Internal Audit Practice from A to Z

Patrick Onwura Nzechukwu, Patrick Nzechukwu

• Publisher: Auerbach Publications
• Year: 2016
• Print ISBN: 9781498742054
• eBook ISBN: 9781315352152
• Edition: 1
• Topic: Business
• Subtopic: Auditing
• Index: Business

Internal Audit Practice from A to Z addresses the practice of internal auditing using GAAS (Generally Accepted Auditing Standards), GAGAS (Generally Accepted Government Auditing Standards) and International Standards for the Professional Practice of Internal Auditing (Standards)-IPPF, International Standards Organization (ISO), International Standards of Supreme Audit Institutions (ISSAI), International Standards on Auditing (ISA) as enunciated by the Institute of Internal Auditors (IIA), International Organization of Standardizations (ISO), International Organization of Supreme Audit Institutions (INTOSAI), Government Accountability Office (GAO) & International Federation of Accountants (IFAC). Unique in that it is primarily written to guide internal auditors in the process and procedures necessary to carry out professionally accepted internal audit functions, the book includes everything necessary to start, complete, and evaluate an internal audit practice, simplifying the task for even non-professionals.

Internal Audit Practice from A to Z features

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• A rich array of forms, figures, tables, and reports, making it a practical, hands-on book

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• Provides comprehensive content that contains all the practical guidance necessary to start, complete, and evaluate an internal audit practice

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• Details on how to ensure quality on internal audit function through peer review

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• Current international standards for the professional practice of internal auditing and other relevant standards for reference

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• Checklists for all practice procedures as well as a checklist of the internal control of virtually all aspects of business function

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• A blend of professional practice with theory.

Internal Audit Practice from A to Z is comprehensively rich, global reference is a must for public, private, NGOs, institutions—every organization.

Chapter 1

Introduction

1.1 Background Information

The year 2001 witnessed a series of large financial information frauds in the United States of America, in particular, and in other big economies of the world. Mostly involved are Enron Corporation, at one time one of the world’s largest accounting firm; Arthur Andersen; the telecommunications company WorldCom; Qwest; and Sunbeam. Others include Adelphia Communications Corporation, Peregrine Systems, Tyco International, among other well-known corporations. A summary of the scandals of some of these companies is provided in this chapter. These scandals highlighted the need to review the effectiveness of accounting standards, auditing regulations, and corporate governance principles. In some cases, management manipulated the figures shown in financial reports to indicate a better economic performance. In other cases, tax and regulatory incentives encouraged the overleveraging of companies and decisions to tolerate extraordinary and unjustified risks.

As the big economies of the world are collapsing today owing to wrong financial indices hatched and produced over a period of time by corporate entities, we have taken time to study the causes and dynamics of the failures of these great companies, and the measures being put in place to forestall future occurrences. We have come to terms that as wealth is being transferred from these failed economies to growing economies, it is pertinent to pay heed to the reasons for their failures and the measures being advanced to arrest future occurrences, in order to avoid being caught in the same web that engulfed these great economies.

Adelphia Communications Corporation (former NASDAQ ticker symbol ADELQ): Adelphia, a Greek word meaning brothers, was a cable television company with headquarters in Coudersport, Pennsylvania. Adelphia was the fifth largest cable company in the United States before filing for bankruptcy in 2002 as a result of internally motivated fraud and corruption cases. It was founded in 1952 by John Rigas in the town of Coudersport, which remained the company’s headquarters until it was moved to Greenwood Village, Colorado, shortly after filing for bankruptcy.

Enron Corporation (former New York Stock Exchange ticker symbol ENE): Enron was an American energy, commodities, and services company based in Houston, Texas. It was one of the world’s leading electricity, natural gas, communications, and pulp and paper companies, with a statement of revenues of nearly $101 billion in 2000. Enron was recorded to have approximately 22,000 staff in its employment before it went into bankruptcy in late 2001. Fortune magazine named Enron “America’s Most Innovative Company” for six consecutive years. At the end of 2001, it was discovered that its reported financial position was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud. This was later interpreted to what is known today as the “Enron scandal.” With this assertion, Enron has gone down in the annals of history as an emblem of willful corporate fraud and corruption. This scandal was responsible for the dissolution of one of the five largest accounting firms in the world at that time, Arthur Andersen (Slucom, 2001; BBC News, 2002; Dan, 2002; Murphy, 2002; Bethany and Peter, 2003; CNN, 2005; Egan, 2005; Fox News, 2006; Pasha, 2006).

Peregrine Systems Inc.: Peregrine is an enterprise software company founded in 1981 that sold enterprise asset management, change management, and Information Technology Infrastructure Library (ITIL)–based IT service management solutions. As a result of an accounting scandal and subsequent bankruptcy, Peregrine was acquired by Hewlett-Packard (HP) in 2005. HP now markets the Peregrine products as part of its IT Service Management Solutions, within the HP Software Division portfolio.

