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AA - Audit and Assurance

Internal Auditors

THE ROLE OF INTERNAL AUDITORS


Internal auditor’s key role: advise and report to management.

Other roles:

1. Review of control activities ● Review of control systems within the entity; and

● Highlighting any control deficiencies that may need to be


addressed.

2. Examining the timeliness of ● Regular review of systems and ensuring that issues are
control information reported.

3. Value for money audits ● Identifying whether a decision is appropriate for the
organisation;

● 3E's (economy, efficiency, effectiveness).

4. Identifying business risks ● Review of the entity and its control systems;

● Reporting to management; and

● Recommendations on how to reduce the risk.

5. Examine compliance ● Expertise to identify non-compliance with laws and regulations;

● Reporting to management; and

● Assessing how this can be avoided in the future.

6. Supporting the audit committee ● Audit committee - a group of non-executive directors who
manage external and internal auditors.
7. Special purpose tasks ● Special investigations requested by the entity management,
including mystery shopper reviews, inventory counts, and asset
inspections.

DIFFERENCES BETWEEN EXTERNAL AND INTERNAL AUDITORS

Difference External Auditors Internal Auditors

1. Independence External auditors must be independent Internal auditors are not


to form an opinion on the FS. independent as they are employees
and report directly to directors.

2. Scope of details Plan and perform audit procedures on Cover many areas looking at the
control systems, transactions and systems and controls used by the
balances in FS. entity. Amount of work depends on
the management’s requirements.

3. Objectives Form an independent opinion on Advise management and improve


whether the FS are true and fair. the control system.
Written report at the end of audit.

4. Reporting To shareholders To directors or the audit committee

5. Appointment and By shareholders by vote, usually at the By the board of directors or the
removal AGM. audit committee.

6. Whether they are a legal Required by law (there are some Not required by law.
requirement exemptions).
Recommended by corporate
governance to ensure sound control
systems.
RELIANCE ON INTERNAL AUDITORS' WORK

External auditors can use


Review of control systems
some of this work, so that Consider how reliable
is what the internal auditor
they can then concentrate on the internal audit is.
carries out.
other areas of the audit.

Considerations in respect of reliability of internal audit:

A. Scope of work;

B. Technical competence;

C. Report quality; and

D. Independence.

Indicators of requiring the internal audit function:

1. Company is large;

2. It has complex systems and regulations that must be followed;

3. It is listed on the stock exchange; and

4. It has been known to have problems.

OUTSOURCING

Outsourcing: Not all companies will benefit from a full-time internal audit function. In this case audit firms
provide expertise for clients needing an internal audit.

Advantages and disadvantages of internal audit outsourcing:

Advantages Disadvantages

● Removing employment costs (recruitment and ● Lack of knowledge of the business;


tax);
● Long-term use may become less cost
● Audit firms may have more specialised skills; effective;

● Increased independence; and ● Services may not be available immediately;


and
● Reducing the burden of having a department
to manage. ● Conflicts of interest may arise if the audit firm
carried out the external audit.