understanding the work of an internal auditor a developing countrys perspective presented by daniel...

Presented by Daniel Bart - Plange

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UNDERSTANDING THE WORK OF AN INTERNAL AUDITOR

A Developing Country’s perspective


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SOME FACTS

90% or more do not know the difference between the Internal Auditor and the External Auditor. All they know is “Auditor”

90% or more think that the work of the internal auditor involves only money

90% of people think that the work of Auditors is to check whether somebody has embezzled money

Most auditors have the pre conceived idea that colleague staff are thieves or ignorant of what they are doing and that is why they should be “checked”


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SOME FACTS Most people think that the auditor has powers

to dismiss anybody who is found to have embezzled money

For one reason or the other most staff in an organization fear auditors

Some auditors think they are the most powerful group of staff in an organization and therefore must be feared

Using of words like “Reporting” and “checking”

These are all misconception about audit created from history which has to be corrected


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SOME FACTS

Unfortunately current circumstances feed into some of these misconception. They include: Types of jobs that are performed by the

Internal Audit in an organisation How some audit staff approach their jobs

in various organisations etc


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BRIEF HISTORY OF INTERNAL AUDIT

The Internal Auditing profession evolved steadily with the progress of management science after World War II.

It is conceptually similar in many ways to financial auditing by public accounting firms, quality assurance and banking compliance activities


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The shift to a war economy further expanded organizations' responsibilities for scheduling, availability of materials and labourers, compliance with government regulations, and an increased emphasis on cost finding.

In seeking ways to deal with these new problems, management appointed special staff people to review and report on what was happening and to probe for the why.


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These people came to be known as “Internal Auditors."

In some organizations, internal auditors were used to check on routine financial and operational activities with a heavy emphasis on compliance, security, and detection of fraud.

In others, internal auditors were given higher levels of status and were asked to analyze and appraise more substantive financial and operational activities.

www.theiia.org/theiia/about-the-institute/history-milestones/

http://www.theiia.org/theiia/about-the-institute/history-milestones/

http://www.theiia.org/theiia/about-the-institute/history-milestones/


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WORK OF THE INTERNAL AUDITOR

From the background information, Internal Audit activities would differ from organizations.


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STRUCTURE OF A BUSINESS ENTITY


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WHERE IS THE AUDITOR IN THIS STRUCTURE

Each of these levels in a business entity structure will need an Independent person to give them a report on the performance of their subordinates.

Shareholders employ the services of External Auditors

Board of Directors (custodian of policies and Procedures) would need the Internal Auditors to review whether the polices and procedures are being followed

Managing Director / CEO would want to have an overall picture of what is happening in various departments, and it is the Internal Auditor who can give this overview.


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CAUTION

If the entity structure is not the efficient one and the Shareholder is the same as the Director (Husband and wife being directors of the company) and the Directors are the same as the CEO and Operations Manager (Husband is the CEO and the wife is the Operations Manager)

Please don’t take your Internal Audit principle to such an organisation, you will face a serious challenge.


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CONTEMPORARY AUDITING

Risk Management & Corporate Governance


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Background


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THE CASE OF ENRON

Enron Corporation was an American energy company based in Texas Before its bankruptcy in late 2001, Enron employed approximately 22,000

staff At the end of 2001, it was revealed that its

reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud,

http://en.wikipedia.org/wiki/Energy

http://en.wikipedia.org/wiki/Texas

http://en.wikipedia.org/wiki/Bankruptcy

http://en.wikipedia.org/wiki/Accounting_scandals


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ENRON’S FRAUD CASE

Enron had created offshore entities

These entities made Enron look more profitable than it

actually was

Corporate officers perform more and more contorted

financial deception to create the illusion of billions in

profits while the company was actually losing money

Executives began to work on insider information and

trade millions of dollars worth of Enron stock

http://en.wikipedia.org/wiki/Insider_information


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ENRON’S FRAUD CASE

As the scandal unravelled, Enron shares dropped from over US$90.00 to just cents / pennies. Enron had been considered a blue chip stock, so this was an unprecedented and disastrous event in the financial world

http://en.wikipedia.org/wiki/Enron

It is believed that if attention had been given to compliance of policies & procedures in the organization these scandals would not have occurred.

http://en.wikipedia.org/wiki/Blue_chip_(stock_market)

http://en.wikipedia.org/wiki/Enron


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AFTERMATH OF ENRON – SOX

It is believed that strengthening the Internal Audit would help reduce some of these anomalies, because they have all the time they need to monitor the policies & procedures

Hence the passing of the law - SOX, Section 404 requires every Public Company in U.S

to report on their compliance or otherwise of their Internal Controls


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AFTERMATH OF ENRON – SOX

The Sarbanes–Oxley Act of 2002 (Pub.L. 107-204, 116 Stat. 745, enacted July 30, 2002)

It is named after sponsors U.S. Senator Paul Sarbanes (D-MD) and U.S. Representative Michael G. Oxley (R-OH).

http://en.wikipedia.org/wiki/Democratic_Party_(United_States)

http://en.wikipedia.org/wiki/Maryland

http://en.wikipedia.org/wiki/Republican_Party_(United_States)

http://en.wikipedia.org/wiki/Ohio


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Risk Management & Corporate Governance


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RISK Risk Defined

The possibility that an event will occur and adversely affect the achievement of objectives. (COSO ERM)

Risk appetiteThe broad-based amount of risk a company or other entity is willing to accept in pursuit of its mission or vision. (COSO ERM)


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RISK MANAGEMENT Risk management involves 3 things. Assessment,

Evaluation and Monitoring Risk assessment

Risk assessment is the process of identifying and analyzing relevant risks to the achievement of the entity’s objectives and determining the appropriate response

Risk evaluation

Means estimating the significance of a risk and assessing the likelihood of the risk occurrence

Monitor

Making sure expectation agrees with actual


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CORPORATE GOVERNANCE

Define: Corporate governance is a term that refers broadly

to the rules, processes, or laws by which businesses are operated, regulated, and controlled

The modern definition calls it the framework of

rules and practices by which a board of directors ensures accountability, fairness, and transparency in the firm's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community)

http://www.investorwords.com/1709/ensure.html

http://www.businessdictionary.com/definition/accountability.html


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DEFINE AUDIT

The Institute of Internal Auditors define internal auditing as:

"… an independent, objective, assurance and consulting activity

designed to add value and improve an organization's operations.

It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processes."

http://www.theiia.org/


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WHY DOES INTERNAL AUDIT EXIST

The main aim of internal auditing is to assist the organization to achieve its objectives.

If your objective is to go to the moon, Internal Audit has to help to achieve it


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AUDITORS BUSINESS

We help businesses to achieve its objectives by assisting all management in the effective discharge of their responsibilities,

We do this by furnishing them with: analyses, appraisals, recommendations and pertinent comments concerning the activities

reviewed


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ADVANTAGES OF AUDIT

Give assurance to the Chief Executive and other Department Heads about their section

Help improve cost reduction Help Improve communication Help improve continuity of activities Making recommendation for best practices Confirming accounting records for the

preparation of Financial statement End result is for the organization achieve its

objective


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Financial Audit – Aims to assess reliability of the accounting system, Information and Financial Reports

Compliance Audit – Aims to assess quality & appropriateness of established systems to ensure compliance with laws, regulations, policies & procedures

TYPES OF AUDITS


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Operational Audit – Assess quality and appropriateness of other systems & procedures eg. Organizational structures, Methods and Resources

Management Audit – Asses the quality of management approach to risk and control in the framework of the University’s controls

TYPES OF AUDITS


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THANK YOU

Q & A

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