Chapter 01. Introduction to Internal Auditing
01.01. Defining Internal Auditing
Key Questions
Briefly reflect on the following before we begin:
- What is internal auditing?
- What role do internal auditors play in an organization?
Performed by professionals with an in-depth understanding of the business culture, systems, and processes of an organization, the internal audit activity assures that internal controls are adequate to mitigate the risks and that organizational goals and objectives are met. The Institute of Internal Auditors (IIA) defines “Internal Auditing” as,
Internal 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.
Definition of internal auditing by The Institute of Internal Auditors. (n.d.).
https://www.theiia.org/en/standards/what-are-the-standards/definition-of-internal-audit/
This definition emphasizes the following key points:
- Systematic Process: Internal auditing is not a random or ad-hoc activity. It follows a structured approach, which includes planning, performing, documenting, and communicating results. This systematic process ensures consistency and reliability in the audit activities.
- Evaluation of Effectiveness: The primary purpose of internal auditing is to assess how well the organization’s risk management, control, and governance processes function. This evaluation helps identify areas of improvement and ensures that the organization achieves its objectives efficiently and effectively.
- Risk Management: Internal auditors examine the organization’s processes to identify and assess risks that could hinder the achievement of its objectives. By understanding and evaluating these risks, internal auditors help management make informed decisions to mitigate them effectively.
- Control Assessment: Internal auditors evaluate the adequacy and effectiveness of the controls implemented by the organization to manage risks. Controls can include policies, procedures, systems, and mechanisms to ensure compliance with laws, regulations, and internal policies.
- Governance Processes: Internal auditors also review the governance processes within the organization, including the roles and responsibilities of the board of directors, management, and other stakeholders. By assessing governance practices, internal auditors contribute to the overall effectiveness and accountability of the organization.
- Improvement of Processes: Internal auditing identifies problems and recommends solutions and improvements. Internal auditors provide valuable insights and recommendations to management to enhance processes, strengthen controls, and optimize operations.
- Independence and Objectivity: Internal auditors maintain independence and objectivity in their assessments. They remain free from bias and undue influence, allowing them to provide impartial evaluations and recommendations that serve the organization’s best interests.
- Internal auditors adhere to high standards of professionalism and ethics. They uphold integrity, confidentiality, and competence in all aspects of their work, ensuring the trust and confidence of stakeholders in the audit process.
- Communication of Results: Internal auditors communicate their findings, conclusions, and recommendations to relevant stakeholders, including management and the board of directors. Effective communication is essential for ensuring audit results are understood, accepted, and acted upon appropriately.
- Continuous Improvement: Internal auditing is a dynamic process that evolves to meet the changing needs and challenges of the organization. Internal auditors continuously seek opportunities to enhance their skills, methodologies, and practices to deliver more excellent organizational value.
Overall, the IIA’s definition highlights the multifaceted nature of internal auditing, encompassing assurance and consulting activities to enhance organizational performance and effectiveness.
Key Takeaways
Let’s recap the concepts discussed in this section by reviewing these key takeaways:
- Internal auditing is an independent, objective assurance and consulting activity. This emphasizes the importance of internal auditors operating independently within the organization, free from bias or undue influence. Their primary goal is to provide unbiased assessments of the organization’s operations, adding value and improving effectiveness.
- Internal auditing is value-adding, aiming to enhance the organization’s operations and help achieve its objectives. By identifying opportunities for improvement, internal auditors contribute to improved efficiency, effectiveness, risk management and governance practices.
- Internal auditing is a critical function that helps organizations achieve their goals, safeguard their assets, and maintain stakeholder trust.
Knowledge Check
Review Questions
- Explain the importance of independence in internal auditing.
- Describe how internal auditors add value to an organization’s operations.
An independent, objective assurance and consulting activity designed to add value and improve an organization's operations by evaluating risk management, control, and governance processes.
An international professional association that provides standards, guidance, and certifications for internal auditors to promote the practice of internal auditing.
A structured approach in internal auditing that includes planning, performing, documenting, and communicating results to ensure consistency and reliability.
An independent, objective assurance and consulting activity designed to add value and improve an organization's operations by evaluating and enhancing risk management, control, and governance processes.
The systematic approach to managing risks through identification, assessment, prioritization, and implementation of strategies to minimize their impact.
The process of evaluating the adequacy and effectiveness of controls implemented to mitigate risks and achieve organizational objectives.
Systems and procedures through which an organization directs and controls its operations, ensuring alignment with objectives and regulatory requirements.
The freedom from conditions that threaten the ability of internal auditors to carry out their responsibilities in an unbiased manner.
An unbiased mental attitude that internal auditors must maintain throughout the audit process to ensure credible results.
The conduct, aims, or qualities that characterize or mark a profession or professional person, ensuring integrity, competence, and ethical behaviour in the workplace.
The ongoing effort to enhance products, services, or processes by making incremental changes over time to increase efficiency and quality.
