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STEP #1: Review the IIAs Professional Practices FrameworkThe best place to begin our journey is by first reviewing the IIAs Professional PracticesFramework. Bydefinition, any profession needs to hold its members to a high andconsistent level of behavior, and theprofession of internal auditing is no

d i f f e ren t . Based on th i s , t he I IA p romulga tes the Professional PracticeFrameworkthat is used as a guide for internal auditors in the performance of their work.The three categories of guidance are

1) The International Standards for the

Professional Practice of Internal Auditing1 (Standards),2 ) P r a c t i c e A d v i s o r i e s , a n d3 ) C o d e o f E t h i c s .

Note: A summary of the IIAStandards and Code of Ethics are shown inAppendices B and CTogether these documents a re cons idered to be essen t ia l f o r t he p rofes sio nal pra ct ic e of inte rna lauditing.

TheStandardshave the following four purposes:

1)Outline the basic principles that represent the practice of internal auditing, as it should

be.

2)Provide framework for performing and promoting a board range of value added

internal auditingservices.

3)Establish the basis for the evaluation of internal auditing performance.

4)Foster (support) improved organizational processes and operations.The IIA Practice

Advisories represent the best practices of implementing the

Standards

. The PracticeAdvisories are not mandatory and do not represent all of the

considerations that may be necessarywhen applying them, but they are simply the

recommended stet of items that should be addressed orfollowed.Finally, there are the

IIAsCode of Ethics. Whereas the Standards provide guidance for internal auditors in the

performance of their duties, The Code of Ethics provides an ethical guide for the

conduct of internal auditors


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STEP #2: Understand stakeholders requirements

For this stage we are trying to answer the question,

How can the internal audit activitybest serve the organization?

In order to answer this question, you need to do a lot of information gathering, and partof this process is to understand the stakeholders requirements. To better understand

the stakeholders requirements you can do the following:

Interview senior management and member of the audit committee. This gives you

a chance to start building a rapport with the top. As we have already said, without their

full and un-mitigating support, the chances of your success are severely diminished.

You want to ensure that they have a clear understanding of the internal audit function.

You can then clarify their expectations.

Review the audit committees Charter. You want to have clearer understanding ofthe audit committeesresponsibility regarding internal auditing (see below)

Note: See Appendix D for a sample Audit Committee Charter.

-Review with management and the chief audit executive the charter, activities, staffing,

and organizational structure of the internal audit function.

-Have final authority to review and approve the annual audit plan and all major changes

to the plan.

-Ensure there are no unjustified restrictions or limitations, and review and concur in theappointment, replacement, or dismissal of the chief audit executive.

-At least once per year, review the performance of the CAE and concur with the annual

compensation and salary adjustment.

-

Review the effectiveness of the internal audit function, including compliance with The

Institute of Internal Auditors'

International Standards for the Professional Practice of Internal Auditing.

-On a regular basis, meet separately with the chief audit executive to discuss any

matters that the committee or internal audit believes should be discussed privately.

Meet with the external auditor. The external auditors would be in a good position to

advise you on some of the problems they have identified during their own reviews.

Coordination between the internal and external auditors is an important issue for the


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internal auditing function and this is agood method to start developing a good, working

relationship.

Meet with other stakeholders,including operations managers.

During these meetings you can get a better feel for their risks and concerns


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STEP # 3: Develop an Internal Audit Charter

After gathering all of the necessary information during the second stage, you should

now be in a position to develop the

Internal Audit Charter.During this stage you will be working with the board and senior management to

articulate the mission for internal audit. It is the Charter that lets internal auditors do

their work. It will probably be the CAE to write up the draft Charter, but for it to mean

something it has to be approved by senior management and accepted by the audit

committee. After its approval and acceptance, it then needs to be communicated to

people within the company. The Charter should define the following items in respect to

the internal audit activity:

1)The scope of the services (i.e., assurance and consulting) and work to be performed,

2)The objectives of the function,

3)The authority of the function to access records, personnel and physical

properties in theorganization,

4)The accountability of the function, and

5)The responsibility of the function.Note: See

Appendix E

for a sample Internal Audit Function Charter. This sample Charter was adapted rom the

one posted on the IIA website (www.theiia.org).Of course, no Charter can possibly

encompass all of the activities that could be possible, so when tailoring your Charter,

just make sure it fits your companys needs. Also, you need to recognize that even

though the Charter is a formal and approved document (approved by senior

management and accepted by the audit committee), it is not a document that is

unchanging. In the beginning you should review the document at least annually (and

more often as circumstances may require) to ensure that it is still relevant and

addresses the needs and issues that the organization and the internal audit activity are

facing. It may be good to include all of the activities you think you might want theinternal audit function be involved in, in the coming two to three years. This does not

mean you have to do these activities, only that you could if the need arose. One of the

important things to remember when developing the Charter is to make sure that your

function maintains its independence and objectivity. We look at these terms below.
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Review the Independence and Objectivity of the Internal Audit Function

Independence:

The function is a unique function within the organization. It is not part of the

organizations regularmanagement structure and as such does not play a managementrole within the organization. Ideally, you want the internal audit activity to

functionally report to the Audit Committee of the Board of Directors, and

administratively to the CEO or some other designated management person.

Why is this?

As with external auditors, internal auditors need to be protect their independence from

any undue internal management pressure. This means that the internal auditor should

be able to perform its Work freely and objectively without having to worry about

individuals or groups within the organization influencing or affecting what it is trying to

do. Functionally reporting to the Audit Committee or some other governing authoritymeans that they are responsible for:

Approving the functions Charter.

Approving the internal audit risk assessment and related audit plan,

Receiving communications from the CAE on the results of the function or other private

meetings with the CAE without management present.

