INTERNAL AUDITING

AUD 571
TOPIC 1
OVERVIEW OF INTERNAL AUDITING

Learning Objectives
After going through this chapter, you should be
able to:
Provide an overview of internal audit profession
Differentiate internal auditor and external auditor
Describe the evolution of internal audit practice
Illustrate methods used to measure internal auditing
performance
Describe factors that enhance the image of internal
audit profession

Defining Internal Auditing

An independent appraisal function established within an organization to
examine and evaluate its activities as a service to the organization. The
objective of internal auditing is to assist members of the organization in the
effective discharge of their responsibilities. Internal auditing furnishes them with
analyses, appraisals, recommendations, counsel, and information concerning
the activities reviewed. The audit objective includes promoting effective control
at a reasonable cost.

Institute of Internal Auditors (IIA)s Board of

Directors have redefined internal auditing:

An independent, objective assurance and consulting activity designed to

add value and improve an organizations 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.
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The Keywords
Independence and objectivity
Assurance and consulting activity
Systematic and disciplined approach
Add value
Risk management
Control
Governance

Every keyword has its significance in

internal audit LEARN THEM!!
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Internal Auditor Vs. External

Auditor INTERNAL AUDITOR EXTERNAL AUDITOR
Reporting
responsibility
Status

Reports to the shareholders

Most of the time is an

organizations employee (at times,
it can be outsourced).

Is an independent contractor, third

party who is external to the
organization.

Stakeholder

Serves needs of the organizations. Serves third parties who need

reliable financial performance.

Independent
status

Is independent of the activities

audited, but is ready to respond to
the needs and desires of all
elements of management.

Is independent of management
and the board of directors both in
fact and mental attitude.

Is directly involved with the

prevention and detection of fraud
in any form or extent in any activity
reviewed.

Is incidentally concerned with the

prevention and detection of fraud
in general, but is directly
concerned when financial
statements may be materially
affected.

Responsibility
towards fraud

Reports to the audit

committee/board of directors

Internal Auditor Vs. External

Auditor
INTERNAL AUDITOR

Scope of work

Timing and
frequency of audit

Professional
qualification

EXTERNAL AUDITOR

Evaluate governance, control and risk

management processes to assure the
accomplishment of entity goals and
objectives.

Review the financial statements to

ensure that the financial statements are
free from material misstatements and
express opinion whether the financial
statements present true and fair view

Reviews activities continually by

focusing on future events

Reviews records supporting financial

statements periodically (usually once a
year) and focuses on the accuracy and
understandability of historical events as
expressed in financial statements

Not necessary, but may acquire Certified Compulsory to be a member of

Internal Auditor (CIA)
Malaysian Institute of Accountants (MIA)
and be granted audit license by the
Ministry of Finance (MoF) before can be
recognized as Chartered Accountant
(CA)

Types of Internal Audit

Financial Audit
Operational Audit
Management Audit
Compliance Audit
Information System/Information Technology Audit
Fraud/Forensic Audit
These are not
all, but should
cover most of
the internal
audit activities
undertaken by
the internal
auditors
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The Rise of Internal Audit

Profession
THEN

NOW

Concentrate on attesting to the

accuracy of financial matters

Provide services that include

examination and appraisal of
control and performance of a
organization

Function as junior sibling to

independent accounting
profession

Now, it established itself as a

distinctive discipline

Once acted as auditees

adversary

Now, it has guide to improve

operations, seeking to maintain
a coorperative working
relationship with clients and
auditees

Evolution of Internal Audit in

Malaysia
In 1970, Ministry of Defence set up its internal audit unit.
In 1979, the Federal Government issued a circular expanding the

establishment of IA to other ministries with a broader role which include

operational audit.

In 1993, the Ministry of Finance requested all government-owned

organizations to set up an audit committee:

To protect the government interest as a shareholder

To oversee the internal audit function in these organizations.

Internal auditing in private sector

Mainly focus on evaluating the efficiency and effectiveness of internal control

systems and compliance

Since 1993, it was mandatory for all public listed organizations to establish audit
committee to monitor accountability, governance, independence and objectivity of the
internal audit department.
Bursa Malaysia Listing Requirements, amended in 2008, mandated public listed
organizations to set up internal audit function.
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Roles of IIAM
Affiliated to The Institute of Internal Auditors Inc. (USA)
Services provided:
Certification offering certification for Certified Internal Auditors (CIA), Certification

in Control Self-Assessment (CCSA), Certified Financial Services Auditor (CFSA),

Certified Government Auditing Professional (CGAP)
Professional development providing quality and "value for money" internal audit
training
Guidance and advisory providing research, technical advisory and responding to
technical enquiries
Surveys conducting surveys on various topics in collaboration with, among others,
Bursa Malaysia, MICG, KPMG and Ernst & Young.
Quality assurance services providing assistance and expertise for Quality
Assurance and Improvement Program (QAIP)

IIA Research Foundation

Research arm of the Institute of Internal Auditors Inc. (USA)
Conducting research related to IA
Disseminate information to internal auditors in Malaysia to keep abreast with latest

news, best practices and development of IA in Malaysia and internationally

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Factors Reimaging Internal Audit

Profession
Professional education and training
Professional discipline: The Professional Practice

Framework
Directing reporting channel to AC
Awakening shareholders activism
Support and recognition by the regulators
Global audit scandals
Commitments of IIAM
Broad scope of IA function

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END TOPIC 1