How Audit Becomes a Tool for Effective Internal Control Systems

Internal Audit

Definition and purposes of internal control Systems

The Turnbull Report, defined internal control systems and their scope as follows:

‘The policies, processes, tasks, behaviours, and other aspects of an organisation that are taken together:

Facilitate effective operation by enabling it to respond appropriately to significant business, operational, financial, compliance, and other risks to achieve its objectives. This includes safeguarding assets and ensuring that liabilities are identified and managed.

Ensure the quality of internal and external reporting, which in turn requires the maintenance of proper records and processes that generate a flow of timely, relevant, and reliable information from both internal and external sources.

Ensure compliance with applicable laws and regulations and also with internal policies.

Definition and purposes of internal control Systems

Internal audit

Definition and purposes of internal audit Systems:

Internal audit may be defined as an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization.

Internal audit supports management in the effective discharge of their responsibilities. 

To this end, an internal audit furnishes management with analyses, appraisals, recommendations, counsel, and information concerning the activities reviewed.

Objectives of Internal Control Systems

The formal objectives of an internal audit may include the following:

• Review of accounting and internal control systems

• Examination of financial and operating information

• Review the ‘three E’s (economy, efficiency, and effectiveness)

• To look into compliance with laws and regulations

• Review of arrangements for the safeguarding of assets

• Reviewing implementation of corporate goals and objectives

• Identification of significant risks to the organization, and monitoring risk management policy and risk management strategies.

• Special investigations as required.

Internal audit and internal control systems

Internal audit is an internal but independent assurance function. While internal auditors are usually employees of the organization, they should operate independently of management so that their analyses, judgements and reports are free from bias or undue influence. The head of internal audit should report to the board of directors or the audit committee. Some organizations reinforce independence by outsourcing the internal audit function to professional external firms.

Internal control systems is the internal assessment of internal controls and as such is a management control to ensure compliance and conformity of internal controls to pre-determined standards.

Key risks:
Internal audit reviews and reports on internal controls concerning key risks affecting the organization. The objective here should be to test the extent to which the controls will control the risk if it crystallizes. The conclusions of these reports should enable management to reconsider the controls and modify or redesign them if appropriate.

Financial and operating information:
Internal audit may examine this information to ensure it is accurate, fit for purpose and timely. Tests may be applied to determine whether the information is correctly measured and therefore suitable as a basis for informing management and external stakeholders.

Compliance:
Increasingly, organizations have to implement performance standards for compliance. This may be to satisfy the demands of external regulators or to operate to pre-determined internal standards. Internal audits should review operations for compliance with such standards. In this respect, the work of internal auditors is broadening, as organizations increasingly pursue compliance not only with industry standards for products and service provision but also with criteria relevant to environmental standards.

Types of audits in internal control systems

In the course of their duties, internal auditors may carry out various types of audits. These include the following:

Operational audits may be concerned with the efficiency of the organization’s activities. They consider performance relative to pre-determined criteria.

Systems audits are used to test and evaluate controls as described in the last section. They test whether the controls can be relied upon to ensure that resources are allocated and managed effectively. They also test whether the information provided by the organization’s systems is accurate. Compliance tests verify whether internal controls are being applied properly. Substantive tests verify the accuracy of figures and can be used to identify errors and omissions.

A transactions or probity audit is concerned with detecting fraud and other types of criminal or unlawful behaviour. However, it can also be extended to matters relating to fairness of dealings, impartiality, accountability, and transparency, sometimes considered to be within the scope of social audit. Generally, social audits may be concerned with any matters relating to governance.

From the above, it is clear that an Internal Audit department is the best tool for practical Internal Control Systems.

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