Approving decisions regarding the appointment or removal of the CAE, and

Making appropriate inquiries of management and the CAE to determine whether there

are scope or budgetary limitations that impeded the ability of the function to execute its

responsibilities. Now, when we are talking about independence, we know that you are

not go to be as independent assay your companys external auditor because, one, it is

management that is going to be involved in the approval of your budget, and two, if you

need to buy some office supplies, youre not going to go to the audit committee to get

approval for the expenditures. For issues like this you should go to someone in

administration, perhaps the chief financial officer. Administrative reporting typically

would include:

Setting the budget for the function,

Having the HR department administer personnel evaluations and compensation,

Monitoring internal communications and information flows, and


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Administering the organizations internal policies and procedures. The idea of

independence is not to be taken lightly. Its this idea of independence that differentiates

internal auditing from the other departments within your organization. When looking at

independence you might want to consider seeking some external assistance in making

sure the function is truly, as best it can, independent. External auditors might be in

a good position to review the independence and objectivity of the internal audit activity.

To some extent, external auditors also have some sake in the establishment of a well-

run internal audit function. Its possible that the external auditors may rely on some of

the work of the internal auditors; so therefore, they want to have some comfort that the

work of the internal auditors is not being manipulated. But their willingness to rely on

some of the work will be diminished if they feel the internal audit function lacks

independence, or objectivity.

Objectivity:

What we mean by objectivity is that you, as an internal auditor, have to be able toremain objective when conducting your work. You should1)

Impartial

.2) Have an unbiased attitude, and

3) Avoid conflicts of interest Being objective means that the conclusions or opinions

that you are drawing are based solely on facts at hand, and are not influenced by

feelings, emotions, relationships with others, monetary bribes or any other outside

influence.

Impairment of Objectivity:

When we talk about objectivity you need to keep in mind others perception of whether

the internal auditor is being objective or not. For example, if the internal

auditor accepts a gift or money of significant value from the client, objectivity would be

perceived to be impaired even if the auditor, in fact, was objective. Also, objectivity is

assumed to be impaired if an auditor performs an assurance review of any activity over

which he or she has recently had responsibility. Individuals who are assigned to or

transferred to your department should

not audit areas where they worked until a reasonable period of time haselapsed. Basedon the IIA Standards, the amount of time is about one year.


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STEP #4: Develop an initial Risk Assessment for your company

Risk assessment

is the systematic process of assessing and integrating professional judgment about

probable adverse conditions and/or events. The questions should always be asked:What could go wrong here?

What assets do we need to protect?

By answering these questions you can then understand the means of controlling the

risks. The COSO study, Internal Control-Integrated Framework, summaries risk

assessment in the following way:

6 Every entity faces a variety of risks from external and internal sources that must beassessed. A pre-condition to risk assessment is the establishment

of objectives, linked at different level sand internally consistent. Risk Assessment is the

identification and analysis of relevant risks to achievement of objectives, forming a basis

for determining how the risks should be

managed.Because economic, industry, regulatory and operating conditions will continue

to change,mechanisms are needed to identify and deal with the special risks

associated with change.The assessment of risks starts by developing the audit

universe or list of all auditable entities. This would be a compilation of the subsidiaries,

business units, departments, groups, processes, or other established subdivisions of an

organization that exist to manage one or more business risks. The assessment of risk

involves determining the volume of transactions and the average dollar amount per

transaction, the dollar value of assets that are exposed to loss, as well as the probability

that a loss will occur. The company objectives must be established before risks can be

assessed. Risk assessment forms the basis for determining how risks (both internal and

external) should be managed.

External risks

include changes in technology, changes in the market in which an entity operates, new

legislation bringing new requirements, natural disasters, economic changes, a failure ofa key supplier, or being sued, defrauded, or robbed.

Internal risks

include employee embezzlement accompanied by falsification of records to conceal the

theft; lack of compliance with government regulations; or other illegal acts by

employees, such as taking a bribe. Internal risks can also include disruption in computer


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systems, poor management decisions, errors, or accidents. Changes in management

responsibilities can affect control activities; and an ineffective board or audit committee

may leave openings for fraudulent actions on the part of anyone within the company


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STEP #5: Develop the Audit Plans

Based on the IIA

Standards

7

The CAE should establish risk-based plans to determine the priorities of the internal

audit activity, consistent with the organizations goals. The function of the audit plan is

to put into writing the audit goals, schedules, staffing needs, and reporting. The plan

should also demonstrate that audit resources are used efficiently and effectively. Based

on this, we can see that audit plans are a good method of promoting internal auditing in

the company. Even though, audit plans are designed to act as a guide or roadmap for

your company when you do the audits, you need to remember that the plans are not

written in stone and might be modified during an audit if circumstances require it. The

audit plan should be prepared at least annually, but it is highly recommendedto develop strategic audit plans as well. The primary purpose of the strategic plans is

to ensure sufficient internal audit coverage.

Strategic Audit Plans:

Strategic means in the future, so this plan would show your audit coverage going out

two, three or more years. Developing this long-term plan is something you should not

take lightly. Sawyer 8 identifies 6 purposes of the strategic plan. These are:1)To

provide a guide for your internal audit department,2)To provide a basis for your budget

request,3)A way of involving management and the board in audit planning,4)Providesthe standard by which you can measure the accomplishments of your department,5)A

means to show management and the board that your department is under competent

control,and6)A notice to the external auditor of proposed audit coverage. Sawyer 9

also outlined some of the basic elements that every strategic plan

should contain. These elements are:

1)All the operations of the company should be analyzed for audit ability and potential

risks.

