The cost and benefits of an internal audit

Every internal audit role should be established with a charter approved and reviewed annually at board level. The internal audit charter should describe the internal audit role in the organization it serves, including its purpose, authority, responsibility, and relationships with external organizations. The internal audit charter should be promoted across the organization at all levels and as appropriate across its supply chains and to its stakeholders. Internal audit should have measures in place to demonstrate its level of performance to the organization. Expectation gaps at organization and individual customer levels should be identified, and all performance measures continuously monitored if the full added value of the internal audit role is to be achieved. New dimensions of the internal audit role in an organization should be continuously explored to ensure that it is at the cutting edge of its professional attributes and in its performance.

Chapter 1

Cost of internal audit

There are two types of internal audit cost

Financial cost

Operational cost

Financial cost

Financial cost of internal audit is those cost that would pay to employees. Organization gives some pays to his employees who conduct internal audit.

Operational cost

Company spend some operational cost when internal audit conducted in the organization e.g stationery documentation

Cost/benefits analysis

While the cost of internal audit is easily quantifiable, measuring its benefits is less straightforward since internal audit may have both direct and indirect effects .

The relevant benefits of internal audit often main fest themselves on several levels and may not be immediately visible

Cost savings are easier to allocated directly than other benefits.

By establishing a correlation between the potential benefits and the costs in cured by the internal audit .Internal audit Department and approximation of the profitability can be obtained .

Efficiency measurement.

It can be very important to measure the efficiency of internal audit work. It involves examining the ratio of costs incurred by internal, Audit during the course of a specific audit, or the cost of the entire internal audit deparment, compared with the actual benefits achieved for lthe company as a whole,

The following criteria can b e used to analyze each audit with regard to the benefits it delivers in the short, medium, and long term.

Cost related benefits (reducing, avoiding, or limiting costs),

Monetary and non monetary benefits ( increased sales, improved operating profits, motivations, reputation,).

Impact on cost.

Generally, the cost impact of an audit can be seen in the short to medium term. Costs normally respond linearly and usually correlate very clearly and closely with their drivers. The can be quantified, for example on the basis of effective payments made, although direct perception declines as the time between implementing the recommendation and the time of payment increases.In addition, imputed costs can be used as part of the analysis. Normally, Imputed costs increase the impacxt of audit findings in area more prone to inducing costs, because ineffective internal controls also lead to costs and expenses that jcould otherwise have been avoided.

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Benefits

While the cost related to internal audits kland the resulting recommendation are relatively straightforward to determine, the benefits are much more difficult to quantify. First, the benefits often continue over long periods of time. Secondly, it is often difficult to measure beenefits and attribute them directly to the process that have brought them about .Benefits are frequently abstract and the interdependencies between cause and effect are often obscure.A complicating factor is that the effects of qualitative and quantitative benefits sometimes overlap and can thus either reinforce or detract from each other. The more geneal the benefit analysis, the more difficult itg will be to reliably assign indicators that map and explain the casual relationship between an audit activity and itgs findings on the one hand and the perceptible benefits on the others.

Deriving Benefits.

Before it is possible to quantify and benefits, representative benchmarks must be defined for each audit field , applying either direct or indirect measures. Quite possibly, audit recommendation will lead to tangible b enefits, such as an improved working atmosphere, greater motivation, or error reduction, which will in turn enhance each employees understanding of values. There may also be a change in the way effects are perceived externally. An improved position in the market place, easier access to finance, and a different public perception, for example, it negative factors are eliminated quickly and with determination and their recurrence is prevented by implementing adequate measures. It is important to recognize that there may be both short term cost savings and longer term benefits gained from internal audit and the implementation on the resulting jcontrol recommendations. Both benefits shold be considered when performing cost/ benefits analysis, even though they may overlap sometimes.

Quantifiable Benefits.

Including quantifiable benefits in the analysis brings up the most difficult aspect of measuring internal Audits efficiency. The main purpose of examining these benefits is to establish a casual link between an audit finding land increased b benefits values for a business unit or the company as a whole. A key challenge in this regard is to extrapolate the quantified benefit created by eliminating a process weakness, thus making it visible.

