Internal Auditing & Management Control

ACCT 620

Otto Chang

Professor of Accounting

DEFINITION OF INTERNAL AUDITING

• Internal auditing is 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 the effectiveness of risk management, control and governance processes.

Conceptual Overview of Internal Auditing

Management Control

Internal AuditingPrimary Objectives: Appraisal of Control

Primary Determinant of Activities: Relative RiskMeans of Fulfilling Responsibilities: Independence

Control Objectives

• Reliability and the integrity of information

• Compliance with policies, plans, procedures, laws, and regulations

• Safeguarding of assets

• Economical and efficient use of resources

• Accomplishment of established objectives and goals for operations and programs

Division of Control Responsibilities

Control Areas of ManagementResponsibilities Primarily ConcernedFormulation of Control Administrative Management Operational Management

Implementation of Control Operational Management

Testing Compliance with Internal AuditingControls Operational Management

Evaluation of Control Internal Auditing Administrative Management Operational Management

SERVICES PROVIDED BY THE INTERNAL AUDITOR

• Risk analysis and risk management

• Evaluation of internal control

• Compliance audit

• Management and operational audit

• Fraud detection

EVOLUTION OF INTERNAL AUDITING

From accounting to management orientation.

From junior sibling of public accountant to distinctive discipline.

From adversary to problem-solving partner.

Audit Direction--What and When to Audit

• Cost and benefit of internal audit– Costs: audit staff’ time and related expenses– Benefits:

• Improvement in business operation and control• Avoiding would-be loss• “Threat value” of an Audit

• In many cases, the relative costs of audits do not differ significantly. Thus, risk become the dominant factor.

Risk Assessment

• Estimated Risk =Estimated loss amount X Estimated probability

Ideal Positioning of Internal Auditing

Administrative Responsibility

Reporting Responsibility

Board of Director Audit Committee

Internal Auditing

Executive Management

Middle Management

Operational Management

Practical Positioning of Internal Auditing

Board of Director Audit Committee

Middle Management

Operational Management

Executive Management

Internal Auditing

Multiple Roles of Internal Auditing

Auditing

Investment ControlAnalysis System Design

Market ControlAppraisals Implementation

Organizational ManagementPlanning PerformanceStrategies Appraisals

Consultants

Internal Auditing