2)Each organizational component should be analyzed as

to specific objectives, performancestandards, and controls. Proposed audit hours shoud

be allocated each of the identifiableelements constituting an audit project.

3)Relative risks should be assessed, taking into account the objectives of internal

control set forth in the Standards:107

Standard 2010.8


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Sawyers Internal Auditing, 5th

Edition, page 945.9

Sawyers Internal Auditing, 5th

Edition, page 947.10

Standard 2120.A1.16

Reliability and integrity of information.

Compliance with internal and external rules and regulations.

Safeguarding assets.

Economical and efficient use of resources.

Achievement of established organizational objectives and goals. The big issue for the

strategic plan is to make sure that all areas of the company are audited at least

periodically. Without such a plan, it is possible that a certain area would never be

audited because it does not meet the requirements for the annual audit. Now, we want

to look at the annual audit planning process.

Annual Audit Plans:

The CAE has the responsibility to develop the annual audit plan based on theassessment of risk and the exposures that may affect the company. Based on risk and

exposure the CAE can prioritize the activities to be audited. You just need to make

certain that the plans are consistent with the Charter and with the goals of the company.

How do you determine which engagements to conduct?

Its ultimately the responsibility of the CAE to determine which engagements are to be

performed. Sometimes it may come down to the judgment of the CAE in making this

decision. Other factors to consider when prioritizing are:

The length of time since the last engagement was performed in the area;

Request from senior management, the audit committee or othergoverning bodies;

An engagements relation to the external audit;

Changing circumstances in the business, operations, programs, systems or controls;


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Changes in the risk environment or control procedures in the department;

The potential benefit that could be achieved from the engagement; and

Changes in the skills of the availab le staff (it may be that a new employee has new

skills, or training has given a staff member new skills) because new skills may enableconducting different types of engagements. Note: In the development of audit plans,

it is generally recommended to leave some time for management request (usually about

10%).We have already mentioned that the primary factor in prioritizing engagements is

risk. When we

discussrisk assessment, you need to remember that there are two types of assessment

s, quantitative (numerical) assessments as well as qualitative (characteristics)

assessments. Quantitative assessments would include the dollar value of the assets at

risk or the potential loss, while qualitative includes things such as the risk in the area of

fraudulent behavior or the importance of the section to the operations of the business as

a whole.

One way to measure the extent of risk in different areas is to multiply the dollar amount

that is at risk of loss by the percentage chance of the loss occurring. In this way, the

CAE is able to address the fact that while petty cash is at great risk because it is cash

that is, in essence, available to everyone in the organization, there is not much cash at

risk at any one time because there is never much cash in petty cash at any point

in time. When combining these factors, petty cash is probably a lower priority when

compared to an area where there is a lower risk of loss, but the loss value would be

much greater. The above discussion has focused on a monetary measurement.

However, there are also risks that are not related to the assets of the company or aspecific monetary amount that also need to be assessed. For example, control

procedures (or, more accurately, lack of control procedures) may also be an area of risk

that would need investigation.

Note: See Appendix F for a sample Schedule of Audit Coverage for a three-

year period. The difference between this 3-year plan and the annual plan is that the

annual plan would include the timing of the audits, and possibly the assigned personnel.


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STEP #6: Build the budget

You are going to build your internal audit budget based on the results of the risk

assessment and audit plan. The internal audit budget must be sufficient to so you can

deliver a risk-based plan developed during the fifth stage. The amount that you are

going to budget to achieve your objectives will be driven by the auditplan, organizational structure, and staffing strategy. In 2004, the IIA conducted a

random survey of 730 companies to get an idea of what companies spend to support

their internal auditing functions

(see Exhibit 1). The survey identified a general range of 0.03% to 0.22% of revenues

for an internal audit budget. The percentage goes up to 1.33% of revenue for

companies with revenue of less than 100 million USD.The following information below

was provided by The IIA Global Auditing Information Network (GAIN)Reports:

Exhibit 1Average Internal Audit Cost By Revenue

Revenue Range Internal AuditStaff CountAverageRevenueAverage

InternalAuditAverage InternalAudit as %

of Revenue$15B74$41,347,965,743$11,678,4230.03%

Source: The IIA Global Auditing Information Network (GAIN).For more information visitwebsite:www.theiia.org/gain

You will have two classifications of costs in the internal audit budget:

Capital expenditures andAdministrative expenses

.1) Capital Expenditures include costs for purchasing desktop computers, notebooks,

printers, copy machine, cell phones, office furniture, etc.2)

Administrative costs could include the following:

The salary of the CAE.

The salary of remaining auditors.

Travel expenses. This could be a significant cost, particularly, if your company has

multiple locations.

IT support costs.
http://www.theiia.org/gainhttp://www.theiia.org/gainhttp://www.theiia.org/gainhttp://www.theiia.org/gain


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Office equipment repair costs.

Office supplies.

General office maintenance costs


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STEP #7: Determine the staffing requirements

The CAE needs to make sure his or her staff is professional. This means having

the right people in the right positions. This follows along the idea that its better to be

understaffed then to hire the wrong people who could very quickly ruin the creditability

of your department. But, the CAE does need to be concerned about not meeting theregulatory requirements, e.g., NYSE, Sarbanes-Oxley, and others.

What staffing options do you have?

In our earlier example, the company is going to float an IPO on the NYSE. In this case,

the company is mandated to have an internal audit function. Again, listed companies

may choose to outsource this function to a third party service provider other than its

independent auditor. Based on this requirement, you have three alternatives. You can:

(1) build the IAA in-house, (2) full you to source the IAA, or (3) partially outsource the

IAA.Building in-house:

This alternative tends to be the more traditional way of creating and building internal

audit activities. Advantages to this approach can include the ability to groom employees

for future needs within the company. The company also has the advantage of having

staff available on a permanent basis who understand the culture, structure, and

practices of the company. In addition, the full-time staff is in a position to further develop

specialized skills through professional certification programs (i.e., CIA, CFSA,CISA, and

others), which further professionalizes the department.

