Internal Auditing Ch 4: Key Relationships

• Internal auditor's interaction with key role-players is an important topic
• Refer to chapter 4 of "Internal Auditing: An Introduction (7th Edition)"

Blueprint of Relationships

• Internal auditors have relationships with:
• External Auditors
• The Board of Directors
• Engagement client staff
• The Audit Committee
• Management

Internal Audit's Role in the Organization

• Internal audit interacts with the Board of Directors, CEO, Audit Committee, and External Auditors.

Relationships: Board of Directors

• The Board of Directors (BoD) is the governing body that determines strategy and direction.
• The Chief Audit Executive (CAE) heads the Internal Audit Function (IAF).
• The CAE functionally reports to the Audit Committee of the BoD and administratively to the CEO.

IAF & BoD

• Directors can be executive or non-executive
• Executive directors are part of daily operations and receive a salary.
• E.g., financial director, marketing director
• Non-executive directors are not part of operations.
• E.g., a retired or resigned director
• Independent non-executive directors are not part of operations, are not related parties, and have no prior involvement
• E.g., a retired CEO/senior manager of a similar organization, but only after 3 years of ending that prior interest or any prior involvement.
• IAF and BoD
• The BoD needs expert advisors for informed decision-making.
• Internal auditors are a reliable and informative source of assurance and advice.
• The CAE should report periodically to the BoD and senior management on the progress of the IA plan.
• Refer to standards 6.1 (Internal audit mandate), 6.2 (Internal audit charter) and 6.3 (Board and senior management support).

Relationships: Audit Committee (AC)

• The Audit Committee is a sub-committee of the BoD.
• The AC promotes the IAF's independence, because ALL members & chairperson should be independent non-executive directors.
• The AC is a governing body with oversight roles related to internal control, IA, EA, and the quality of the organization's financial reporting practices
• IA's role in supporting AC
• Review the charter of the AC annually and advise
• Encourage the AC to conduct periodic reviews of its activities
• The CAE meets with the chairperson to discuss and re-assess information needs
• Communication between the AC and IAF is important

More on the Audit Committee and IAF

• Meet privately with the CAE regularly to discuss sensitive issues
• The CAE issues periodic reports summarizing results.
• Coordination between IA and EA occurs through reporting back by the CAE.
• Refer to standards 6.2 (Internal audit charter), 6.3 (Board and senior management support), and 7.1 (Positioned independently)

Structure of the Audit Committee

• ALL members should be independent non-executive directors (KING IV).
• The chairperson should be an independent non-executive director (KING IV).
• The AC needs full BoD support and AC charter, and is not involved in daily operations.
• A competent chairperson is important.
• The AC should have continuity with at least 3 members, a balance of skills, frequent meetings, and at least one financial expert.
• The CEO, EA, and CAE attend meetings but are NOT members of the audit committee.

Audit Committee Functions

• The AC provides combined assurance and oversight, and reports to the BoD.
• External auditors review preliminary and final F/S, and the EA reports audit results to the AC.
• Internal Auditors maintain direct communication between the AC and CAE
• The AC approves the IA charter, coordination, CAE appointment, and reviews significant engagement findings
• The AC relationship is managed by the CAE.
• IA & AC have overlapping goals and objectives.