Organizational and Time delays

With regard to the implementation of audit results organizational effort and time delays should not be ignored. Since each audit field has different c ontent, each must be considered in detail. In business audits for example, linear correlations between audit result and increased jprofits can be established, because there is a direct link between the audit object and the success driver.

Cost Benefit Relationship.

Often, the benefit derived from internal audits is unclear, without a direct link to the measurable benefit related units. Therefore, equivalents must be established by using auxiliary variables to quantify the cost impact and the benefits related to the audit findings.

Standard Cost benefit analysis

To define a standard cost /benefit analysis for each audit field, internal Audit must define and categorize separate bench marks .Thus, Internal Audit is integrated into the business control and decision processes, which results in interdependencies with other disciplines, such as capital investment appraisal, management accounting, and planning.Reduced operating costs through better effic

Benefits of an effective internal audit process

There are number benefits of an effective internal audit process.

They include the following;

Reduced operating costs

Reduced operating costs through better efficiency increased

Productivity, better planning, and reduced scrap and rework.

Some organizations have planned actual revisit on venture on audit conclusion that have totaled well into six and seven information in annual proceeds. Calculating revisit on venture for internal audit conclusion is auxiliary discussed in Chapter 2.

Better safety concert.

Though ISO 9001;2008 does not exclusively address worker health and protection, the necessities

of ISO 9001;2008 and the internal audit course can have a positive collision on safety routine.A good worker instruction process and well-written in service commands supply to an successful professional health and safety supervision arrangement. When these have been joint with the accountability that audits present, many organization have seen significant improvement in their safety routine presently from implement an ISO 9001-based classification.

Better client agreement.

Of course the final ambition of Any excellence administration system is enhanced consumer satisfac-

tion. enhanced customer agreement often leads to an improved customer bottom. Higher levels of consumer happiness also lead to reduction in customer complaint and arrival product, both of which are wealthy to any humanity in provisions of manpower luggage charges, revision and fragment.

better spirits.

Many organization foundation their internal audit course will ask, How do you lay the words’audit’ and

‘better morale’ on the same page exclusive of amused out loud” The answar be simple. When workers are expectant to give To the audit course and see improvement completed base on their participation,

Audits serve to allow the personnel as a substitute of criticism them.

Chapter 2

Introduction

Establishing the internal audit role in any organization require formality to ensure that it is understood not only by the board and management but also by its customer across the organization and, where necessary, those external to the organization The internal audit assurance and consulting role should be explained clearly in a charter to minimize any expectation gaps at board and organization level .The institute of internal auditor as the global professional body representing internal audit in every country, has always recommended and now require in its international standards for professional practice of internal auditing (standard) that “the purpose ,authority and responsibility of an internal audit activity … should be formally approved and kept under review at the highest level in an organization ” in some sector this may be also a requirement of one or more of an organization ‘ stakeholder, such as government or a sector’s regulator

Internal audit definition

Auditing regular ASA 610 allowing for the Work of Internal Audit, issued by the Auditing and declaration Standards Board (AUASB) defines internal audit as follows:

“Internal audit” means an evaluation activity recognized within an unit as a service to the entity. Its functions include, between other things, monitoring internal control.

In calculation, the Institute of Internal Auditors (IIA) has residential the globally conventional definition of ‘internal auditing’ as follows:

‘Internal auditing is an self-determining, objective guarantee and consulting activity planned to add value and progress an organization’s operations. It helps an agency achieve its objectives by bringing a systematic, closely controlled approach to estimate and recover the usefulness of risk management, control and governance processes.’

Instruction

The capacity of internal audit action embraces the wider concepts of corporate governance and risk – recognizing that control exists in an organization to manage risk and support successful governance.

The two types of internal audit manner contemplated by the definition have been defined by the IIA as follows

.assertion Services – an purpose assessment of proof for the reason of as long as an self-regulating evaluation of risk management, control or governance processes for the organization.

.Consulting Services – optional and connected customer activities, the scenery and capacity of which are approved upon with the consumer and which are planned to add value and develop an organization’s operations.

