The Impact of Internal Audit in an Organization
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Goals of Internal audit
The internal audit function is an integral part of the corporate governance regime of most public companies and a number of larger private companies. The primary goal of internal audit is to evaluate the company’s:
- risk management,
- internal control and
- corporate governance processes and ensure that they are adequate and are functioning correctly.
In-house or outsourced
Internal audit may be carried out by an in-house department or outsourced. Where the function is outsourced to the same firm that performs the Company’s external audit, care should be taken to ensure that suitable ‘Chinese walls’ exist. The Chinese wall attempted to create an environment in which a single company could engage in both assignments. This wall is not a physical boundary, but rather an ethical one that financial institutions are expected to observe. In practice there is often a high degree of cooperation between the external and internal audit functions of a company, and the external auditors usually affirm in their audit report the extent to which reliance has been placed on the work performed by internal audit.
The advantages of outsourcing the internal audit function:
- Specialization can facilitate creation of the team with very good skills in the audited domain, having in this way assured the access to the best practices in the domain at a high competence;
- Objectivity can be higher comparative with the objectivity of the internal auditors hired by the company, because the external consultants - internal auditors - did not interact on the long term with the employees of the company;
- Significant support from the management of the company can be provided depending on the specialty of the contracted audit team;
- Eliminating the costs generated by the recruiting the internal auditors and the training needed for the audit team;
- Eliminating the costs supposed by the investment in the methodology and technology;
- Higher flexibility in allocating resources.
Purpose, authority and responsibility
The purpose, authority and responsibility of the internal audit function should be formally defined in a form consistent with the standards of the Institute of Internal Auditors, and a formal Internal Audit Charter (engagement) should be approved by the board. The charter should define the mission and scope of the internal audit function, its responsibility, its authority within the company, and its accountability and reporting obligations.
The internal audit function should be sufficiently independent of the activities audited to ensure that the fact that internal auditors may be employees of the company does not restrain their independence and their ability to be objective. Internal audit should report at a level within the company that allows it to accomplish its responsibilities without undue interference, preferably to the CEO. As previously stated, the head of the company’s internal audit function should have regular, independent access to the chairman of the audit committee. The appointment or dismissal of the head of internal audit should be dealt with in consultation with the audit committee.
