Internal Audit Overview

Internal Audit

• Internal auditing is an independent management function within an organization. Its purpose is to evaluate operating activities and enhance the effectiveness of risk management, control, and governance.

Introduction

• Recent global financial crises highlighted the importance of internal auditing within corporate governance structures.
• Internal audit played a key role in the early implementation of the Sarbanes-Oxley (SOX) Act, including in creating and managing SOX programs.
• The IIA Saudi provides professional guidance and represents the internal audit profession in Saudi Arabia.

Risk Management

• Risk is the potential for an event to impact achieving objectives.
• Risk is measured by its impact and likelihood.
• Internal audit helps management by identifying and assessing significant risks, determining appropriate responses, and evaluating if risks are under control.

Controlling

• Controlling involves rules and procedures to ensure financial and accounting information integrity, accountability, and fraud prevention.
• Internal audit evaluates controls to suggest improvements for increased efficiency/lower costs.
• It assesses if policies and procedures are followed correctly, detects fraud/record manipulation, and provides reasonable assurance goals are achieved.

Governance

• Governance is the combination of processes and structures implemented by the board.
• It informs, directs, manages, and monitors organizational activities to achieve objectives.
• Functions include promoting ethics and values, communicating risk and control information, and coordinating activities among board, external/internal auditors, and management.

Effective Governance

• A diagram depicts a cyclical relationship between the board of directors, external audit, internal audit, and management.

Audit Committee

• The audit committee comprises 3-5 members of the board; ideally including both board members and external individuals.
• The committee oversees internal and external audit functions, acting as an independent check on management.

Internal Audits Types

• Audits are performed for various reasons and objectives.

• Some are mandated by regulations or policy, while others are requested by management to improve processes.

• All organizations, regardless of size, should have an internal control system.

• Compliance Audit: Ensures adherence to rules, regulations, and laws for the company.

• Operational Audit: Evaluates the effectiveness and efficiency of organizational operations.

• Information System Audit: Evaluates and ensures the proper functioning of the information system.

• Environmental Audit: Ensures compliance with environmental laws and regulations.

Internal vs. External Audits

Internal Audit Process

• The internal audit process consists of planning, fieldwork, reporting, and follow-up.
• Planning involves defining the scope and objectives of the audit.
• Fieldwork is the actual audit execution.
• Reporting involves issuing a report to management, sharing key findings with responsible managers.
• Follow-up is critical to ensure all recommendations are implemented.

This quiz covers the fundamental concepts of internal auditing, focusing on its role in risk management, control, and governance. It also discusses the relevance of internal audit in corporate governance following global financial crises and legislative acts like SOX. Test your understanding of how internal audit functions within organizations.