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ADVANCED INTERNAL AUDITING-RELATIONSHIP MANAGEMENT
Prepared for Presentation By
Patrick Masarirambi
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Introduction In todays world, the internal auditors
need to have a variety of skills to be
successful. Not only do they have to begood in their traditional area ofcompetency like financial andgovernance expertise, analytical skills,
risk assessment but also be businesssavvy, have an eye towards creatingvalue, and provide a larger perspective.
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Introduction Soft skills are becoming crucial.
Operating managers are requesting
assistance from internal audit staff toimprove effectiveness and efficiency ofoperations. Findings are not treated asdeficiencies but as practices that can be
improved by modification jointlydeveloped by client and auditor workingtogether.
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Introduction To top it all and ensure that internal
audit is effective, communication is
most crucial. Sound governancerequires effective interaction among theboard, management, the external
auditor, and the internal auditor.
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Internal Audit and Audit
Committee The audit committee should be
composed of board members who have
the knowledge and experience of theorganisations business. They shouldhave the skills to evaluate financial andmanagement controls, and the ability,
experience, and willingness to act forthe good of the organisation and itsstakeholders.
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Internal Audit and Audit
Committee They should have the time to find out enough
about the organisation so that they caneffectively challenge the executive
management. A professional internal audit activity is a
major source of information to the board andits special committees. It provides assurance
on the effectiveness of governance, riskmanagement and internal control processes,covering strategic, market, credit, operationaland financial risks.
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Internal Audit and Audit
Committee The audit committee and the internal audit
team need to maintain a strong positiverelationship.
The chief audit executive has to report on itsfindings to the audit committee anydeficiencies that have been detected and the
audit committee also has to enquire in depthfrom internal audit into complex issues. Theinternal audit activity is answerable to theaudit committee and not management
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Internal Audit and Audit
Committee The chief audit executive should attend
audit committee meetings and discuss
the charter, review the audit plan,staffing requirements, audit findingsand status of implementation of
recommendations
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Internal Audit and Audit
Committee The audit committee has to assess the
performance of the internal audit team to
review whether the activity is effective andcapable to be the agent of the of the auditcommittee in the organization. It may alsoact as facilitator between the internal audit,
executive management and the statutoryauditors to ensure proper allocation of workand ensure good corporate governance.
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Relationship with
Executive Management Maintaining a balanced relationship with
the executive management is most
crucial and difficult for the internalauditor. For internal audit to beeffective, the relationship withexecutive management has to be
constructive. The relationship has to bebased on mutual confidence but itshould not be too friendly
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Relationship with
Executive Management Nowadays, operating managers are
requesting assistance from internal audit staffto improve effectiveness and efficiency ofoperations. Findings are not treated asdeficiencies but as practices that can beimproved by modification jointly developed byclient and auditor working together.
The chief audit executive should havefrequent meeting with the management toshare information.
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Relationship with
Executive Management Reports
Within the management, there are different
levels. The audit report has to be designed tosuit the interest, needs and requirements ofdifferent levels of management. All the levelsneed to know as to what is happening in the
areas of their concern and internal auditreport can serve as one of the vehicles ofinformation.
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Relationship with
Executive Management However the degree of detail required
by each is different. The local office
needs an in- depth report with all thedetails and documentation so thatfollow up actions /rectifications can betaken. The regional offices would need
general information on the operationsand performance of the local office.
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Relationship with
Executive Management The top management needs to be
informed of serious issues and
frauds and information onproblems across offices etc. Thus,as the levels go up the details
required are less.
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Relationship with
Executive Management For easy readability and distribution,
the report could have an executive
summary, a main report divided byfunctional areas and lastlyrecommendations. Thus, each level gets
focused information according to theirneeds.
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Relationship withExecutive Management
Oral communications
Formal written communications are necessary
and but informal communications cannot beignored altogether. It can help drawmanagements attention towards importantissues. Debriefings minimise the chance of
something important passing unnoticedbecause of other priorities and pressures.
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Relationship withExecutive Management
Overview
An audit report consists of details of the audit
assignment of the audited unit. At some pointit also needs to see things from a largerperspective- to focus on the forest ratherthan the trees. On the basis of recurring
observations and trends, it would be possibleto identify areas which need more attention,policy changes or guidance.