Fully Outsourcing:

Outsourcing

is generally defined as contracting out the IAA to others who are not employees of the

company. There are a variety of reasons why a company may consider fully outsourcing

the internal auditing function, including:

have an operational function immediately,

dence and objectivity. This is because they would

not be onstaff of the company.


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What could be a disadvantage of outsourcing?

One disadvantage could be that since the contracted auditors are not part of the

company they might not have the loyalty to the company has in-house auditors. Also, in-

house auditors would be more familiar with the business environment of the company,

and thus, be in a better position to help the company. Finally, internal auditing issupposed to be a value added function, but if executive management and the board are

not a 100% on board, then outsourcing could limit the benefits of the IAA.

Partial Outsourcing:

Even with fully developed in-house internal auditing staff, its unlikely you will have the

capability to provide complete audit coverage. In these cases, you should consider

partially outsourcing to an outside organization that can provide specialized skills so you

can meet your objectives. For example, if your company offers a pension plan then it

is not unusual for an actuary to be hired to look at the reasonableness of future pensionliabilities. Or, if your company produces environmental waste, it might be good to hire

an outside firm to look at compliance with environmental laws. You should never think

that your department has to be specialist in every area of the organization. It is just not

realistic to think so. When deciding whether to hire in-house, outsource or possibly do

both, you need to ask yourself:

1)What are the priorities for the internal auditing function? If you build in-house, can to

hire the staff that can handle the work? Can they do the work professionally, and get it

done on time?

2)If you outsource, can you improve the effectiveness of your department? What are thelong-term implications? Will outsourcing save the company funds? How about long-

term needs?

3)Can you source staff internally on a part-time basis to help meet the departments

objectives?

For example, if you had scheduled an environmental audit for the current period,

perhaps the company has an experienced environmental engineer who could help with

the audit. An important issue with this is to make sure the employee maintains his or

her objectivity. The CAE simply needs to realize that outsourcing is a viable option. Thecompany has particular

needsand compliance deadlines and these factors will dictate whether building, outsour

cing, or using acombination of both is right for your company. Each option has its

benefits and risks so an analysis should be conducted to determine which option is the

right option. Some of the things to consider in your analysis are:


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Independence of the service provider.

Allegiance of in-house versus external service provider.

Professional standards followed by the service provider.

Qualifications ofthe service provider.

Staffing training, turnover, rotation of staff, management.

Flexibility in staffing resources to meet engagement need or special request.

Availability of resources.

Retention of institutional knowledge for future assignments.

Access to best practices or insight to alternative approaches.

Culture of the company receptiveness to service providers.

Coverage of remote locations (if relevant).

Coordination with in-house internal audit services.

Coordination with external auditors.

Use of internal auditing as a training ground for internal promotions.

Retention, access to and ownership of working papers.

Acquisition and availability of specialty skills.

Cost considerations.

Good standing membership in an appropriate professional organization.

Drafting Job Descriptions:

By drafting descriptions, it will be much easier for you to determine whether your

department is properly staffed. Having good job descriptions is also an important basisfor the recruitment and promotion of staff. In

Appendix G

We have drafted sample job descriptions for the various internal auditing positions. We

included job descriptions for the positions:


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Chief Audit Executive

Internal Auditing Manager

Internal Auditing Senior Supervisor

Internal Auditor SupervisorIts unlikely you would have the resources available to

initially fill these positions, but again you alwaysneed to be thinking beyond current

needs

STEP #8: Establish a plan for the development of Staff

Once youve hired the staff, staff development will be an important part of the long-term

success of your department. Staff development consists oftraining, counseling and

performance evaluations. Training needs to be provided with the goal of providing the

staff with the necessary skills to

performtheir jobs in the short term, and also to develop and broaden their skills for their long-termdevelopment. Individuals often see training as a benefit and a well-developed

training program is an excellent recruiting tool for the company. Individuals personal

desires should be considered, but are not the only consideration. This means that it is

possible that people will be trained, or assigned to, areas and engagements that they

are not personally interested

in.However, not only should training benefit the individual, it should also help the functio

n meet itsorganizational goals. As such, some staff may be trained in areas where the

function does not currently have skills, but which are required in the company.

Counseling, ormentoring, is a growing element of staff development. The CAE has aresponsibility for counseling and assisting staff members in their growth in the

organization. This is not to say that the CAE is supposed to have weekly counseling

sessions with each member, but the CAE has a responsibility o step in as needed. In a

large internal audit department, there may be a formal counseling/mentoring program

and, in this case, the CAE most likely is responsible for the oversight and management

of the process. Additionally, the CAE may be the counselor for some of the higher-level

staff members in the department.

Performance appraisals

should be performed at least annually, and more often if needed. Theperformance

evaluations need to focus on the skills that are necessary for the individual to perform

their work and for IAA as a whole to perform its duties. These staff evaluations should

be seen as a means

of giving internal audit employees the opportunity to identify their weaknesses and give t

hem anopportunity to improve their performance. The evaluation should not be based


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on personal likes or dislikes or other non-job related factors. This is particularly true

when the evaluation is an engagement evaluation of their work on a specific job, and

not an annual evaluation. There should be sufficient time to allow everyone to prepare

for conducting the annual evaluation. This usually involves the auditor and the manager

both filling out the evaluation form and preparing for the meeting. The meeting should

be scheduled when both parties are not pressed for time so that anything hat arises

during the evaluation can be discussed and addressed without one person trying to

hurry through the evaluation because of other commitments. The performance

evaluation form can be a standard form (and will be a standard form in large

companies) because this provides focus to the evaluation on the areas that are most

important. However, for this process to work as well as possible, the evaluation needs

to be carefully thought through by the evaluator and should not include

standard comments that are applicable to everyone. Examples and specific references

to events should be provided and included whenever possible.

