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Tutorial on internal auditing
External audit and good corporate governance
Effectiveness of internal auditing
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Introduction
Internal Audit is an independent objective assurance and consulting activity designed to add value and improve operations. It helps accomplish objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of governance, risk management, and control processes.
Internal Audit is organized to examine and evaluate current and proposed processes and controls. The objectives of Internal Audit are to:
1. Promote effective and efficient controls through audits, reviews and objective consulting arrangements.
2. Pursue effective corrective action to the root cause of significant issues.
3. Assist Senior Management in the effective discharge of their duties by furnishing them with analysis, appraisals
All employees are requested to assist Internal Audit in fulfilling their audit, review and consulting activities. Internal Audit will also have free and unrestricted access to the Senior Management and/or other regulatory agency. Documents and information given to Internal Audit during a review will be handled in the same prudent and confidential manner as by those employees normally accountable for them and as require by regulation.
Responsibility
The scope of Internal Audit encompasses the examination and evaluation of the adequacy and effectiveness of the organization 's governance, risk management and control systems. In addition, Internal Audit will examine and evaluate the quality of performance in carrying out assigned responsibilities to achieve the organization 's stated goals and objectives. More specifically the scope will include:
1. Reviewing the reliability and integrity of financial and operating information and the means used to identify, measure, classify, and report such
At a minimum, those general audit procedures will include guidance related to audit planning, scheduling, risk and control assessment, reporting, and accountability.
Quality Assurance and Improvement Program
The Director of Internal Audit will develop a quality assurance and improvement program that complies with the Standards. An external quality assessment will be conducted at least once every five years.
Periodic Assessment
On an annual basis, the Director of Internal Audit will assess whether the purpose, authority, and responsibility as defined in this charter, continue to be adequate to enable Internal Audit activity to accomplish its objectives. The result of this periodic assessment should be communicated to Senior
Internal controls is defined as a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance
The specific obligations in this case would include monitor corporate governance activities and compliance with organization policies, and assess audit committee effectiveness and compliance with regulations
These methods include the structure of the CPA firm and the procedures established by the firm. The CPA firm follows its specific quality control procedures to help the firm meet auditing standards consistently on every audit engagement. Quality control policies and procedures should be documented by each CPA firm, and the procedures should focus on the size of the firm, the number of offices, and the nature of the practice. The quality control procedures that firms use should address six elements such as leadership responsibilities for quality within the firm, relevant ethical requirements, acceptance and continuation of clients, human resources, engagement performance, and monitoring. CPA firms must also be enrolled in an AICPA approved practice-monitoring program or peer review in order for other CPA firms to determine and report if its quality control system is in effect and
The SOX act section 404 requires that the auditor assess the company’s management of internal controls and report on it. The act requires that a company include a copy of the internal controls in the year end annual report. All financial statements must be certified by a company’s management. (Coustan, 2004)
The purpose of the internal audit is to protect Costco 's assets through evaluating the acceptability and efficiency of internal controls; recognizing areas of possible risk, revenue improvement and/or cost reductions; and making sure transactions are authorized, completed, and logged as proposed. The internal auditors are accountable for guiding audits of all Costco’s local and global activities, its affiliates, and other entities Costco conducts business with as deemed necessary by management.
Objectivity also needs to be evaluated to make sure the internal audit is reliable. The internal audit needs to be free of conflicting responsibilities as well
The oversight responsibilities of the board, the CAE lacking of expertise or broad understanding of financial controls and responsibilities, and the understaffed internal audit functions lacking of independence and direct access to the board of directors contributed to the absence of internal controls. To begin with, the board should be retrained to achieve financial literacy to review financial reporting. Other than attending formal meetings, the board of directors should be more involved with the management. For the Audit Committee, the two members who were recruited as acquaintances to Brennahan need be replaced with experts who are more sufficiently knowledgeable about accounting rules beyond merely “financially literate”. Furthermore, the internal audit functions need to expand with different expertise commensurate with the expanded activities of the organization, testing financial reporting rather than internal controls from an operational perspective. The CAE should be more independent and proactive to execute audit plans, instead of following orders from the CFO, and initiate a direct and efficient communication between internal audit and audit
Firstly, there is a mandatory assessment of the board’s performance every two years by an independent auditor. This is to ensure accountability. Additionally, there is now required online posting of board members’ and staffers’ travel expenses to lend to transparency.
According to the article authored by Mark Rupert, what are the seven best practices in the roles and responsibilities of an internal audit function?
Firstly, there is no external quality or process auditors. Frequently, the internal auditors faced great pressure to declare quality defects. For example the QC should shut down the affected product lines when they found defects, but in real cases, they are hardly dared to do so.
In this approach, the focus will be on the internal control objectives so that the control design can be well assessed. First, the auditor will define the control measures and objectives and then find out which measures already installed meet the objectives (Tyrer, 1994).
The part of the unit known as the internal affairs department is under the inspection unit section. The main job of an internal affairs investigator entails keeping a close eye on department’s policies and procedures by conducting “internal quality control inspections” (Dempsey, Frost, & Carter, 2014) (p. 99). Other duties that one must consider when working in this area of the unit according to (Dempsey, Frost, & Carter, 2014) is to focus on suspected “misconduct and corruption of other officers” (p. 99). They must ensure that all employees within the department are adhering to the rules and conducting themselves in the manner that the system, guidelines and policies requires. Another main objective that the internal affairs division has is to uphold the integrity of the department. In fact, according to (Dempsey, Frost, & Carter, 2014), “they are the police that police the department” (p. 247).They do so by making any improvements and putting new practices into practice and making sure officers are abiding in those protocols and
Audit is a process to evaluate and review the accounts and financial statement objectively. We can divide it into internal auditors and external auditors. Internal auditors have a inner knowledge of business process. Auditor has access to the much confidential information and all levels of management. But they may lose their judgement and they are not acceptable by the shareholder. “The overall objective of the external auditors is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to report on the financial statements in acco...
...e financial reports and statements are correct. This auditing will be conducted by auditing department of the organization, even may be done by an independent auditor who is not part of the organization, and sometimes public officials are elected. In case of unmatched consequences the organization need to give explanation on the misrepresentation of wrong statements. Auditors purpose is then to ensure that the misrepresentations are corrected, then maintain accurate, reliable financial documents and statements.
Overall, the company is having ineffective controls regarding different departments and in the whole organization. An effective internal audit department should be established within the organization which should test the effectiveness of these controls on regular basis and make it sure that all controls are working effectively and efficiently with the different departments of the organization. Also the Internal auditor should implement the most effective processes and measures to prevent and detect the fraud, corruption and non compliance with the laws and regulations in the organization. Establishment of internal audit committee would be helpful in this regard which comprises of executive and non executive directors.