relationship managenment in internal auditing

8/3/2019 Relationship Managenment in Internal Auditing

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ADVANCED INTERNAL AUDITING-RELATIONSHIP MANAGEMENT

Prepared for Presentation By

Patrick Masarirambi


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Introduction In todays world, the internal auditors

need to have a variety of skills to be

successful. Not only do they have to begood in their traditional area ofcompetency like financial andgovernance expertise, analytical skills,

risk assessment but also be businesssavvy, have an eye towards creatingvalue, and provide a larger perspective.


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Introduction Soft skills are becoming crucial.

Operating managers are requesting

assistance from internal audit staff toimprove effectiveness and efficiency ofoperations. Findings are not treated asdeficiencies but as practices that can be

improved by modification jointlydeveloped by client and auditor workingtogether.


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Introduction To top it all and ensure that internal

audit is effective, communication is

most crucial. Sound governancerequires effective interaction among theboard, management, the external

auditor, and the internal auditor.


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Internal Audit and Audit

Committee The audit committee should be

composed of board members who have

the knowledge and experience of theorganisations business. They shouldhave the skills to evaluate financial andmanagement controls, and the ability,

experience, and willingness to act forthe good of the organisation and itsstakeholders.


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Committee They should have the time to find out enough

about the organisation so that they caneffectively challenge the executive

management. A professional internal audit activity is a

major source of information to the board andits special committees. It provides assurance

on the effectiveness of governance, riskmanagement and internal control processes,covering strategic, market, credit, operationaland financial risks.


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Committee The audit committee and the internal audit

team need to maintain a strong positiverelationship.

The chief audit executive has to report on itsfindings to the audit committee anydeficiencies that have been detected and the

audit committee also has to enquire in depthfrom internal audit into complex issues. Theinternal audit activity is answerable to theaudit committee and not management


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Committee The chief audit executive should attend

audit committee meetings and discuss

the charter, review the audit plan,staffing requirements, audit findingsand status of implementation of

recommendations


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Committee The audit committee has to assess the

performance of the internal audit team to

review whether the activity is effective andcapable to be the agent of the of the auditcommittee in the organization. It may alsoact as facilitator between the internal audit,

executive management and the statutoryauditors to ensure proper allocation of workand ensure good corporate governance.


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Relationship with

Executive Management Maintaining a balanced relationship with

the executive management is most

crucial and difficult for the internalauditor. For internal audit to beeffective, the relationship withexecutive management has to be

constructive. The relationship has to bebased on mutual confidence but itshould not be too friendly


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Relationship with

Executive Management Nowadays, operating managers are

requesting assistance from internal audit staffto improve effectiveness and efficiency ofoperations. Findings are not treated asdeficiencies but as practices that can beimproved by modification jointly developed byclient and auditor working together.

The chief audit executive should havefrequent meeting with the management toshare information.


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Relationship with

Executive Management Reports

Within the management, there are different

levels. The audit report has to be designed tosuit the interest, needs and requirements ofdifferent levels of management. All the levelsneed to know as to what is happening in the

areas of their concern and internal auditreport can serve as one of the vehicles ofinformation.


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Relationship with

Executive Management However the degree of detail required

by each is different. The local office

needs an in- depth report with all thedetails and documentation so thatfollow up actions /rectifications can betaken. The regional offices would need

general information on the operationsand performance of the local office.


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Relationship with

Executive Management The top management needs to be

informed of serious issues and

frauds and information onproblems across offices etc. Thus,as the levels go up the details

required are less.


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Relationship with

Executive Management For easy readability and distribution,

the report could have an executive

summary, a main report divided byfunctional areas and lastlyrecommendations. Thus, each level gets

focused information according to theirneeds.


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Relationship withExecutive Management

Oral communications

Formal written communications are necessary

and but informal communications cannot beignored altogether. It can help drawmanagements attention towards importantissues. Debriefings minimise the chance of

something important passing unnoticedbecause of other priorities and pressures.


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Relationship withExecutive Management

Overview

An audit report consists of details of the audit

assignment of the audited unit. At some pointit also needs to see things from a largerperspective- to focus on the forest ratherthan the trees. On the basis of recurring

observations and trends, it would be possibleto identify areas which need more attention,policy changes or guidance.