Note: See Appendix H for a sample internal auditing evaluation form.


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STEP #9: Communicate the existence of the Internal Audit Function in the

Company

This next step seems obvious, but it is a very critical part of establishing the internalaudit function int he organization. You have to have some level of confidence that when

you actually start your work you will have the complete cooperation of the employees

and departments in the organization. Without theircomplete cooperation, you just wont

be able to do your

work.When management communicates the existence of the internal auditing activity th

ey should bepromoting the function as a management orientated resource, not a futile

exercise. If they do this, internal auditors have a better chance of getting what they

need. Sawyer listed some ways for management to market the internal audit function.

Brochures. An easily read non-technical booklet can go a long way toward removingthe mystery and hence the fear from internal auditing.

Bulletins/newsletters. Bulletins can highlight urgent, current findings. Newsletters can

beanecdotal and hence easily understood without getting into internal audit jargon.

Organization publications. These often include human interest stories on employees.

And a well-written story might be accepted and useful in showing the human side of

internal auditing.

Organization programs. Many organizations sponsor civic or charitable activities.

Helping to lead one of these will present internal auditors in a favorable light.

Open house/open door. Hosting an open house lets internal auditors meet operating

personnel under relaxed circumstances.

Client vs. auditee. In both written and oral statements it is preferable to refer to the

people being audited as clients or customers.

Advisory board. To develop an interchange of information about organization re

organization, changes, and developments, develop an advisory board of operating

managers, chaired by the chief audit executive. Subjects discussed could relate to risk

exposures and potential problems. The boardis advisory only but can augment theapproach to what and when to audit.

Pre-audit meeting. This is good way to start building a relationship with the client.

During the meeting you can explain internal auditing and its true function one that

is more than the mysterious resident critic.


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Risk rating. This has generally been regarded as a one-dimension, internal audit

function. But by promoting liaisons between internal auditors and selected operating

people, it can be developed into a problem solving partnership.

Post audit questionnaire. Properly used, the questionnaire can be a valuable quality

assurance tool. Client opinions can help fine-tune the audit process.

Client training. This can include courses for client personnel and a period of actually

working in the internal audit function for top-level new hires who are destined for

management positions. This can offer hands-on training in assessing internal controls

and valuable experience when the trainees take on the jobs they were hired for.

Quality programs. Internal auditors can be in the forefront of the quality quest

sweeping the country. Audit reports receive wide distribution in the organization and

should be quality-oriented to foster the attitude of doing it right the first time


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STEP #10: Establish a quality assurance program

Our final stage is the establishment of a quality assurance program. It is through this

program that wewill be able to measure the success of the internal audit activity.At this

point, you might be asking yourself, So,

whos going to be auditing the internal auditors?

Theanswer, in short is, they will be auditing themselves.

So, how can internal auditors, audit themselves?

You do this by being objective and by being professional. The role of auditing the

internal auditing function falls on the shoulders of the CAE.According to the

Standards:

The CAE should develop and maintain a quality assurance and improvementprogram (QAIP) that covers all aspects of the internal audit activity and continuously

monitors its effectiveness.

Thisprogram includes periodic internal and external quality assessments and ongoing in

ternalmonitoring. Each part of the program should be designed to help the internal

auditing activity add value and improve the organizations operations and to provide

assurance that the internal audit activity is in conformity with the

Standards and the Code of Ethics. Thus, it is the QAIP that justifies the internal audit

activity, but it will be the CAE doing the justifying. Therefore, the internal audit function

is really auditing itself. But, as we will see later this is only partially true.

Quality Program Assessment:

The CAE will be responsible for the implementation of a quality program, the monitoring

of that quality program and the assessment of the quality of the program. The quality

program should include both internal and external assessments. The function of these

internal and external assessments is for the company stakeholders to feel comfortable

with the services the IA function is providing to the organization. Theyre asking theques

tion -Is the internal auditing function contributing to the overall success of the

organization?

Quality program assessments should include evaluation, if appropriate, of:

Compliance with theStandards and Code of Ethics, including timely corrective actions

to remedy any significant instances of noncompliance,

Adequacy ofthe IAAs charter, goals, objectives, policies, and procedures,


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Contribution to the organizations governance, risk management and control

processes.

Compliance with applicable laws, regulations, and other governmental or industry

standards,

Effectiveness of continuous improvement activities and adoption of best practices, and

Whether the auditing activity addsvalue and improves the organizations operations.

The results of these assessments will then be provided to the above-mentioned

stakeholders. A problem that can often arise when doing quality program assessments

is that qualities can mean different things to different people. This is particularly true of

service operations such as the internal audit function. For example, the internal audit

department may be conforming to the Standards, but that doesnt mean its operating in

an effective or efficient manner. To resolve this potential problem, organizations develop

quality circles. A quality circle is a group of employees (anywhere from five to 15employees) who are intimately familiar with an operation and are brought together to

improve quality and productivity. They do this by studying the operation, or problem,

making recommendations, and depending on the operation, they may have the authority

to implement

recommendations.Quality circles frequently use benchmarking as a means to improve q

uality and productivity.

