audit term paper 1 Essay

UNIVERSITY OF NAIROBISCHOOL OF BUSINESSMASTER OF BUSINESS ADMINISTRATIONDAC 505: PRINCIPLES OF AUDITINGSEMESTER: SEPTEMBER ” DECEMBER 2018TERM PAPER: INTERNAL AUDIT AS A TOOL IN ACHIEVING ORGANISATIONAL OBJECTIVESPRESENTED BY:DIANA KEMUNTO NYAKUNDI D61/87963/2016INTERNAL AUDIT AS A TOOL IN ACHIEVING ORGANISATIONAL OBJECTIVESINTRODUCTIONInternal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s 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.

Internal auditing is a catalyst for improving an organization’s governance, risk management and management controls by providing insight and recommendations based on analyses and assessments of data and business processes. With commitment to integrity and accountability, internal auditing provides value to governing bodies and senior management as an objective source of independent advice. Professionals called internal auditors are employed by organizations to perform the internal auditing activity. The scope of internal auditing within an organization is broad and may involve topics such as an organization’s governance, risk management and management controls over: efficiency/effectiveness of operations (including safeguarding of assets), the reliability of financial and management reporting, and compliance with laws and regulations.

Internal auditing may also involve conducting proactive fraud audits to identify potentially fraudulent acts; participating in fraud investigations under the direction of fraud investigation professionals, and conducting post investigation fraud audits to identify control breakdowns and establish financial loss.Internal control system may be insufficient based on some predicament which may include independence and separation of roles with the accounting departments. Also the scope of duties of internal audit are so wide while the scale of their operations so low as well as the shortage of qualified staff to carry out internal auditing and accounting duties.Independence of the internal auditor can be easily influenced by the management which can affect the internal audit system of an organization therefore overriding the efficiency of the system. Hence the study of internal audit as a tool for achieving organizational objectives.Internal Auditing ApproachesOperational audit. An operational audit is a systematic review and evaluation of an organizational unit to determine whether it is functioning effectively and efficiently, whether it is accomplishing established objectives and goals, and whether it is utilizing all of its resources appropriately. Resources in this context include funds, personnel, property, equipment, materials, information, intellectual property, or space. Operational audits often include evaluations of the work flow and propriety of performance measurements. These audits are tailored to fit the nature and objectives of the operations being reviewed. Program audit. A program audit evaluates whether the stated goals or objectives for a project or initiative have been achieved. It may include an appraisal of whether an alternative approach can achieve the desired results at a lower cost. These types of audits are also called performance audits or management audits. Fraud audit. A fraud audit investigates whether the organization has suffered through misappropriation of assets, manipulation of data, omission of information, or illegal acts. It assumes that deceptions were intentional. Ethical business practices audit. An ethical business practices audit determines the extent to which the organization, management, and employees support established codes of conduct, policies, and standards of ethical practices. Topics that may fall within the scope of such audits include procurement policies, conflicts of interest, gifts and gratuities, entertainment, political lobbying, patents, copyrights, and licenses (including software use), or fair trade practices Compliance audit. A compliance audit determines whether a process or transaction is or is not following applicable rules. Such rules can originate internally as corporate bylaws, policies, and procedures or externally as laws and regulations. Characteristic of compliance audits are the yes/no aspects of the evaluation. For each process or transaction examined, the auditor must ultimately decide whether it complies with the rule or not. Reaching that conclusion is not necessarily simple in domains governed by complex regulations (e.g. occupational health and safety, environmental, federal grants and contracts, employee pensions and benefits, or federal tax). Compliance auditors and attorneys specializing in these fields may be engaged to assist with evaluations if such specialists are not part of the internal audit staff. Systems development and life cycle review. A systems development and life cycle review is an information systems audit conducted in partnership with operating personnel who are implementing a new information system. The objective is to appraise and independently test the system at various stages throughout the design, development, and installation. The approach intends to identify issues and correct problems early because modifications made during developmental stages are less costly and some problems can be avoided altogether. The concern about this type of audit is that the internal auditor could lose objectivity through extended participation in the system design and installation. Control self-assessment audit. A control self-assessment audit enlists management to share audit responsibility by evaluating and reporting on the state of controls and levels of risks under their supervision. Internal auditors provide training and act as facilitators. In effect this become a problem solving partnership and can be a cost-effective. Its inherent risk is that management’s self-evaluation may be biased. Although, the internal auditor can retain the right to independently verify any reported conclusions. Financial audit. A financial audit is an examination of the financial planning and reporting process, the conduct of financial operations, the reliability and integrity of financial records, and the preparation of financial statements. Such a review includes an appraisal of the system of internal controls related to financial