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The Nature of Internal Auditing
The Evalution of Internal Auditing 1.
Internal auditors achievement of identity 2.
Differences between external and internal auditing 3.
Definitions of internal auditing 4.
Internal auditing as a profession 5.
How professions differ from trades and crafts 6.
Internal Auditing progress 7.
IIA Statement of Responsibilities 8.
IIA Code of Ethics 9.
IIA Standrards of the Professional Practice of Internal Auditing 10.
The Common Body of Knowledge 11.
A competency framework 12.
Certified Internal Auditor program 13.
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The Nature of Internal Auditing
Professional Recognition Credit 14.
Specialty certifications 15.
Internal auditing forms and approaches 16.
Control self-assessment 17.
Audit specialties 18.
Outsourcing 19.
A Core Function 20.
Service to management 21.
Independence in internal autiting 22.
Whistleblowing 23.
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The Nature of Internal Auditing
From an essentially accounting-oriented craft to a management oriented profession
As a junior sibling to the independent accounting profession and attesting to the accuracy of
financial matters was the professions paramount concern. Now, however, internal auditing has
established itself as a distinctive dicipline with a far broader focus.
Modern internal auditing provides services that include examination and appraisal of controls,
performance, risk, and governance throughout public and private entities. Financial matters only
one aspect of its.
For many years, external auditors continued to influence the way internal audits were performed.
Modern internal auditing began to envolve in 1941 when The Institute of Internal Auditors (IIA) was
formed.
John B. Thurston, one of the IIA founders, said in 1941:
The Evalution of Internal Auditing 1.
Internal auditors achievement of identity 2.
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The Nature of Internal Auditing
You will recognize the unhappy inadequacy of the phrase internal auditor. years ago it was
probably satisfactorily descriptive of our earlier predecessors in the profession. But to day,
auditing, precise meaning of the word, is only one of the functions of the internal auditor. You
organizing committee gave much thought to the possibility of using some other phrase or term
and finally reached the conclusion that we must bow to historical precedent.
The activities of internal and external auditor may overlap but the same of their do not so much
with the differences.
The diference
John B. Thurston, oen of the IIA founders, said in 1941:
Differences between external and internal auditing 3.
Internal reviews of accounting controls are important, and internal audiotrs must be involved
with them; but that is not their entire mission. The losses resulting from poor production,
engineering, marketing, or inventory management can be far greater than those suffered from
financial peculations. Management controls over fianancial activities have greatly
strengthened over the years.
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The Nature of Internal Auditing
Internal Auditor
Is an organizations employee , or can be an
independent entity ( outsource or cosource)
External Auditor
Is an independent services
Serves needs of the organization, though the
function must be managed by the
organization
Serves third parties who need realiable
financial information
Focuses on future events by evaluating
controls designed to assure the
accompolishment of entity goals and
objectives
Focuses on the accuracy and
understandability of hostorical events as
expressed in financial statements.
Indirectly concerned with prevention of
fraud in any form or exten in any activity
reviewed
In accidentally concerned with the
prevention and detection of fraud in general,
but is directly concerned when financial
statements may be materially affected.
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The Nature of Internal Auditing
Internal Auditor
Is an independent of the cativities of
audited, but is ready to respond the needs
and desires off all elements of management.
External Auditor
Is an independent of management and the
board of directors both in fact and in mental
attitude.
Reviews activities continually
Reviews records supporting financial
statements periodically usually once a
year.
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The American Accounting Association defines it as a systimatic process of objectively
obtaining and avaluating assertions about economic actions and events to ascertain the
degree of correspondence between this assertions and established criteria and
comunicating the results to interested users. This definition is intended to describe the
process applied to all types of audits; but the term economic actions and events
demonstrates that is thrust is toward financial of accounting matters.
The IIA introduced its original standards for the Professional Practice of Internal Auditing
(Standards) with the following definition:
Internal auditing is an independent apapraisal function established within an
organization to examine and evaluate its activities as a service to the
organization.
In 1998 The IIA established a Guidence Task Force (GTF) to consider possible changes to
the Standards and other guidance . One of the first and most critical elements of the GTF
mission was to develop a new definition of internal auditing thst would capture the
modern essence of the profession and record it in as clear and concise a manner as
possible.
Definitions of internal auditing 4.
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In its deliberations, the GTF took into account comments and suggestions from from IIA
members, as well as a new competency-based definition that emerged from preliminary
drafts of the Competencey Framework for Internal Auditing (CFIA), published in 1999 by
the IIA Research Foundtion. CFIA defines internal auditing as a process by which an
organizatioan gains assurance that the risk exposures it faces are understood and
managed appropriately in dynamically changing contexts.
In the spring of 1999 the GTF submitted the following definition for exposure and
comment by IIA members:
Internal auditing is an objective assurance and consulting activity that is
independently mamanged within an organization and guided by a phiosophy of
adding value to improve the operations of the organization. It assists an
organization in accomplisihing its objectives by briging a systematic and
disciplined approach to evaluate ana improve the effectiveness of organizations
risk management, control, and governance proceses.
