CORPORATE GOVERNANCE & INTERNAL AUDIT

INTERNAL AUDIT

The UK combined code of corporate governance and the US Sarbanes Oxley Act has emphsized upon organizations to have an internal audit functions, for an orderely and efficient conduct of the business and to prevent and detect fraud and errors in the organization.

We have seen that two factors which contribute strongly to good corporate governance are:

• The way the board is structured.
• Mechanisms to ensure that management is subject to checks and balances which ensure that managements action are review either by:

          *       A supervisory board or
          *       Non-executive directors acting through board sub-committiees.
As we all very well, however:

• The external auditor's role is to form an opinion that whether or not the statutory financial statements give a true & fair view and they cannot, indeed they must not be involved in the operation of the business.
• The role of those charged with governance is of a high level, supervisory nature, so that they too cannot become involved with monitoring the detail of how well the company is run.

Unfortunately, if no one considers how well the company is actually being run in practise, none of these mechanisms will have any impact. There is therefore a need for a separate department within the company who can check that:

• Systems are operating efectively
• The procedures put in place to delicer good governance really worked.

In large public company, therefore there is need for internal audit.
In small owner managed business there is unlikely to be a need for internal audit because the owners are able to exercise more direct control over operations, and are accountable to fewer stakeholders.

SCOPE OF INTERNAL AUDIT

Value for Money Audit (VFM) is concerned with evaluating 3 'Es'.

• Economy buying the resources needed at the cheapest cost.
• Efficiency using the resources purchased as wisely as possible.
• Effectiveness Doing the right things and meeting the organization's objectives.

Information Technology Audit This involves testing controls within the computer systems of the business, Areas which might be the subject of audit include:

• Systems development process.
• Asset management
• Data base management system
• E-business
• Networks
• Access controls

Financial Internal Audit This was the traditional role of internal audit. it involved gathering evidence (mainly within the company's record's) to substantiate the information in the management accounts and financial statements.

Operational Internal Audit are audits of the operational process of the organization. Their prime objective is the monitoring of management's performance, ensuring company policy is adhered to. They can also be called management or efficiency audits.

ROLE OF AUDIT COMMITEE

• Monitor & review the effectiveness of internal audit function.
• Appointment & termination of head of internal audit department.
• Review & assess the annual audit plan and work of internal audit function.
• Meet the head of internal audit function at least once a year without closed & secured meeting.

OUTSOURCING INTERNAL AUDIT

Increasingly companies are outsourcing their internal audit function to accountancy firms.

ADVANTAGES:-

• Increased independence of internal auditors.
• Relevant accounting & auditing skills.
• Increased reliability.
• Risk of staff turnover is passed to the outsourcinf firm.
• Access to market place technologies, e.g. audit methodology software without associated costs.

DISDAVANTAGES:-

• Cost to company.
• Limited knowledge of specific entity.
• Independence issues if external auditor provides internal auditor function.
• Lack of control over standard of service.
• Flexibility and availability may not be as high as with an in-house function.

COMPARISON BETWEEN INTERNAL & EXTERNAL AUDITING

Internal Auditing
Objective:- Examining and Evaluating the financial statements.
Qualification:- No formal qualifications required.
Report To:- Management/Directors.
Status:- Employee of company/Contracted by company (outsourcing).

External Auditing
Objective:- Giving an opinion on the financial statements.
Qualification:- Must be a member of Recognized Supervisory Body.
Report To:- Shareholders/Members.
Status:- External to company/Independent.