functions. Benefits of Internal AuditProper accounting system: The benefits of internal audit is that proper accounting system is introduced, Accounting system is a chain of activities in an entity by which transactions are processed for financial records. There is a need of orderly arrangement of personnel procedures, recordsћ forms and devices to achieve desired results.Better management: The benefits of internal audit is that there better management of the business concern. The internal auditor can point out the weak areas of management. The goals of can be achieved if there is proper internal control, internal check and internal audit. It should be noted that management could rely on internal audit for best results.Progress review: The internal audit is beneficial to review the progress of business concern. The figures for previous year are compared with this year. Moreover the performance results of similar companies can be compared to determine the progress made by the entity.Effective control: The internal audit is helpful to have effective control over the business activities. Control is function of management that relates to supervision and direction of ongoing activities. The manager concerned can remove the difficulties for smooth working. Internal audit alerts the management for effective control.Assets protection: The assets safeguard is achievable through internal audit. The management can use the asset for the benefit of business only. The assets cannot be used for private purpose. The misappropriation of cash, misappropriation of stock and misuse of other assets is not possible as internal auditor keeps close watch over assetsDivision of work: The internal audit if helpful to apply division of labor. The division of labor is necessary to watch the activities of all employees including management. The internal auditor can suggest the ways and means to improve the performance of business.No errors: The internal audit is used to protect the accounting records from errors. The accounting and auditing go side by side. When the accounting work is over the auditing work starts. There is no time gap. In such situation the accounting staff is not in a position to commit errors.Fixing responsibility: Internal audit is used to fix the responsibility of the people having poor performance. The management establishes the performance standards. The internal auditor can evaluate the performance of all employees. People can be held responsible for below standard work and action can be taken against them.External auditing assist: the work done by internal auditor can be helpful for the external auditor. The audit procedure of the internal auditor and external audit is almost same. The external auditor can go through the internal audit report at the time of starting audit work. Anyhow external auditor is responsible for external audit.No fraud: The internal audit is beneficial to detect frauds in the books of accounts and other records. The auditor provides no time gap to commit any fraud. The work of accounting staff is examined on daily basis. The accounting staffs have no time to plan any type of fraud.Improved performance: Internal audit is very helpful to get better the performance of the organization. The achievements of previous year are the basis of preparing budgets for the next years. The estimated income statement and balance sheet are drawn up. An attempt is made to get helpful results. Thus internal audit look up performance of business and employees.Proper use of resources: Internal audit is used to check the proper use of resources. The misuse of resources can increase the cost of organization. The optimum use of resources can be determined to control the cost of output. In this way internal audit is a tool to use the resources in the best interest of business.Investigation: Internal audit is helpful to investigate into the business matters. In case of doubt internal auditor can be asked to examine the facts and figures and to confirm or clear any doubt. The internal auditor can observe the material in any manner. Such exploration can be made on the demand of management or owners.Suggestions: Internal audit is used to suggest the ways and means for improving the business performance. The management can rely on internal auditor. The workable ideas of the internal auditor can be put into practice.Limitations of Internal AuditIncompetent staff: The limitation of internal audit is that audit staff may be incompetent. The purpose of internal audit fails to help the management. There may be lack of experience and training on the part of internal audit staff.Staff shortage: The limitation of internal audit is staff shortage. There may be need of realistic audit staff to scrutinize the record, the shortage of staff is difficult to get the benefit of internal audit.Time lag: The limitation of internal audit starts when there is the time lag between recording and checking entries. The accounting and internal audit must go side by side with a minimum time lag.Executive function: The limitation of internal audit is that the internal auditor may be linked to executive function. In this case, he cannot examine the accounting books and other records. He cannot find out his own weaknesses.Errors: The drawback of internal audit is that there may be errors in books of accounts. It depends upon the capability of internal audit staff. If audit staff is knowledgeable there is less chance of errors. In case of poor audit staff, there is no assurance that audited accounts are free of errors.Responsibility: The limitation of internal audit is that the management may not feel their responsibility in completing the audit formalities. The audit staff may give suggestions for the proper working of the business. The top-level management may not pay attention to suggestions. In this way, the audit work cannot help the business.Duties: The limitation of internal audit is that there may not be proper division of duties. In this case, the internal auditor is unable to fix the responsibility for the negligence of duties. The management must be aware of the division of duties. The audit work can point out the weakness of business employees, otherwise, whole arrangement goes wasted.Significance of the StudyThe ignorance of the