Benchmarking is the process of a company using the standards set by other

companies as a target or model for its own operations. (This is also called best

practices.) It is the process of continuously trying to emulate (imitate) the bestcompanies in the world. By striving to meet the standards of the best companies, an

organization may be able to create a competitive advantage

by achieving a higher standard than its competitors. Benchmarking can use both

financial (profit margin) and non-financial (%of defects).The company that is used as the

benchmark does not necessarily need to be in the same industry as the company that is

trying to improve


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Appendix D

Audit Committee Charter - Sample

PURPOSE:

To assist the board of directors in fulfilling its oversight responsibilities for the financial reportingprocess, the system of internal control, the audit process, and the company's

process for monitoring compliance with laws and regulations and the code of conduct.

AUTHORITY:

The audit committee has authority to conduct or authorize investigations into any

matters within its scope of responsibility. It is empowered to:

Appoint, compensate, and oversee the work of any registered public accounting firm

employed bythe organization.

Resolve any disagreements between management and the auditor regarding

financial reporting.

Pre-approve all auditing and non-audit services.

Retain independent counsel, accountants, or others to advise the committee or assist

in the conduct of an investigation.

Seek any information it requires from employees-all of whom are directed to cooperate

with the committee's requests-or external parties.

Meet with company officers, external auditors, or outside counsel, as necessary.

COMPOSITION:

The audit committee will consist of at least three and no more than six members of the

board of directors. The board or its nominating committee will appoint committee

members and the committee chair. Each committee member will be both independent

and financially literate. At least one member shall be designated as the "financial

expert," as defined by applicable legislation and regulation.

MEETINGS:

The committee will meet at least four times a year, with authority to convene additional

meetings, as circumstances require. All committee members are expected to attend

each meeting, in person or vital- or video-conference. The committee will invite

members of management, auditors or others to attend meetings and provide pertinent

information, as necessary. It will hold private meetings with auditors (see below) and


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executive sessions. Meeting agendas will be prepared and provided in advanceto

members, along with appropriate briefing materials. Minutes will be prepared.

RESPONSIBILITIES:

The committee will carry out the following responsibilities:Financial Statements

Review significant accounting and reporting issues, including complex or unusual

transactions and highly judgmental areas, and recent professional and regulatory

pronouncements, and understand their impact on the financial statements.

Review with management and the external auditors the results of the audit, including a

nydifficulties encountered.

Review the annual financial statements, and consider whether they are complete,

consistent within formation known to committee members, and reflect appropriate

accounting principles.

Review other sections of the annual report and related regulatory filings before release

and consider he accuracy and completeness of the information.

Review with management and the external auditors all matters required to be

communicated to the committee under generally accepted auditing

Standards.

Understand how management develops interim financial information, and the nature

and extent of internal and external auditor involvement.

Review interim financial reports with management and the external auditors before

filing with regulators, and consider whether they are complete and consistent with the

information known to committee members.

Internal Control

Considerthe effectiveness of the company's internal control system, including informati

ontechnology security and control.

Understand the scope of internal and external auditors' review of internal control over

financialreporting, and obtain reports on significant findings and recommendations, toge

ther with management's responses.


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Internal Audit

Review with management and the chief audit executive the charter, activities, staffing,

andorganizational structure of the internal audit function.

Have final authority to review and approve the annual audit plan and all major changesto the plan.

Ensure there are no unjustified restrictions or limitations, and review and concur in thea

ppointment, replacement, or dismissal of the chief audit executive.

At least once per year, review the performance of the CAE and concur with the annual

compensation and salary adjustment.

Review the effectiveness of the internal audit function, including compliance with The

Institute of Internal Auditors'

International Standards for the Professional Practice of Internal Auditing.

On a regular basis, meet separately with the chief audit executive to discuss any

matters that the committee or internal audit believes should be discussed privately.

External Audi

Review the external auditors' proposed audit scope and approach, including

coordination of audit effort with internal audit.

Review the performance of the external auditors, and exercise final approval on the

appointment or discharge of the auditors.

Review and confirm the independence of the external auditors by obtaining statements

from the auditors on relationships between the auditors and the company, including

non-audit services, and discussing the relationships with the auditors.

On a regular basis, meet separately with the external auditors to discuss any matters

that the committee or auditors believe should be discussed privately.

Compliance

Review the effectiveness of the system for monitoring compliance with laws and

regulations and the results of management's investigation and follow-up (including

disciplinary action) of any instances of noncompliance.

Review the findings of any examinations by regulatory agencies, and any auditor

observations.


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Review the process for communicating the

code of conduct to company personnel, and for monitoring compliance therewith.

Obtain regular updates from management and company legal counsel regarding compli

ancematters.

Reporting Responsibilities

Regularly report to the board of directors about committee activities, issues, and relate

drecommendations.

Provide an open avenue of communication between internal audit, the external

auditors, and the board of directors.

Report annually to the shareholders, describing

the committee's composition, responsibilities andhow they were discharged, and any

other information required by rule, including approval of non-audit services.

Review any other reports the company issues that relate to committee responsibilities.

Other Responsibilities

Perform other activities related to this charter as requested by the board of directors.

Institute and oversee special investigations as needed.

Review and assess the adequacy of the committee charter annually, requesting board

approval for proposed changes, and ensure appropriate disclosure as may be required

by law or regulation.

Confirm annually that all responsibilities outlined in this charter have been carried out.

Evaluate the committee's and individual members' performance on a regular basis


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Appendix E

Sample Internal Audit Charter

Mission and Scope of Work:

The mission of the internal audit department is to provide independent, objective assurance andconsulting services designed to add value and improve the companys

operations. It helps the

companyby bringing a systematic, disciplined approach to evaluate and improve the eff

ectiveness of riskmanagement, control, and governance processes.

