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Standards on Internal Audit
Business Risk ServicesChennaiTraining SessionSeptember 24, 2011
- Praveen Kumar , Assistant Manager
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Contents
1. Internal AuditIndian Scenario
2. Statutory Requirement for Internal Audit
3. Standards on Internal Audit
4. Important Requirements of the Standard
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We all know what is an Internal Audit?
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ICAI Definition of Internal Audit
Internal audit is an independent managementfunction,
involving a continuous and critical appraisalof the
functioning of the entity
to suggest certain improvementsandvalue additions
to strengthen thegovernancemechanism of the entity
includingstrategic risk managementand internal control system
to provide assurance regardingtransparency in reporting.
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Is Internal Audit MANDATORY?
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Companies (Auditor's Report) Order,2003. Clause (vii) requires the auditor to
report as follows:
Whether the Company has aninternal audit system
commensurate with itssize andnature of business
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Other statutory requirements of internal
audit
IRDA (Investment) (Fourth Amendment) Regulations, 2008has introduced requirements of quarterly internal audit forinsurers.
The Securities and Exchange Board of India has mandated
complete internal audit on a half-yearly basis for stockbrokers/trading members/ clearing members.
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Other statutory requirements of internal
audit
Compliance to provisions of Clause 49 of the listing agreementwhich imposes duties on Audit Committee to review anddiscuss with the internal auditors on the internal controls ofthe companies.
Section 292A of the Companies Act, 1956, requires public
companies having paid up capital not less than Rs. 5 crorestoconstitute a committee of the Board, i.e., the AuditCommittee and also requires internal auditors to attend theaudit committee meetings
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Should only Chartered Accountants be
Internal Auditors?
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Is there any statutory requirement that
only a Chartered Accountant beappointed as Internal Auditor?
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YES!
Which Act? Which section?
Section 581ZF of the Companies Act, 1956 requires that every Producer Company
shall have internal audit of its accounts carried out by a Chartered Accountant
Then for OTHER COMPANIES??
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No Statutory Requirement that only a
Chartered Accountant be appointed asInternal Auditors!
But In India, as a practice a Chartered
Accountant is appointed as an internal
auditor
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As Chartered Accountants are generally
appointed as Internal Auditors ICAI has
issued the Standards on Internal Audit toregulate and provide guidance to
members
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Applicability of Standards of Internal
Audit
While carrying out Internal Audits, it shall be the dutyof themember to comply with the requirementsof the internal auditstandards.
If for some reason, member of the institute has not able tocomply to the requirement of the standards, the reportshould draw attention to material departures
Non compliance to the above requirements may result inprofessional misconduct
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Standards on Internal Audit issued by
ICAI17 Standards
1. Planning an Internal Audit
2. Basic Principles Governing InternalAudit
3. Documentation
4. Reporting
5. Sampling
6. Analytical Procedures
7. Quality Assurance in Internal Audit
8. Terms of Internal AuditEngagement
9. Communication with Management
10. Internal Audit Evidence
11. Consideration of Fraud in an InternalAudit
12. Internal Control Evaluation
13. Enterprise Risk Management
14. Internal Audit in an InformationTechnology Environment
15. Knowledge of the Entity and itsEnvironment
16. Using the Work of an Expert
17. Consideration of Laws and Regulationsin an Internal Audit
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SIA 3Documentation
What is to be documented:
Matters which provide evidence that the audit was carried out as per the standardsand support his findings
Why documentation?
aids in planning and performing the internal audit
aids in supervision and review of the
provide evidence of the internal audit work performed to support the internalauditors findings and opinion.
aid in third party reviews
provide evidence of the fact that the internal audit is performed inaccordance terms of engagement
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SIA 3Documentation
Form and content of documentationInternal audit documentation should record the
internal audit charter,
the internal audit plan,
the nature, timing and extent of audit procedures performed, and
the conclusions drawn from the evidence obtained
Audit documentation to include all aspects of the engagement
Engagement acceptance;
Engagement planning; Risk assessment
Review of findings
Communication and follow up
Documentation to also contain who prepared the work paper, who reviewed the work paper. Thepreparer and reviewer are required to sign off the work paper
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SIA 3Documentation
Time limit for completion of documentationThe internal audit file should be assembled within sixty daysafter the signing of theinternal audit report.