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Working with theStatutory Auditors
Internal audit and statutory audit havedifferent objectives. The primary
objective of statutory auditors is toexpress an opinion on accuracy andfairness of financial statements. Thefocus of the report is on objectivity,
accuracy and brevity. They focus onhistorical financial data. The objectivesof internal audit are much wider
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Working with thestatutory auditors
They are involved in operational audits,management audits, review of processes,practices & procedures and otherassignments.
However, the statutory auditors need tounderstand the functioning and operations ofthe enterprise and the internal controlsystems. Not only that, they have to includein their report an opinion on the state ofinternal controls in the organisations
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Working with theStatutory Auditors
Thus, if they co-ordinate their effortsthere would not be any overlapping nor
would there be any gaps. Every aspectof the organisation could be coveredwithout duplication of work andimprove service to management and
the audit committee. Internal andexternal auditors both are equallyimportant.
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Working with theStatutory Auditors
There should be sufficient liaison between theauditors .Both should share information
regarding scope, audit programme and auditfindings. However, several factors determinethe type of relationship. Some chief auditexecutives (CAEs) are of the opinion that the
relationship should be arms-lengthrelationship while others feel that thereshould be a close working relationship.
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Working with theStatutory Auditors
It is finally up to the organisation andthe auditors to decide as to what type
of relationship best fits an organizationtaking into account its resources andtime and issues
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Benefits of Co ordination
Varied strengths increase effectiveness
By the nature of their responsibilities, internal
auditors spend a lot of time working for thesame company. This gives them a betterunderstanding of the culture and working ofthe organisation. The external auditors on the
other hand have exposure to wider variety offinancial issues as they have multiple clients.
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Benefits of Co ordination
Increase in efficiency
Coordination increases efficiency. When the
audit is not properly coordinated, externalauditors may duplicate work alreadyperformed by the internal auditors.
Better audit coverage
It is expected that elimination of redundantwork will leave time and resources for betteraudit coverage.
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Benefits of Co ordination
Cost reduction
Coordination reduces the time and
efforts which the external auditor wouldexpend on redundant work thus,reducing the audit fees.
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Benefits of Co ordination
Better understanding of each otherswork
Coordination would imply that the auditorscommunicate and consult with each othertheir plans and findings. This will lead toclearer understanding of respective audit
roles and requirements and a betterunderstanding by each group of auditors
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Building Co-operation
Approval
External and internal auditors owe allegiance
to different set of people .The internal auditoris accountable to the management. When theexternal auditor needs assistance from theinternal auditor, he has to first inform the
management /governing body and seek theirapproval.
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Building Co-operation
Commitment
As discussed earlier, both the auditors
work with different objectives andresponsibilities. Given this situationwhen the need for coordination arises,
it requires commitment. They have toadjust and plan the work to satisfy eachothers needs
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Building Co-operation
Communication
Communication is sine qua non for success of
any coordination process. . There should befrequent and open communication betweeninternal and external auditors. They shoulddecide on timing and nature of
communication-it may be written or electronicor face to face or telephonic or combinationof whatever format is suitable.
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Building Co-operation
Trust
There needs to be mutual confidence
between both groups of auditors. Thisconfidence is enhanced when theauditors are members of professional
bodies and are bound by theirprofessional standards and code ofconduct..
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Building Co-operation
When the external auditor requiresdirect assistance or needs to rely on the
work in certain area, he may conductprocedures to get specific assurance.There also needs to be confidence that
any information exchanged is treatedprofessionally and with integrity
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Building Co-operation
Areas of co-operation
Internal control
Corporate governance
Reporting and financial statements
Compliance with lawsAnti Fraud measures
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Building Co-operation
Performance indicators
Testing
systems
programs
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Building Co-operation
Liaison between company and externalauditors
Ensure that all information, documentationis provided to internal auditor
Audit of dispersed organizations
Follow up on audit issues andimplementation of recommendations
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Relationship withRegulators
Internal Audit is gaining moreimportance with the regulators. The
role of Statutory Auditors is confined toreporting on financial accuracy andapplication of accounting principles and
standards.
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Relationship withRegulators
Market regulators are interested not only infinancial results but also concerned thatbusiness operations are conducted in a
manner so that all foreseeable risks areaddressed by appropriate internal controlmechanism and three are no revenueleakages.
Internal Auditing is applicable to: - Listed Company Other unlisted Companies
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Relationship withRegulators
Only the internal audit activity can provide aobjective assurance to the market regulatorthat
the operations are in compliance with lawsand regulations set up by them,
internal control exists in all the key risk areas, internal control framework is functioning
effectively and gaps if any are identified reported and
prompt action is taken to rectify the same.