Role:

The Internal Auditing Function is established by the Board of Directors, and its

responsibilities are defined by the Audit Committee of the Board of Directors as part of

their oversight function.

Professional Standards:

The internal auditing staff shall govern themselves by adherence to The Institute of

Internal Auditors Code ofEthics. The

InstitutesInternational Standards for the Professional Practice of InternalAuditing (

Standards

) shall constitute the operating procedures for the department. These twodocuments co

nstitute an addendum to their charter. The Institute of InternalAuditorsPracticeAdvisories will be adhered to as applicable. In addition, Internal Auditing will adhere to the

companys policies and procedures and Internal Auditings Standard Operating

Procedures Manual. The Standard Operating Procedures Manual shall include attribute,

performance, and implementation standards to guide the Department.

Authority:

The chief audit executive and staff ofATMs internal audit department are authorized to:

Have unrestricted access to all functions, records, property, and personnel.

Have full and free access to the audit committee.

Allocate resources, set frequencies, select subjects, determine scopes of work,

and apply the techniques required to accomplish audit objectives.


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Obtain the necessary assistance of personnel in units of the organization where they

perform audits, as well as other specialized services from within or outside

the organization.

The chief audit executive and staff of the internal audit department are not authorized

to:

Perform any operational duties for the organization or its affiliates.

Initiate or approve accounting transactions external to the internal auditing department.

Direct the activities of any organization employee not employed by the internal auditing

department, except to the extent such employees have been appropriately assigned to

auditing teams or to otherwise assist the internal auditors.

Organizational Status:

The CAE shall report administratively to the Chief Executive Officer (CEO) and

functionally to the Audit Committee of the Board of Directors.

Independence:

All internal audit activities shall remain free of influence by any element in the

organization, including matters of audit selection, scope procedures, frequency, timing,

or report content to permit maintenance of an independent and objective mental attitude

necessary in rendering reports. Internal auditors shall have no direct operational

responsibility or authority over any of the activities they review. Accordingly, they shall

not develop nor install systems or procedures, prepare records, or engage in any otheractivity which would normally be audited.

Mission and Scope of Work:

The scope of work of the internal audit department is to determine whether the

organizations network of risk management, control, and governance processes, as

designed and represented by management, is adequate and functioning in a manner to

ensure:

Risks are appropriately identified and managed.

Interaction with the various governance groups occurs as needed.

Significant financial, managerial, and operating information is accurate, reliable, and

timely.

Employees actions are in compliance with policies, standards, procedures, and

applicable laws and regulations.


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Resources are acquired economically, used efficiently, and adequately protected.

Programs, plans, and objectives are achieved.

Quality and continuous improvement are fostered in the organizations control process.

Significant legislative or regulatory issues impacting the organization are recognized

and addressed appropriately. Opportunities for improving management control,

profitability, and the organizations image may be identified during audits. They will be

communicated to the appropriate level of management.

Audit Planning:

Annually, the CAE shall submit to senior management and the Audit Committee a

summary of the audit work schedule, staffing plan, and budget for the following fiscal

year. The audit work schedule is to be developed based on a prioritization of the audit

universe using a risk-based methodology. Any significant deviation from the formallyapproved work schedule shall be communicated to senior management and the Audit

Committee through periodic activity reports.

Reporting:

A written report will be prepared and issued by the CAE or designee following the

conclusion of each audit and will be distributed as appropriate. A copy of each audit

report and a summarization will be forwarded to the CAE and the Chairman of the Audit

Committee

The CAE or designee may include in the audit report the auditees response andcorrective action taken or to be taken in regard to the specific findings and

recommendations. Managements response should

include a timetable for anticipated completion

of action to be taken and an explanation for any recommendations not addressed. In

cases where a response is not included within the audit report, management of the

audited areashould respond, in writing, within thirty days of publication

to Internal Auditing and those on the distribution list. Internal Auditing shall be

responsible for appropriate follow-up on audit findings and recommendations. All

significant findings will remain in an open issues file until cleared by the CAE or the

Audit Committee.

Periodic Assessment:

The CAE should periodically assess whether the purpose, authority, and responsibility,

as defined in this charter, continue to be adequate to enable the internal auditing activity

to accomplish its objectives. The result of this periodic assessment should be


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communicated to senior management and the Board

of Directors.Chief Audit Executive ______________________Chief Executive Officer __

____________________Audit Committee Chairman______________________Date

______________________


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Appendix G

Job (Position) Descriptions for Internal Auditing Staff

Help to facilitate the recruiting by stating explicit job requirements.

Provide a means to justify salaries.

Means to express themanagements expectations.

Method for the internal audit activity to engage in personnel planning.The following

job (position) descriptions are presented in

Sawyers Internal Auditing 5thedition, pages839, 846-848.

CHIEF AUDIT EXECUTIVE

Authority:

The chief audit executive is authorized to direct a broad, comprehensive program of

internal auditing within the organization. Internal auditing examines and evaluates the

adequacy and effectiveness of

thesystems of management control provided by the organization to direct its activities to

ward theaccomplishment of its objectives in accordance with organization polices and

plans. In accomplishing these activities, the chief audit executive and members of the

audit staff are authorized to have full, free, and unrestricted access to all organization

functions, records, property, and personnel.

Responsibility:

The chief audit executive is responsible for:

Establishing policies for the auditing activity and directing its technical and

administrative functions.

Developing and executing a comprehensive audit programs for the

evaluation of management controls provided over all organization activities.

Examining the effectiveness of all levels of management in their stewardship of organiz

ationresources and their compliance with established policies and procedures.

Recommending improvement ofmanagements controls designed to safeguard organiz

ationresources, promote organization growth, and ensure compliance with government l

aws andregulations.