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Working with theStatutory Auditors

Internal audit and statutory audit havedifferent objectives. The primary

objective of statutory auditors is toexpress an opinion on accuracy andfairness of financial statements. Thefocus of the report is on objectivity,

accuracy and brevity. They focus onhistorical financial data. The objectivesof internal audit are much wider


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Working with thestatutory auditors

They are involved in operational audits,management audits, review of processes,practices & procedures and otherassignments.

However, the statutory auditors need tounderstand the functioning and operations ofthe enterprise and the internal controlsystems. Not only that, they have to includein their report an opinion on the state ofinternal controls in the organisations


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Thus, if they co-ordinate their effortsthere would not be any overlapping nor

would there be any gaps. Every aspectof the organisation could be coveredwithout duplication of work andimprove service to management and

the audit committee. Internal andexternal auditors both are equallyimportant.


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There should be sufficient liaison between theauditors .Both should share information

regarding scope, audit programme and auditfindings. However, several factors determinethe type of relationship. Some chief auditexecutives (CAEs) are of the opinion that the

relationship should be arms-lengthrelationship while others feel that thereshould be a close working relationship.


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It is finally up to the organisation andthe auditors to decide as to what type

of relationship best fits an organizationtaking into account its resources andtime and issues


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Benefits of Co ordination

Varied strengths increase effectiveness

By the nature of their responsibilities, internal

auditors spend a lot of time working for thesame company. This gives them a betterunderstanding of the culture and working ofthe organisation. The external auditors on the

other hand have exposure to wider variety offinancial issues as they have multiple clients.


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Increase in efficiency

Coordination increases efficiency. When the

audit is not properly coordinated, externalauditors may duplicate work alreadyperformed by the internal auditors.

Better audit coverage

It is expected that elimination of redundantwork will leave time and resources for betteraudit coverage.


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Cost reduction

Coordination reduces the time and

efforts which the external auditor wouldexpend on redundant work thus,reducing the audit fees.


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Better understanding of each otherswork

Coordination would imply that the auditorscommunicate and consult with each othertheir plans and findings. This will lead toclearer understanding of respective audit

roles and requirements and a betterunderstanding by each group of auditors


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Building Co-operation

Approval

External and internal auditors owe allegiance

to different set of people .The internal auditoris accountable to the management. When theexternal auditor needs assistance from theinternal auditor, he has to first inform the

management /governing body and seek theirapproval.


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Commitment

As discussed earlier, both the auditors

work with different objectives andresponsibilities. Given this situationwhen the need for coordination arises,

it requires commitment. They have toadjust and plan the work to satisfy eachothers needs


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Communication

Communication is sine qua non for success of

any coordination process. . There should befrequent and open communication betweeninternal and external auditors. They shoulddecide on timing and nature of

communication-it may be written or electronicor face to face or telephonic or combinationof whatever format is suitable.


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Trust

There needs to be mutual confidence

between both groups of auditors. Thisconfidence is enhanced when theauditors are members of professional

bodies and are bound by theirprofessional standards and code ofconduct..


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When the external auditor requiresdirect assistance or needs to rely on the

work in certain area, he may conductprocedures to get specific assurance.There also needs to be confidence that

any information exchanged is treatedprofessionally and with integrity


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Areas of co-operation

Internal control

Corporate governance

Reporting and financial statements

Compliance with lawsAnti Fraud measures


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Performance indicators

Testing

systems

programs


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Liaison between company and externalauditors

Ensure that all information, documentationis provided to internal auditor

Audit of dispersed organizations

Follow up on audit issues andimplementation of recommendations


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Relationship withRegulators

Internal Audit is gaining moreimportance with the regulators. The

role of Statutory Auditors is confined toreporting on financial accuracy andapplication of accounting principles and

standards.


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Market regulators are interested not only infinancial results but also concerned thatbusiness operations are conducted in a

manner so that all foreseeable risks areaddressed by appropriate internal controlmechanism and three are no revenueleakages.

Internal Auditing is applicable to: - Listed Company Other unlisted Companies


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Only the internal audit activity can provide aobjective assurance to the market regulatorthat

the operations are in compliance with lawsand regulations set up by them,

internal control exists in all the key risk areas, internal control framework is functioning

effectively and gaps if any are identified reported and

prompt action is taken to rectify the same.

relationship managenment in internal auditing

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