Ownership
The work paper documents obtained during internal audit is the property of theinternal auditor.
Retention of work papers
Audit documentation to be retained for a period of seven years
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SIA 4Audit Report
Basic elements of Internal Audit Report1. Title;
2. Addressee;
3. Report Distribution List;
4. Period of coverage of the Report;
5. Opening or introductory paragraph:
identification of the processes/ functions and items of financial statementsaudited; and
a statement of the responsibility of the entitys management and the
responsibility of the internal auditor;6. Objectives paragraph - statement of the objectives and scope of the internal
audit engagement;
7. Scope paragraph (describing the nature of an internal audit):
8. Executive Summary, highlighting the key material issues, observations, controlweaknesses and exceptions;
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SIA 4Audit Report
Basic Elements of Internal Audit Report9. Observations, findings and recommendations made by the internal auditor;
10. Comments from the local management;
11. Action Taken ReportAction taken/ not taken pursuant to the observations
made in the previous internal audit reports;12. Date of the report;
13. Place of signature; and
14. Internal auditors signature with Membership Number.
Standard also suggests to include a clause on Restriction on usage and report circulation otherwiseto the intended recipients
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SIA 5Sampling
What is Audit Sampling:
"Audit sampling" means the application of audit procedures to less than 100% of the items within an account balance or class of transactions
to enable the internal auditor to obtain and evaluate audit evidence about somecharacteristic of the items selected
in order to form a conclusion concerning the population;
Sampling risk means
the risk that from the possibility that the internal auditors conclusions, based on
examination of a sample may be different from the conclusion reached if the entire population was
subjected to the same types of internal audit procedure.
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SIA 5Sampling
TolerableError
Considerations whendetermining the sample size
Smaller sample sizes are considered when the population is expected to be error free
Smaller the tolerable error, greater the sample size to be
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SIA 5SamplingSample Size Table
Smaller sample sizes are considered when the population is expected to be error free
Smaller the tolerable error, greater the sample size to be
Frequency of control activity
Minimum sample size
Risk of failure
Lower Higher
Annual 1
Quarterly (including period- end, i.e., +1) 1+1 1+1Monthly 2 3
Weekly 5
Daily 15 25
Recurring manual control (multiple times perday) 25 40
SIA 5 S li S l S l i
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SIA 5SamplingSample SelectionMethodology
Using
RandomNumber
Generators
SystematicSelection
HaphazardSelection
BlockSelection
SIA 5 S li D i
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SIA 5SamplingDocumentationRequirements1. Relationship between the design of the sample vis a visspecific audit objectives, population
from which sample is drawn and the sample size.
2. Assessment of the expected rate of error in the population to be tested vis a visauditorsunderstanding of the design of the relevant controls.
3. Assessment of the sampling risk and the tolerable error.
4. Assessment of the nature and cause of errors.
5. Rationale for using a particular sampling technique and results thereof.
6. Analysis of the nature an cause of any errors detected in the sample.
7. Projection of the errors found in the sample to the population.
8. Reassessment of sampling risk, where appropriate.
9. Effect of the sample results on the internal audits objective(s).
10. Projection of sample results to the characteristics of the population.
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SIA 10Audit Evidence
The internal auditor should, based on his professional judgment, obtain sufficientappropriateevidence to enable him to draw reasonable conclusions therefrom on which to base his opinionor findings.
Sufficient evidenceSufficiency refers to the quantum of evidences
Appropriate evidence Appropriateness relates to relevance of the evidences
Internal Auditors judgment as to what is sufficient and appropriate internal audit evidence is
influenced by:
1. The materiality of the item.
2. The type of information available.
3. Degree of risk of misstatement which may be affected by factors such as :
The nature of the item.
The nature or size of the business carried on by the entity.
Situation which may exert an unusual influence on management.
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SIA 10Audit Evidence
Inspection ObservationInquiry and
Confirmation
AnalyticalReview
Computation
Methods of obtaining audit evidence:
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Let us follow SIA
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Any Questions?