public as to the contribution of internal audit department to efficient management makes this study essential. Most people believe that the department is not necessary as it delays work while some see it as the only way to detect fraud and misappropriation of funds in the organization. So this study will show the benefits of internal audit.Also the inability of employees to effectively and efficiently utilize resources and lack of proper control mechanisms has led to wastage of human resources, time and finance resources. Internal audit now comes into play to check the above wastages.Therefore it will show the benefits of having this wonderful department in the organization. LITERATURE REVIEWThe lending credibility theory suggests that the primary function of the internal audit is to add credibility to the financial statements. Audited financial statements are seen to have elements that increase the financial statement users’ confidence in the figures presented by the management (in the financial statement). The users’ are perceived to gain benefits from the increased credibility, these benefits are typically considered to be that the quality of investment decisions improve when they are based on reliable information. The theory of inspired confidence (Theory of rational expectations) (Limperg 1932) addresses both the demand and the supply for audit services. The demand for internal audit services is the direct consequence of the participation of third parties (interested parties of a company) in the company. These parties demand accountability from the management, in return for their investments in the company. Accountability is realized through the issuance of periodic financial reports. However, since this information provided by the management may be biased, and outside parties have no direct means of monitoring, an internal audit is required to assure the reliability of this information. With regard to the supply of audit assurance, Limperg (1932) suggests that the auditor should always strive to meet the public expectations. Agency theory (Watts and Zimmerman 1978, 1986a, 1986b) suggests that the auditor is appointed in the interests of both the third parties as well as the management. A company is viewed as a web of contracts. Several groups (suppliers, bankers, customers, employees etc.) make some kind of contribution to the company for a given price. The task of the management is to coordinate these groups and contracts and try to optimize them: low price for purchased supplies, high price for sold goods, low interest rates for loans, high share prices and low wages for employees. In these relationships, management is the agent, which tries to gain contributions from principals (bankers, shareholders, employees etc.). The other theory is the policeman theory which states that the internal auditor’s job to focus on the prevention and detection of fraud.Conceptual framework18859504127501276350403225952598425Usefulness of Internal AuditUsefulness of Internal Audit2847975156844Achieving organizational objectives0Achieving organizational objectivesleft137795Internal audit department performance0Internal audit department performance18954758382012763501028700266065Internal audit value for money00Internal audit value for money1276350158115RECOMMENDATIONSThe internal auditor’s main goal is to verify and provide supporting evidence that the program audited either complies with or does not comply with the established requirement or standard. The internal auditor should not just interview the personnel but also review policy, procedures, and records; observe, and evaluate all the collected information to confirm that it is meeting the planned and established standard. Once the Internal Audit have been concluded; the auditor will conduct a closing meeting with the appropriate department staff, confirm the scope or area covered during the audit, read out non-conformities (where appropriate), assign responsibility, agree to corrective actions with deadlines and thank everyone for their time and cooperation.There are many challenges facilities face when conducting internal audits and but there are some recommendations that will help overcome many of these challenges.Develop Internal Audit Program objectives with Senior Management to include reducing non-conforming product, promoting continuous improvement, and meeting customer and regulatory specifications.Manage internal audits as a separate program that include procedures, trending analysis, formal training, cross department representation, and increasing the size of the internal auditing team.Ensure the internal audit is an official event and do not let other work interfere with audit completion or reporting. This includes making sure everyone treats this seriously and formalizing the audit to include a set schedule, opening meeting, closing meeting, audit checklist, and non-conformity report provided in a timely manner.Ensure internal auditors are objective and only collect evidence or facts. Do not attempt to voice opinion or argue. Do not provide advice and attempt to fix non-conformities during the audit (unless there are critical food safety hazards present). Do not interfere with production activities. Take pictures for training purposes and reduce audit bias by having a cross-function internal audit team.Train internal auditors to properly communicate by asking open-ended questions and avoiding sarcasm, tricky questions, leading questions, ambiguous questions and multiple questions. Internal auditor needs to be professional, objective, open, and honest when interviewing facility personnel. This also includes avoiding poor body language or facial expression and using an appropriate and respectful tone of speech.Internal Auditor must always remember to audit the system and not the person.Internal audit non-conformity report must be written in a timely manner and provide routine updates to Senior Management.REFERENCES UK. (November 2013). Concepts and Theories of Auditing. Retrieved from “PWC-2012 State of the Internal Audit Profession Survey-March 2012”. Pwc.com. 2012-03-20. Retrieved 2013-09-04.drogalas.gr/uploads/publications/Theoretical_approach_in_an_Internal_Control_System_A_conceptual_framework_and_usability_of_internal_audit_in_hotel_business.pdf