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INTERNAL AUDIT

WELCOME. INTERNAL AUDIT. SAI INDIA. Internal Audit ParimalPaul Director(Administration). So me conditions. Do not make any noise in the class. Do not ask any question during presentation except on the instruction of the faculty.

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INTERNAL AUDIT

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  1. WELCOME INTERNAL AUDIT SAI INDIA

  2. Internal Audit ParimalPaul Director(Administration)

  3. Some conditions • Do not make any noise in the class. • Do not ask any question during presentation except on the instruction of the faculty. • Do not gossip in the class and maintain silence in the class. • If you do not feel any interest you may go out of the class.

  4. Continued___ • Questions may be asked only after the presentation. • Please sign the Attendance Register. • Please fill up the “Training Feedback Form ”

  5. About Internal Audit

  6. Internal Audit Definition of Internal Audit:“An internal audit is an audit conducted by business, organization for the purpose of improving the business operation”. Improvement is fundamental to the purpose of internal Auditing.

  7. Internal Audit “According to the Institute of Internal Auditors (ITA): “Internal Audit means an independent, objective assurance and consulting activity deigned to add value and improve an organization’s operation. It helps an organization to accomplish its objectives by bingeing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance process.”

  8. What is Internal Audit • Is it Management Audit • Is it Efficiency Audit • Is it Performance Audit • Is it Propriety Audit • Is it Operations Audit • Is it System Audit

  9. Features of Internal Audit Internal Independent Assurance and Consulting Activity Designed to add value Improve an organisation’s operations Accomplish objectives Systematic, disciplined approach Evaluate and Improve Effectiveness Risk management, control and governance processes

  10. Scope of Internal Audit • Reliability and integrity of financial and operational information. • Effectiveness and efficiency of operations. • Safeguarding of assets. • Compliance with laws, regulations and contracts.

  11. Internal Auditors • Integral to Good Corporate Governance • Governance = Accountability

  12. Indian Initiatives - Corporate Governance • Desirable Code of Corporate Governance - CII (1998). • Kumar Manglam Birla Committee Report - SEBI (2000) • Companies (Amendment) Act, 2000 • Ganguly Committee Report-RBI (2002) • Naresh Chandra Committee Report-DCA (2002) • Narayan Murthy Report - SEBI (2003)

  13. Good Corporate Governance • Good corporate governance is the “right thing to do”, but improved shareholder returns helps to justify the cost. • Good corporate governance applies to all companies/organisations no matter where they are located. • Good corporate governance needs to be principle based rather than rule based.

  14. Core Attributes of Corporate Governance • Discipline • Transparency • Independence • Accountability • Responsibility • Fairness or equitable treatment • Social responsibility

  15. Evolution of Internal Auditing • (1947) Internal Auditing, “……. deals primarily with accounting matters but may properly deal with matters of an operating nature”. • (1957) Internal Auditing is, “….. the review of accounting, financial and other operations”.

  16. Evolution of Internal Auditing (1971) Internal Auditing is, “……the review of operations as a service to management”. (1981) Internal Auditing is an independent appraisal function established within the organisation of examine and evaluate its activities as a service to the oganisation.

  17. Evolution of Internal Auditing (2002) “Internal Auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”

  18. Range of Activities • Reviewing and appraising (Accounting/Finance/Operational controls) • Promoting effective controls at reasonable cost • Extent of compliance (Laws/Regulations/Policies/plans/procedures)

  19. Range of Activities (Contd.) • Assets are safeguarded and accounted • Reliability of management data developed within oganisation • Appraising quality of performance in carrying out assigned responsibilities • Recommending operating improvements

  20. Purpose of Internal Audit • Basic weaknesses of an organisation • Functions • Systems • External or internal relationships

  21. Purpose of Internal Audit(Contd.) • Incompatibility, inadequacy, contradiction, invalidity, inconsistency • Objectives • Strategy • Policy • Plan • Approach

  22. Benefits of Internal Audit • Renewed vigour • Greater efficiency • Higher effectiveness • Better quality • Reduction of waste • Higher productivity • Problems to be tackled • Low Productivity • High cost • Low competitive strength

  23. Who Should conduct Internal Audit • Department • Chartered Accountant in Practice • Management Consultant

  24. Qualifications of Internal Auditor • Chartered Accountant • Cost Accountant • Master in Business Administration • Engineer • Systems Analyst

  25. The Challenge or the Answer? • Offering assurance about the control system is challenging, especially when such assurances have not been offered previously. • It can go against IA’s instincts to offer any overall conclusions about the entire organisation, and audit resources are always limited.