During this paper all references to “internal assessment” will include both of these services. Wed by internal audit organization

History of internal audit

The Internal Auditing occupation evolves gradually with the progress of management science after World War II. It is theoretically similar in many ways to financial auditing by public accounting firms, excellence assurance and banking conformity activities. Much of the speculation fundamental internal auditing is resulting from management consulting and public accounting professions. With the completion in the United States of the Sarbanes-Oxley act of 2002, the profession’s expansion accelerated, as many internal auditors take the skills necessary to help companies congregate the necessities of the law

Nature of internal audit activity

Based on a risk evaluation of the organization, internal auditors, management and failure to notice Boards resolve where to spotlight internal auditing hard work. Internal auditing activity is usually conducted as one or more isolated projects. A representative internal audit project [7] involves the following steps:

Establish and converse the scope and objectives for the audit to suitable management.

Develop and considerate of the business area under evaluation. This includes objectives, capacity, and key operation types. This involves review of documents and interviews. Flowcharts and narratives may be produced if required.

Explain the key risks opposite the business activities within the scope of the audit.

Identify control events used to make sure each key risk and operation type is correctly restricted and monitored.

Develop and implement a risk-based example and difficult approach to conclude whether the most significant controls are operating as projected.

Report problems recognized and consult action plans with management to talk to the problems.

Follow-up on reported conclusion at proper intervals. Internal audit departments continue a follow-up record for this reason.

Project duration varies based on the difficulty of the activity being audited and Internal Audit possessions presented. Many of the above steps are iterative and may not all occur in the progression indicated.

By analyzing and recommending business improvements in critical areas, auditors help the organization meet its objectives. In addition to assessing business processes, specialists called Information Technology (IT) Auditors review information technology controls.

Cost & benefit of internal audit

Internal audit can be helpful to most organizations because, if designed correctly, it provides management with a style to recognize those risks that may avoid the organization from meeting its objectives. For example, if a company has a planned objective to elevate $20 million in loans to build a new facility there are a number of risks that may prevent that from occurring. One risk may be the external factor of increased interest rates. Another risk may be internal risk that management does not qualify for credit because of covenants they will not be able to meet.

Financial costs of internal audit will vary based upon the size and goal of the internal audit function. Additionally, the cost will be based upon the resources used to perform the work (outsource, co-source, in-house). The most significant non-financial cost may be a negative reputation of the internal audit role throughout the organization. If the function is not properly established, socialized and executed then the validity of the function could be jeopardized.

Benefit of internal audit

Proper accounting system

Better management

Progress review

Effective control

Assert protection

Division of works

No errors

Fixing responsibility

Help external auditing

No fraud

Performance improve

Proper use of resources

Investigation

Suggestion

OBJECTIVES AND SCOPE OF INTERNAL AUDIT

Internal audit is and self-governing assessment function established by the management of an organisation for the review of the internal control system as a service to the organisation. It separately examines, evaluates and reports on the sufficiency of internal control as a involvement to the correct, economic and successful use of resources

Scope of internal auditing

The possibility of internal auditing currently embraces wider concepts of community governance: risk and power – recognizing that organize exists within an organization basically to manage risk and advance valuable governance [1] . The most significant vary is that the internal auditors are estimated to modify their mindset: from faultfinders to advisors. Internal auditors should take care of the

auditee as their consumer. As with a client, the internal auditor should obviously communicate with the auditee, engage management in the audit development process, consider organizational risks that are prospective areas of audit anxiety, work with managers to find suitable solutions, discuss conclusion before officially reporting, and seek suggestions from the auditee for the development of audit practice. Some organizations with broad-scope internal auditing is in progress using internal audit as a exercise ground for their prospective managers, as it provides a bird’s eye too analysis of the entire organization. Internal auditing has become a profession in its own right, with a body of comprehension, professional qualifications, code of ethics, self-sufficient career progression and a system of quality secure.

