entity’s operations, including operational and financial performance goals, and safeguarding resources against loss.

Reporting objectives pertain to internal and external financial and nonfinancial reporting and may encompass reliability, timeliness, transparency, or other terms as set forth by regulators, standard setters, or the entity’s policies.*

*Internal Control – Integrated Framework (Jersey City, NJ: Committee of Sponsoring Organizations of the Treadway Commission, 2013), 2.

Chapter 1: Introduction to Internal Auditing

Risk management, Control,

and governance

An organization cannot achieve its objectives and sustain success without effective risk management, control, and governance processes.

Risk management is the process conducted by management to understand and deal with uncertainties (risks and opportunities) that could affect the organization’s ability to achieve its objectives.

Governance is the process conducted by the board of directors to authorize, direct, and oversee management toward the achievement of the organization’s objectives.

Control is the process conducted by management to mitigate risks to acceptable levels.

Chapter 1: Introduction to Internal Auditing

A systematic and disciplined

approach

To truly add value and improve operations, internal assurance and consulting engagements must be performed in a systematic and disciplined manner. There are three fundamental phases in the audit engagement process:

Planning

Obtaining an understanding of the auditee or costumer

Setting the engagement objectives

Determining the required evidence

Deciding the nature, timing, and extent of the audit tests

Performing

Making inquiries, observing operations, inspecting documents, Gathering evidence, and analyzing the reasonableness of information

Evaluating the evidence gathered and reaching logical conclusions

Communicating

Providing the results of the assessments made of the information and documentation gathered

Chapter 1: Introduction to Internal Auditing

Auditing is not a subset of accounting.

Chapter 1: Introduction to Internal Auditing

The IIA is the internal audit profession’s global voice, standard-setter, and resource for professional development and certification.

Chapter 1: Introduction to Internal Auditing

The IIA offers many certifications that help internal auditors become more proficient and advance their careers.

Chapter 1: Introduction to Internal Auditing

Competencies needed by

Internal auditors

Characteristics of successful internal auditors:

Competence

Credibility

Connectivity

Communication

Courage

Chapter 1: Introduction to Internal Auditing

Internal audit career paths

Pathways into Internal Auditing

Directly out of college, particularly schools with IIA endorsed internal audit programs

From public accounting

As a rotational part of a management trainee program

Pathways out of Internal Auditing

Into financial or nonfinancial management positions

Into a position with a professional services firm that provides internal assurance and consulting services

Careers in Internal Auditing

Move up the ladder into a management position within one organization

Move up the ladder into management positions across different organizations

Move upward through the various levels in a professional services firm that provides internal assurance and consulting services