  26. (Contd.) • In the wake of Enron, WorldCom and other recent financial reporting disasters though, these are just the services that more and more boards are demanding from internal auditing. • Whether or not to judge the appropriateness of organisation's objectives or the Board’s Strategies to achieve them.

  27. Whom Internal Auditor should Report • Managing Director • Board of Directors • Chairman • Audit Committee • Secretary (Ministry) • C&AG • DAI • DGAC

  28. Objectives of Internal audit • PROPER CONTROL: The purpose of internal audit is to keep proper control over business activities, when there is proper control there is maximum efficiency. • ACCOUNTING SYSTEM:The purpose of internal audit is to evaluate the accounting system. It is concerned with checking proper authority for transactions like purchase, retirement and disposal of fixed assets.

  29. (Contd.) • HELP MANAGEMENT: The purpose of internal audit is to help management by pointing out the weakness. • WORKING REVIEW: The purpose of internal audit is to review the working of business with a view to locate the points. • ASSET PROTECTION:The purpose of internal audit is to protect the assets. The proper record of assets must be there. Internal auditor can examine the valuation, verification and possession.

  30. (Contd.) • INTERNAL CHECK: The purpose of internal audit is to evaluate the internal check system. • FAIR STATEMENTS: The purpose of internal audit is to present a true and fair view of the financial statements by adopting the accounting principles

  31. (Contd.) • CHECK ERRORS:The purpose of internal audit is to detect the errors in accounting records by through scrutiny and checking and rectify mistakes to prepare accounts at the end of the year in order to help the external auditor. • DETECT FRAUDS: The purpose of internal audit is to detect frauds in the books of accounts. As the work of internal audit starts after the work of Accounting staff Accounting staff remains alert because there is no time gap between recoding and checking. Thus detection of fraud is possible.

  32. (Contd.) • DETERMINE LIABILITIES: The purpose of internal audit is to determine liabilities of employees. The duties are divided among the staff. It is easy to note the negligence on the part of employees. The internal audit can pinpoint the person responsible for carelessness. • HELP INDEPENDENT AUDIT: The purpose of internal audit is to help an independent audit. The external auditor can rely on internal auditor and there is no need of cent percent checking. In this way there is saving of time and money due to internal audit.

  33. (Contd.) • PERFORMANCE APPRAISAL: The purpose of internal audit is to check the performance of appraisal. The management must achieve the targets fixed in budgets and plans. The internal audit is a tool to evaluate the working of each management function. • PROVIDE SUGGESTIONS:The purpose of internal audit is to provide suggestions for improvement of business activities..

  34. (Contd.) • NEW IDEAS:The purpose of internal audit is to seek new ideas relating to products, marketing, finance and other business matters. The internal audit staff can provide new ideas about various business matters. The viable ideas can be put into practice for the benefit of the business. • USE OF RESOURCES:The purpose of internal audit is to determine the proper use of resources. The misuse of resources can increase the cost of doing business. The proper use of resources means that the management is efficient.

  35. (Contd.) • ACCOUNTING POLICIES: The purpose of internal audit is to examine the accounting policies. The understanding of accounting system and procedure is helpful to devise the effective audit plans and procedures. The internal auditor may find some weakness in the internal control. He can comment on accounting policies. • SPECIAL INVESTIGATION:The purpose of internal audit may be to conduct special investigation about any business matter. Internal audit can be used as a tool to note the effectiveness of management function.