Reviewing procedures and records for


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Their adequacy to accomplish intended objectives, and appraising policies and plans

relating to the activity or function under audit review.

Authorizing the publication of reports on audits, including recommendations for

improvement.

Appraising the adequacy of operating managements actions to correct reported deficie

ntconditions; accepting adequate corrective action; continuing reviews with appropriate

managementpersonnel on action the chief audit executive considers inadequate until th

ere has been asatisfactory resolution of the matter.

Conducting special audits as requested by management, including the reviews of

representations made by persons outside the organization. Acting in a consulting

capacity relative to the above areas of responsibility.

INTERNAL AUDITING - MANAGER

Purpose:

To administer the internal audit activity of an assigned location or operation.

To develop a comprehensive, practical program of engagement coverage for the

assigned location or operation.

To obtain accomplishment ofthe program in accordance with acceptable engagement

standards and stipulated schedules.

To maintain effective working relations with executive and operating management.

Authority and Responsibility:

Within the general guidelines provided by the chief audit executive:

Prepares a comprehensive, long-range program of engagement coverage for the

location to which assigned.

Identifies those activities subject to engagement coverage, evaluates their significance,

andassesses the degree of risk inherent in the activity in terms of cost, schedule, and

quality.

Establishes the related departmental structure.

Obtains and maintains an audit staff capable of accomplishing the internal audit

function.


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Assigns engagement areas, staff, and budget to supervisors.

Develops a system of cost and schedule control over engagement projects.

Establishes standards of performance and, by review, determines that performance

meets the standards.Provides executive management within the assigned location with reports on engagem

entcoverage and engagement results, and interprets those results so as to improve the

engagement program and the engagement coverage.

Establishes and monitors accomplishment ofobjectives directed toward increasing the

internal audit activity's ability to serve management.

INTERNAL AUDITING - SUPERVISOR

Purpose:

To develop a comprehensive, practical program of engagement coverage for assigned

areas.

To supervise the activities of staff assigned to the review of various organizational and

functional activities.

To ensure conformance with acceptable standards, plans, budgets, and schedules.

To maintain effective working relations with operating management.

To provide for and conduct research and develop manuals and training guides.


Under the general guidance of a manager:

Supervises the work of staff engaged in the reviews of organizational and functional

activities

Provides a comprehensive, practical schedule of annual engagement coverage within

general areas assigned by the manager.

Determines areas ofrisk and appraises their significance in relation to operational

factors of cost, schedule, and quality. Classifies engagement projects as to degree of

risk and significance and as to frequency of coverage.

Provides for flexibility in engagement schedules so as to be responsive to

management's special needs.


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Schedules projects and staff assignments so as to comply with management's needs,

within the scope of the internal audit activity's overall schedule.

Coordinates the program with the organization's public accountant.

Reviews and approves the purpose, scope, and approach of each engagement projectfor assigned areas.

Directs engagement projects to see that professional standards are maintained in the

planning and execution and in the accumulation of information.

Counsels and guides staff to see that the approved engagement objectives are

met and that adequate, practical coverage is achieved.

Reviews and edits engagement communications and, in organizations with the auditor-

in-charge for the assigned project, discusses the communications with appropriate

management.

Presents oral briefing to branch-level management.

Provides for and performs research on engagement techniques.

Provides formal plans for the recruiting, selecting, training, evaluating, and supervising

of staff personnel. Develops manuals and other training aids.

Accumulates data, maintains records, and prepares reports on the administration of

engagement projects and other assigned activities.

Identifies factors causing deficient conditions and recommends courses of action to

improve the conditions, including special surveys and audits.

Provides for a flow of communication from operating management to the manager and

to the chief audit executive. Assists in evaluating overall results of the engagements.

INTERNAL AUDITOR - SENIOR

Purpose:

To conduct reviews of assigned organizational and functional activities.

To evaluate the adequacy and effectiveness of the management controls over those

activities.

To determine whether organizational units are performing their planning, accounting,

custodial,

riskmanagement, or control activities in compliance with management instructions, appli


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cablestatements of policy and procedures, and in a manner consistent with both

organizational objectives and high standards of administrative practice.

To plan and execute engagements in accordance with accepted standards.

To report engagement observations and to make recommendations for correctingunsatisfactory conditions, improving operations, and reducing cost

To perform special reviews at the request of management

To direct the activities of assistants.


Under the general guidance of a supervisor:

Surveys functions and activities in assigned areas to determine the nature

of operations and the adequacy of the system of control to achieve establishedobjectives.

Determines the direction and thrust of the proposed engagement effort.

Plans the theory and scope of the engagement, and prepares an engagement work

program.

Determines the engagement procedures to be used, including statistical sampling

and the use of information technology.

Identifies the key control points of the system.

Evaluates a system's effectiveness through the application of a knowledge

of business systems,including financial, manufacturing, engineering, procurement, and

other operations, and anunderstanding of engagement techniques.

Recommends necessary staff required to complete the engagement.

Performs the engagement in a professional manner and in accordance with the approv

edengagement work program.

Obtains, analyzes, and appraises information as a basis for an informed, objective conclusion(opinion) on the adequacy and effectiveness of the system and the efficiency of

performance of the activities being reviewed.

Directs, counsels, and instructs staff assistants assigned to the engagement, and

reviews their work for sufficiency of scope and for accuracy.


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Makes oral or written presentations to management during and at the conclusion of the

engagement, discussing observations and recommending corrective

action to improve operations and reduce cost.

Prepares formal written communications, expressing opinions on the adequacy and

effectiveness of the system and the efficiency with which activities are carried out.

Appraises the adequacy of the corrective action taken to improve deficient conditions

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