These scandals also brought into question the existing accounting practices and activities of many corporations in the United States and contributed substantially to the creation of the Sarbanes–Oxley Act of 2002.

In a related development, ever since the Asian economic crisis of 1998, the call for risk management has become the single most important answer or survival tool kit for industries. For internal auditors, this has broadened their roles; their focus and approach in considering the audit function has undergone radical change. In assessing the adequacy and effectiveness of internal controls, internal auditors no longer only determine controls and test their effectiveness, but have evolved into examining the business objectives first and identifying the associated risks before proceeding to assess the business control. Today, internal auditing has progressed from compliance- to risk-based auditing (Zarkasyi, 2006).

It was on this premise that our research effort inspired the development and production of a document (Nzechukwu, 2011) that we believe would augment relevant legislative pronouncements and standards in the fight against managerial fraudulent manipulation of financial reports and other operations. Also, the corrupt and fraudulent practices in public organizations, particularly in developing economies, like Africa and some parts of Asia, South America, etc., with so much executive impunity and compromised legislative and judicial arm-seating, have propelled the development of this book.

Traditionally, people understand internal audit as an activity of a self-imposed internal check and also supposedly an activity that involves going around telling people what they are doing wrong. The traditionalist internal auditors tend to see themselves as revered personalities sneaking around at odd times in order to catch people indulging in wrongdoing. However, the truth remains that even if one sees it from a narrow sense, the contribution of internal audit activity is of great importance in that an effective internal audit system leads to improved accountability, ethical and professional practices, effective risk management, and improved quality of output, as well as supports decision making and performance tracking.

Historically, it has always been held that internal auditing is confined to merely financial activities, that is, ensuring that the accounting and allied records have been properly maintained, and the assets management system is in place in order to safeguard the assets and also to see whether policies and procedures are in place and are duly being complied with. However, with changing times, this concept has undergone a radical change with regard to its definition and scope of coverage. The modern approach suggests that it should not be restricted to financial issues alone but also on issues such as cost–benefit analysis, resource utilization and their deployment, matters of propriety, effectiveness of the management in enterprise-wide risk management, corporate governance and control processes, etc. Internal auditing has always been viewed as an integral part of organizational governance, and increasingly as an instrument for improving the performance of the organization, in both the private and public sectors.

Internal auditing is an assessment tool that provides a reliable indicator of the integrity of your organization’s system and processes, and their capacity to support your objectives. Audits help an organization identify problems, risks, good practices, and opportunities that would better serve its customers. The information obtained from well-conducted audits is a company asset that far outweighs the modest investment in time, training, and other costs associated with the audits. The manner in which the organization values and uses this asset is partially dependent on the quality of the audits. Hence, executive management, through visible support and allocation of resources, has primary responsibility for ensuring the effectiveness of the internal audit program. On the other hand, auditors have the responsibility for good stewardship of management’s support, as demonstrated by their commitment to good auditing practices and the production of meaningful audit reports (Robitaille, 2007).

Internal audit practice is one big area being advanced to be strengthened by corporate bodies to ensure quality and reliable financial reporting; sound corporate governance and virile internal control system; effective enterprise-wide risk management; and adherence to relevant legislations, standards, policies, and procedures.

Every successful audit is based on a comprehensive planning under an atmosphere of constructive participation and communication between the auditee and the auditor.

As indicated in the publication of AuditNet, LLC (2014), every audit project is unique; however, the audit process is similar for most engagements and generally consists of four phases: planning (also called survey or preliminary review), fieldwork, audit report, and follow-up review. It is important to involve the client/auditee at each phase of the audit process. It is equally important to note that, as in any special project, internal auditing results in a certain amount of time being diverted from the auditee’s usual routine; hence, one of the key objectives in the audit program is to minimize this time diversion and avoid disrupting ongoing activities.

1.2 Definition

1.2.1 Meaning of Internal Auditing

The International Auditing Standard, ISA 610 (2007), Considering the Work of Internal Audit, issued by the Auditing and Assurance Standards Board, defines internal audit as follows:

Internal audit means an appraisal activity established within an entity as a service to the entity. Its functions include, amongst other things, monitoring internal control.

Accordin...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of Figures
• List of Tables
• Preface
• Acknowledgments
• About the Author
• 1 Introduction
• 2 Internal Audit Procedure and Techniques
• 3 Internal Audit Charter
• 4 Managing the Internal Audit Function (IAF)
• 5 Internal Audit Practice Layout
• 6 Internal Audit Documentation and Reporting
• 7 Internal Audit Peer Review
• 8 What the Standards Say
• 9 Internal Control Checklist
• Glossary
• Index