  36. Role of Internal Auditor Role of Internal Audit include, monitoring assessing, analyzing organizational risk and control, and reviewing and confirming information and compliance with policies, procedures and laws and provide the executive management assurance that risks are mitigated and organization’s corporate governance is strong and effective. And, when there is room for improvement, internal auditors make recommendations for enhancing the possesses, policies and procedures.

  37. International Scenario Institute of Internal Auditors The function of this institute is to ensure that an organization meets its objectives through a systematic, disciplined objective approach for evaluating and improving the effectiveness of risk management, control and governance.

  38. Standards of the Institute of Internal Auditors Standards are the criteria by which the operations of an internal auditing department are evaluated and measured. The procedures listed above should reflect the implementation of the standards. • 100Independence– Internal auditors should be independent of the activities they audit. This is accomplished through organizational status (the direct reporting relationship to the Board) and objectivity in performing audits.

  39. (Contd.) • 200Professional Proficiency– Internal audits should be performed with proficiency and due professional care. Internal auditors should comply with professional standards of conduct; they should possess the knowledge, skills, and disciplines essential to the performance of internal audits. Internal auditors should be skilled in dealing with people and in communicating effectively; they should maintain their technical competence through continuing education.

  40. (Contd.) • Internal auditors should exercise due professional care in performing audits. This calls for the application of the care and skill expected of a reasonably prudent and competent internal auditor in the same or similar circumstances; it implies reasonable care and competence, not infallibility or extraordinary performance.

  41. (Contd.) • 300 Scope of Work– The scope of the internal audit should encompass the examination and evaluation of the adequacy and effectiveness of the organization’s system of internal control and the quality of performance in carrying out assigned responsibilities.

  42. (Contd.) The objectives of internal control are: • The reliability and integrity of information. • Compliance with policies, plans, procedures, laws, and regulations. • The safeguarding of assets. • The economical and efficient use of resources. • The accomplishment of established objectives and goals for operations and programs.

  43. (Contd.) • 400 Performance of Audit Work– Audit work should include planning the audit, collecting, analyzing, interpreting, and documenting information to support audit results, communicating results, and following up to ascertain that appropriate action is taken on reported audit findings.

  44. (Contd.) • 500 Management of the Internal Audit Department– The Director of Internal Audit (i.e., Internal Auditor) should properly manage the department so that audit work fulfills its approved general purposes and responsibilities and that the audit work conforms to the Standards for the Professional Practice of Internal Auditing.)

  45. Indian scenario Standards on Internal Audit Institute of chartered Accountants of India have issued the following Standards on Internal Audit (SIA): • SIA-1: Planning an Internal Audit • SIA-2: Basic Principles governing Internal Audit • SIA-3: Documentation

  46. (Contd.) • SIA-4: Reporting • SIA-5: Sampling • SIA-6: Analylitical procedure • SIA-7: Quality Assurance in Internal Audit • SIA-8: Terms of Internal Audit engagements • SIA-9: Communication with Management • SIA-10: Internal Audit evidence • SIA-11: Consideration of fraud in an Internal Audit

  47. (Contd.) • SIA-12: Internal Control evaluation • SIA-13: Enterprise risk Management • SIA-14: Internal Audit in IT environment • SIA-15: Knowledge of the entity and its environment. • SIA-16: Using the work of an expert • SIA-17: Consideration of laws and Regulation in an Internal Audit • SIA-18: Related parties.

  48. Different Types of Internal Audit • The Internal Auditor may perform the following different types of audits: A. Full Audit – Normally, full audits are required when an area has never been audited before, or significant changes have occurred subsequent to the last audit. A full audit requires completion of all of the following phases:

  49. (Contd.) • Preliminary Survey and Planning • System Documentation • Internal Control Evaluation • Audit Program • Audit Testing • Reports and Conferences

  50. (Contd.) B. General Audit – A general audit usually does not require the completion of all the phases of a full audit. The topics are usually conducted year after year and tend to require the same testing. There is no need to fully document the system and consider the impact of internal controls again. It is only necessary to ensure that the system has not drastically changed since the prior audit.

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