Much of the development in internal auditing has taken place in the private sector. However, the public sector has also started realizing the importance of this function. The public sector has seen several waves of thought. Soon after the World War II, the rebuilding of war torn economies and developing the de-colonized countries became the most important priority. Everyone was enthusiastic about planning, import substitution and fixed exchange rate. The theory worked well for a few years when it started showing constraints. The challenge of socialism and the cold war concerns gave birth to large-scale nationalizations around the globe. The size of Government started bulging. The public sector became quite large. This gave birth to the realization that the public sector must perform in an environment of economy, efficiency and effectiveness. Demands for performance measurement, and value-for-money became prominent. While there was a level of dissatisfaction with the frameworks for performance measurement and value for money auditing that governments had in place, these concerns about the efficiency and effectiveness of the public sector remained vexing and generally were not addressed in any substantive way until a wave of privatization engulfed the entire world. The privatization led to demands for proper regulation of the newly emerging privatized enterprises. Along with this came a whole host of concerns for good governance, transparency and accountability of the public sector from a much broader and more influential range of stakeholders.

Objectivity of the internal auditor

Each internal auditor should have and purpose manner of mind and be in a sufficiently autonomous position to be able to implement judgement, express opinions and present recommendations with impartiality.

(a) The internal auditor, although his employment by the organisation, should be free from any difference of attention arising either from professional or personal relationships or from pecuniary or other interests in an organisation or activity which is subject to audit.

(b) The internal auditor should be free from undue influences which either restrict or modify the scope or conduct of his work or over-rule or significantly affect judgement as to the content of the internal audit report.

(c) The internal auditor should not allow his objectivity to be impaired when auditing an activity for which he has had authority or responsibility.

(d) An internal auditor should be consulted about significant proposed changes in the internal control system and the implementation of new systems and make recommendations on the standards of control to be applied. This need not prejudice the auditor’s objectivity in reviewing those systems subsequently.

(e) An internal auditor should not normally undertake non-audit duties but where he does so, exceptionally, he should ensure that management understands that he is not then functioning as an internal auditor.

Internal audit functions in an organization?

Internal audit is one of the internal control procedures that are to be followed by the various departments and employees of the organization. The objectives and scope of internal audit cover the following:

Verification of compliance with established policies.

-Verification of the effective operation of established systems and other controls.

-Verification of both fixed and current assets of the organization.

-Based on the above findings, suggest improvements in the system controls in order to plug the loopholes.

An internal audit manual indicating the scope of verification of each functional area within the organization is necessary so that the responsibility entrusted to the internal audit department is clear to the functional departments and external auditors also. Whether the controls as aforesaid are operating normally without breakdown of any system is to be observed by internal auditor. In judging the adequacy or otherwise of the internal audit functions

Internal audit procedure

1. PURPOSE

The purpose of this process is to ensure that both an initial internal audit and follow-up internal audits are carried out in accordance with ISO9002.

2. SCOPE

This procedure covers the performance of regular internal audits which are to be carried out on all procedures as listed under the Quality Management System.

3. COMPLIANCE

This procedure is written in compliance with ISO9002 clause 4.17.

4. DEFINITIONS

4.1 INTERNAL AUDITOR: A delegated staff member who has undertaken an internal auditing workshop conducted within the department.

4.2 INTERNAL AUDIT: An audit to be carried out by an internal auditor who is independent of the procedure being audited. To be carried out on a regular basis to verify the effectiveness of the procedure in accordance to ISO9002.

4.3 AUDITEE: Staff member who is audited and who is either directly responsible for or familiar with the duties as set out by the relevant procedure which is being audited.

4.4 AUDIT SCHEDULE: Time set aside for the procedure to be audited by an internal auditor.

4.5 AUDIT REPORT: A report which confirms that an audit took place and which details the internal audit gathering. To be finished and returned to the Quality Co-Ordinator. There are four sections to this report; Part One – audit findings by the Internal Auditor, Part Two – explanation and/or recommendations. Both Part One and Two to be completed by the Internal Auditor. Part Three – auditee’s comments and actions. Part Four – comments by the Quality Co-Ordinator.

4.6 CORRECTIVE ACTION: Updating of procedures to reflect the current duties which are carried out by all the sections as listed under the Quality Management System.