SCOPE OF INTERNAL AUDIT :
The Institute of Internal Auditors defines scope of internal auditing as ‘The examination and evaluation of the adequacy and effectiveness of organization’s system of internal control and the quality of actual performance’.
On the analysis of above, it can be argued that internal auditing is concerned with an evaluation of both internal
control as well as the quality of actual performance. According to The Institute of Internal Auditors, internal audit
involves five areas of operations, which can be discussed as follows:
1. Reliability and Integrity of Financial and Operating Information: – Internal Auditors should review the reliability and integrity of financial and operating information and the means used to identify, measure, classify and report such information.
2. Economical and Efficient Use of Resources: – Internal Auditor should ensure the economic and
efficient use of resources available.
3. Compliance with Laws, Policies, Plans, Procedures, and Regulations: – Internal Auditor should review the systems established to ensure compliance with those policies, plans and procedures, law and regulations which could have a significant impact on operations and should determine whether the organization is in compliance thereof.
4. Accomplishment of Established Goals for Operations: – Internal Auditor should review operations, programmes to ascertain whether results are consistent with established objectives and goals and whether the operations or programmes are being carried out as planned.
5. Safeguarding of Assets: – Internal Auditor should verify the existence of assets and should review means of safeguarding assets.
Techniques of Internal Audit
An Internal auditor uses Internal Audit tools/techniques to ensure that controls, processes and policies are adequate and effective, and that they adhere to industry practices and regulatory mandates. An internal auditor also checks a corporation’s financial statements to ensure that such reports are prepared in accordance with generally accepted accounting principles. The techniques which are often used by an internal auditor are discussed herein.
Review of Operating Environment
For carrying out the audit effectively, it is necessary for an internal auditor to understand how the company
operates. He determines it by referring to departmental employees, external auditors report, and risk specialists.
A firm’s operating environment describes management’s ethical qualities, leadership style and business practices . An internal auditor also could determine how a corporation operates by evaluating industry trends and regulations.
Review Controls
An internal auditor determines how a company’s segment or departmental controls operate by reading prior audit reports or working papers and by inquiring from segment employees who perform such controls on a
regular basis. An auditor applies generally accepted auditing standards (GAAS) to detect mechanisms, procedures, tools and methodologies that build controls.
Test Controls
An internal auditor tests a business organization’s controls, policies and guidelines to ensure that such controls are adequately designed and are operating effectively. Controls are mechanisms and methodologies a corporation’s management puts into place to prevent losses due to error, fraud, theft or breaks in technology systems. Effective controls remedy deficiencies and problems properly. Controls are adequate if they provide detailed step-by-step procedures and guidelines for task performance, decision-making processes and lines of hierarchy.
Account Details
An internal auditor performs tests of account details to ensure that financial statements of a business entity are not “materially misstated.” Tests of account details and account balances are referred to as substantive tests. An auditor conducts such tests if a firm’s controls and processes are not adequate or not functioning properly. “Material” means significant or substantial in accounting and audit parlance; a misstatement could result from human errors, intentional fraud or technology system weaknesses.
The above list is not exhaustive and other techniques may also be used by an Internal Auditor in the internal
audit exercise.
Internal Audit Process :
