The document provides an overview of internal auditing, including: 1) It defines internal auditing as an independent appraisal activity that reviews accounting, financial, and other operations to provide constructive services to management. 2) The objectives of internal auditing include analyzing internal controls, detecting inefficient operations, and verifying financial records. 3) The scope of internal auditing involves monitoring internal controls, examining financial and operating information, and reviewing compliance and special investigations.

1. 1
INTERNAL AUDIT
Prepared and Presented
By
Honory Mkelemi

2. 2
Learning objectives:
i. Introduction.
ii. Definition.
iii.Objectives of internal
audit.
iv.Scope and functions of
internal audit.

3. 3
….learning objectives.
v. The essentials of effective
internal audit.
vi. Relationship between
internal audit and external
audit.
vii. Reliance of external
auditor on the work of
internal auditor.

4. 4
1.0 Introduction
• Many large organizations
have an internal audit
department within the
organization as an integral
part of internal control.

5. …..introduction
The scope and functions of
this department vary
considerably from one
organization to the other.

6. 6
…..introduction.
• Internal audit is concerned
mainly with a review of various
operations. Traditionally,
internal audit embraced
financial transactions and
financial records only.

7. …..introduction.
However, internal audit now
extends to such matters
which are not directly of a
financial or accounting
nature.

8. 8
2.0 Definition
The Institute of Internal
Auditors defines internal audit
as;
‘The independent appraisal
activity within an organization
for the review of accounting,
financial and other operations
as a basis for protective and
constructive service to the
management’.

9. 9
….definition.
• According to this definition,
internal audit deals
primarily with accounting
and financial matters, but it
may also properly deal with
matters of an operating
nature.

10. 10
….definition.
• The International standard in
auditing 610 defines internal
audit as an appraisal activity
established within an entity as
a service to the entity. Its
functions includes amongst
other things monitoring
internal control.

11. 11
3.0 Objectives of internal audit
i. To analyze the existing system
of internal control and suggest
improvements in this system.
ii. To operate an effective system
of internal audit as an
important function of the
control activities.

12. 12
…. Objectives of internal audit.
iii.To correct and detect
inefficient operations and weak
points. Based on this, to
recommend changes.
iv. To verify mainly the accuracy,
the integrity and reliability of
financial and other related
records.

13. 13
…. Objectives of internal audit.
v. To ascertain whether the
organization adheres to the
standard accounting practices
and the properly established
methods of accounting.
vi. To take up an investigation at
the special request of the
management.

14. 14
4.0 Scope and functions of
internal audit
The scope and functions of
internal audit vary widely and
depend on the size and structure
of the entity and the
requirements of its management.
Ordinarily, internal audit
activities include one or more of
the following;

15. 15
….Scope and functions
i. Monitoring and internal control
• Establishment of an adequate
internal control is the
responsibility of management.
controls, monitoring their
operation and recommending
improvements thereto.

16. ….Scope and functions
Internal audit is ordinarily
assigned specific
responsibilities by management
for reviewing
16

17. ….Scope and functions
ii. Examination of financial and
operating information
Includes identifying, measuring,
classifying and reporting
information. Involves detailed
testing of transactions and
balances.

18. ….Scope and functions
iv. Review of the economic efficiency
and effectiveness of operations.
v. Review of compliance of laws,
regulations and other external
requests.
vi. Special investigations into particular
areas eg. Suspected fraud.

19. 5.0 The essentials of effective
internal auditing
i. Independence
The auditor should have the
independance in terms of
organization status and
personal objectivity which
permits the proper
performance of his duties.

20. ….. essentials of effective internal auditing
ii. Staffing and training
• The internal audit unit should be
appropriately staffed in terms of
numbers, grades, qualifications
and experience, having regard to
its responsibilities and objectives.

21. …..essentials of effective internal auditing
The internal auditor should be
properly trained to fulfill all his
responsibilities.
• The effectiveness of the internal
audit depends substantially on
quality, training and experience
of its staff.
21

22. ….. essentials of effective internal auditing
iii. Relationships
The internal auditor should
seek to foster constructive
working relationship and
mutual understanding with
management, external auditors
and any other review agencies.

23. ….. essentials of effective internal auditing
iv. Due care - the internal auditor should
exercise due care in fulfilling his
responsibilities.
v. Planning, controlling and recording
The internal auditor should adequately
plan, control and record his work.
All internal audit plans should be
sufficiently flexible to respond to
changing priorities.

24. ….. essentials of effective internal auditing
vi. Evaluation of the internal control
system.
The internal auditor should identify
and evaluate the organization
internal control system as a basis
for reporting upon its adequacy and
effectiveness.

25. ….. essentials of effective internal auditing
vii. Evidence
The internal audit should
obtain sufficient, relevant
and reliable evidence on
which to base reasonable
conclusions and
recommendations.

26. ….. essentials of effective internal auditing
viii. Reporting and follow-up.
The internal auditor should ensure
that findings, conclusions and
recommendations arising from
each audit assignment are
communicated promptly to the
appropriate level of management
and he should actively seek a
response.

27. ….. essentials of effective internal auditing
• He should ensure that
arrangements are made to follow-
up audit recommendations, to
monitor what action has been
taken on them.

28. 6.0 Relationship between the
internal audit and external audit
The relationship between the
internal audit and external audit
are highlighted below;

29. ….relationship between..
A: Common functions
Both are interested to
ascertain whether;
i. An effective internal
control system is in place to
detect and prevent fraud and
errors.
29

30. ….relationship between..
ii. The system of internal control is
operating systematically and
satisfactorily.
iii.The accounting system and
procedures are adequate to
provide information that is
necessary for the preparation of
financial statements.

31. ….relationship between..
B: Differences between internal audit
and external audit
i.Functions and responsibilities
The functions and responsibilities
of the internal audit are
determined by management,
whereas those external audit
are determined statutorily.

32. ….relationship between..
ii. Objectives
• The main objective of the internal
auditor is to ensure that there is
an efficient accounting system,
the accounting statements and
other accounting data presented
to management are accurate and
disclose all material facts.

33. ….relationship between..
• The main objective of the statutory
auditor, is to see that the balance sheet
submitted to the shareholders shows a
true and fair view of the state of
affairs, and that the profit and loss
account shows a true and fair view of
the profit or loss for the year ended on
that day.

34. ….relationship between..
iii. Appointment
The internal auditor is
appointed by management,
whereas the statutory auditor,
in the case of a company, is
appointed by the shareholders.

35. ….relationship between..
iv. Responsibility
The internal auditor is
responsible to management and
reports to management and the
Audit Committee, if this exists.
The statutory auditor is
responsible to the shareholders
and reports to them.

36. ….relationship between..
v. Employment
The internal auditor is an employee
of the company; the statutory
auditor is not.
vi. Independence
The internal auditor does not enjoy
that independence and status as is
enjoyed by the statutory auditor.

37. 7.0 Reliance of statutory auditor
on the work of internal audit
The statutory auditor must
inquire carefully about internal
audit before determining the
extent to which he can rely on
the work of the internal auditor.
The statutory auditor will have to
consider the following factors:

38. …. Reliance of statutory auditor
i. Composition of the internal audit
staff.
ii. Qualifications and competence of
internal audit staff.
iii. The authority given to internal audit
department.
iv. Efficiency of the work of internal
audit staff.

39. …. Reliance of statutory auditor
v. Internal audit reports.
vi. Points raised by internal auditor
in his/ her report.
vii. How the points raised by the
internal auditor are dealt with by
the management and the extent
of action taken by the
management.