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Internal auditing is a dynamic and evolving profession that anticipates change in
its operating environment and adapt to changes in organization al srtuctures,
processses, and technology. Professionalism and a commitment to excelence are
facilitated by operating within a framework a professional practice established
by The Institute of Internal Auditors.
In July 1999 The IIA Board of Directors adapted the following definition:
Internal auditing is an independent, objectives assurance, and consulting activity designed
to add value and improve an organizations operations. It helps an organization
accomplish its objectives by bringing a systimatic, disciplined approach to evaluate and
improve the effectiveness of risk management, control, and governance process.
A resolution creating a new Professional Practice Framework was also passed by The IIA
Board. IIAs Internal Auditing Standards Board has developed all recommended changes to
the Standards.
For the purposes of this book, the following defition has benn created to describe the
broad, unrestricted scope of modern internal auditing
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Toward a Definition of Internal Auditing
Internal auditing is Systematic , objectives appraisal by internal auditors of the
diverse operations and controls within an organization to determine wether (1)
financial and operating information is accurate and realible; (2) risks to the
enterprise are identified and minimized; (3) external regulations and acceptable
internal policies and procedures are followed; (4) satisfactory operating criteria
are met; (5) resources are use efficiently and economically; (6) the organizations
objectives are effectice achieved all for the purpose of consulting with
management and for assisting members of the organization in the effective
discharge of their governance responsibilities.
This definition not only spells out the internal auditors role and purpose, but it identifies
opportunities and responsibilities. In addition, the defition embodies significant
requirements spelled out in the Standards and captures the modern internal auditors
broadening emphasis on adding value and all on matters related to risk, governance, and
control.
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The follwing catalog of criteria is often used to judge the professional quality of any
occupation:
1. Service to the public
2. Long specialized training
3. Subcription to a code of athics
4. Membership in an association and attendance at meetings
5. Publication of a journals aimed at upgrading practice
6. Examinations to test entrantss knowledge
7. Licensure by the state or certification by a board.
Internal auditing as a profession 5.
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The Profession of Internal Auditing
Service to the public. Internal auditors provided service by promoting the efficient and
effective use of resources. Their code of ethics requires members of the IIA to avoid being
party to any illegal or improper activity. In addtion, internal auditors serve the public
through their work with audit committees, boards of directors, and other governance
bodies.
Long specialized training. In some instances and in some areas in some of the world,
internal audit departments accept people with varying degrees of training or learning.
Only those who have demonstrated training, passed tests, and earned certification can
properly regard themselves as professionals.
Subscription to a code of ethics. Members must subcribed to the IIAs Code of Ethics.
They also must follow the Standards. These documents are printed later in this chapter or
in the book.
Membership in an association and attendance at meetings.. The IIA is unquestionably a
profession association. Yet in many countries, including the United States, The IIA accepts
members who may be practicing internal auditing, but who have been not certified. In
other countries, such as Ireland and England, passing certaint tests in a requirement for
full membership. The IIA may be eventually consider the establishment of a seperate
branch, restricted to certified Internal Auditors, who are board certified who must follow
a prescribed continuing education program.
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The Profession of Internal Auditing
Publication of a Journals aimed at upgrading practice. The IIA publishes a technical
journal, Internal Auditor, as well as technical books, research studies, monographs, audio
visual presentations, and other instructional materials. Contributions are submitted by
practionaries as well as by respected academician and other experts.
Examination to test entrance knowledge. The IIA began its certfication program in 1974.
Candidates must passed a rigorius two-day examination covering a wide range of subjects.
Successful candidates receive the designation of Certified Internal Auditors (CIA). As a
foundation for the examination The IIA established a Common Body of Knowledge for
those seeking to prepare themselves for that examination. In 1999 a Competency Frame
work for Internal Auditors was published in lieu of a third iteration of the Common Body
of Knowledge.
Licensure by the state or certification by a board. The practice of internal auditing is not
limited to licensees. Anyone who can convince an employer of ones internal auditing
capability can be hired, and in many organizations a lack of certification is not necessarily
a bar. Anyone working as an internal auditor can sign an internal audit report and render
an internal asuditor audit opinion.
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External
1881 First training school
Internal

1881 First university school
First professional organization:
1886
AICPA (originally the American Association
of Public Accountants
1941
The Institute of Internal Auditors
First state licensing law and examination
1896
First CIA examination
1974
Professional journals first published:
1905
Journal of Accountancy
1943
Internal Auditor
Internal Auditing progress 7.
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Internal Auditings Progress
External
First education treatises published:
Internal
1892 Dicksees Auditing (England)
Montgomerys Auditing (US)
1941
Brinks Internal Auditing (US)
1973
Sawyers Modern Internal Auditing (U.S)
Formal Code of Ethics
1917
1968
Statement of Responsibilities
1947
Standards for Professional Practice 1954 1978
1914
IIA Statement of Responsibilities 8.
In 1947 The IIA its first Statement of Responsibilities of Internal Autiting