Internal Audit: Definition, Characteristics, and Guidance

Chapter 1: Definition, Characteristics, and Guidance

• Internal audit is significantly changing, its role remains consistent in providing independent, objective assurances and consulting services to improve organizational operations.
• Universities and other academic institutions have developed organizational theories that create centralized systems with defined hierarchies, distinct authority levels, reporting lines, clear rules, and division of labor, building on industrial era lessons.
• Internal audit have adapted to these theories and standardized methodologies, often creating checklists, standard audit programs, and validating an organization's structure against a standard model.
• Creative thinkers were not being sought for internal audit.
• Internal auditors sometimes isolated themselves from the businesses they were examining, and at times abstained from making recommendations to improve the weaknesses they identified.
• Businesses changed due to globalization, technological advancements, competition, and new social, demographic, and financial landscapes.
• Many internal auditors were slow to adapt, becoming irrelevant due to clinging to checklists and outdated procedures from the standard business model.
• Management lost confidence in the internal audit function citing a disproportionate and inflexible focus on traditional business models disconnected from the company's actual needs.
• Internal audit had evolved as an offshoot of external audit.
• Internal audit began a transformation in the early 1990s, aligning more with the true organizational needs and stakeholders which was further propelled by factors like stakeholder theory, corporate governance, quality, and the Sarbanes-Oxley Act of 2002.
• Internal audit skills are becoming more diverse.

Definition and Characteristics of Operational Auditing

• Operational auditing is defined as a future-oriented, systematic, and independent evaluation of organizational activities with operational policies and objectives and internal controls may be evaluated during the review.
• Business Dictionary defines it as 'A review of how an organization's management and its operating procedures are functioning with respect to effectiveness and efficiency in meeting stated objectives'.
• Experience in banking operations shows that effective internal audit assesses all activities within a process, including the people and systems involved is critical for performance.
• Individuals within organizations are working on activities with unclear purposes.
• The organization must be cognizant of
  • Independence within the organization's hierarchy
  • Objectivity with no bias
  • Assurance to give confidence

Corporate Social Responsibility (CSR)

• Corporate Social Responsibilty (CSR) corporate social responsibility (CSR), humane working conditions, and low ecological impact being incorporated due to stake holder demands.
• It should function as a built-in, self regulating mechanism
• Sustainabilabilility's Triple bottom line encompasses
  • People (social)
  • Planet (environment/ecology)
  • Profit (economic)
• Consulting involves providing advice to management and the board, organizational improvement, and special projects.
• Modern internal auditors are expected to improve an organization's operations.
  • Accomplish objectives
  • Respond to threats
• Auditors bring a systematic approach and direction with a framework using the Standards, Practice Guides, and Practice Advisories.
• Auditors provide independant assessments on the appropriateness of the organization's assessment practices by looking at
  • Risk management: This refers to identification
  • Control: Activities that help mitigate surprises

The Risk-Based Audit

• Risk-based auditing means internal auditors must apply organizational risks accounting & financial risks including
  • Delays
  • Waste
  • Inefficiency
  • Excessive customer and employee trunover
• Many organizations are hiring auditors with diverse backgrounds to correct deficiencies.
• While traditionalists may find this puzzling, it is consistent with the guidance provided
• Performing audits requires
  • Brainstorming
  • Interactions with process owners

The Other Parts of the Definition

• People focus on accounting and complinace aspects of internal auditing
• Auditors will also be doing consulting and improve organization operations

Identifying Operational Threats and Vulnerabilities

• Going beyond inspecting transaction and focusing on future events that may occur through
  • Operational: How the organization manages time it takes,staffing,
  • Technological: Cyber security

The Skills Required for Effective Operational Audits

• There is a shift in work based performance
  • Communication
  • Ability to promete value of intrenal audit knowledge
  • Industry knowledge
  • conflict resolution
• There is a great importance in individual and team competencies
  • Confidential
  • Work with management
• Internal audit must have access to key it risk

Integrated Auditing

• Businesses, resources, and risk are always changing therefore must be able to support business
• Integrating business and IT leads to greater results

Other Audit aspects

• The definition of internal audting
• Audit procedures
• Note, these notes are not exhaustive. Refer to the source material for full context*

This chapter covers the evolving role of internal audit in providing independent assurance and consulting services. It discusses how internal audit adapted to organizational theories, standardized methodologies, and the impact of globalization and technology on business practices.