INTERNAL AUDITING

1. INTERNAL AUDITING

2. WHY AN INTERNAL AUDIT - How it was define and the role it take decades back to 21st century - What service it offers to gain appreciation with the booming industry and developing country -What are the internal auditing standards its explanations and applications as a guide to perform the audit functions of internal auditors with the objective of assurance and consulting activity to add value and improve an organization’s operations.

3. If decades back, internal auditing focused as a mere watchdog of management and or organization to comply that the internal control procedures are properly undertaken, to this end the internal auditing broadened its functions to wit: • Review critical business activities • Monitor the accuracy , timeliness and cost of work in compliance with the quality of management system • Identify the root where the error occur • It furnish management of systems data analysis , recommendation, advise and other relevant infos

4. -helpful to the management based on the activities and processed reviewed -Assist the management in governance, risk and control -It must posses technical and business management skills to provide the management of highly relevant information aside from professional skills that a candidate in internal audit committee possesses.

5. Applying the function of an internal audit, it assists all members of management in the effective discharge of their responsibilities

6. Branch of Accounting Accounting Auditing Taxation Financial accounting Financial Management Management accounting Bookkeeping Government need funds from established business, thus taxes shall be correctly imposed, verified, and checked by th agency of the Government. Bookkeeper collects data, records to book of accounts,&extract for financial statement reports- for owners and management entity use. Cost accounting Financial managers Need detail planning Requiring comprehensive cost analysis data to set objectives in safeguarding financial resources

7. Changing Definitions of Internal Auditing

8. Prior 19th century 21st Century Independent appraisal activity within an organization for the review of accounting, financial and other operations as a basis for protective and constructive service to management An independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization 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

9. systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes Assurance would mean review of historical financial information and assurance dealing with subject matterOther than historical financial information

10. Important NOTES inDefinition of Internal Auditing

11. The term “service” implies that internal auditing is a staff rather than a line activity within the organization. • There is a shift from “serving management” to “serving the organization” to finally “an integral component of corporate governance as a separate value-added function”. • The focus of internal auditing has shifted away from appraisal and compliance activity toward objective assurance and consulting activities. • The role of internal auditors has changed from providing management with input and objective feedback to directly participating in decision-making. • These definitions view internal auditing as an “activity,” which implies it can be performed either within the organization or outsourced to external auditors.

12. Internal audit Valuable Independent judgment Follows professional standard Internal- Carried within an organization Add value and improve organizational operations Characteristics

13. ORGANIZATION INTERNAL AUDIT SERV ICE FUNCTION Transaction event Compliance R E V I E W Fraud Operation Procedures G A A S A F R F Record trasaction Financial Report Audit commBod FS

14. Based on the internal service function enumerated & graphically presented, the role of management and the internal auditor are defined as follows

15. OPERATIONAL AUDITING! • Internal auditors doing the operational or performance auditing as they study of business operation for the purpose of: • Making recommendation about economic & efficient use of resources • Effective achievement of business objectives • Compliance with company policies Goal? To help managers discharge their management responsibilities and improve profitability…

16. OBJECTIVES OF INTERNAL AUDIT IN RELATION TO SERVICE IT OFFERS • Determine the adequacy, efficiency and effectiveness of the entity’s internal control structure. 2. Review the reliability and integrity of management, financial and operating information 3. Review the systems established to ensure compliance with policies, regulations, procedures and laws. 4. Review the means of safeguarding the assets of the entity 5. Appraise the economy and efficiency with which resources are employed

17. 6. Review operations or programs to determine whether results and outcomes consistent with established objective and goals are being achieved 7. Participate in the design of major information system 8. Provide advisory and training services for entity’s segments or components as required or requested to ensure fiscal and administrative integrity of the entity.

18. Question of independence have been viewed by many to be with flaws in an internal audit environment because of the employer and employee relationship; but does it mean the external audit are free from the view of independence not in question? INDEPENDENCE • External users needs independent report from the external auditors, while high executives level and the audit committee of the board of directors demand for the operational and reporting independence • Free from control of direct influence of operating managers whose function, operations, & results they may be assigned to audit • To be objective in report findings without having to fear for their jobs

19. INDEPENDENCE Organization separation from such influence is essential for independence for the internal auditors can report directly to top management without fear of their job or compensation retribution

20. CODE OF ETHICS… With the independence so requires, with the management rely on the profession to assist in the fulfillment of management stewardship, internal auditors must maintain high standard of conduct, honor, and character in order to carry on proper and meaningful internal auditing practice. With the code of ethics, the responsibility to conduct with integrity and good faith are not to be question & promote the highest possible internal auditing standards advancing to the interest of the company organization As approved by the Institute of Internal Auditors

21. CODE OF ETHICS… Members, • Shall have an obligation to exercise honesty, objectivity, and diligence in the performance of their duties and responsibilities • In holding the trust of their employers, shall exhibit loyalty in all matters pertaining to the affairs of the employer or to whomever they may be rendering service, however, they shall not knowingly be a part of any illegal or improper activity • Shall refrain from entering into any activity which may be in conflict with the interest of their employers or which would prejudice their ability to carry out objectively their duties and responsibilities

22. CODE OF ETHICS… Members, • 4. Shall not accept a fee or a gift from an employee, a client, a customer, or a business associate of their employers without the knowledge and consent of their senior management • 5. Shall be prudent in the use of information acquired in the course of their duties. They shall not use confidential information for any personal gain nor in a manner which would be detrimental to the welfare of their employer • 6. In expressing an opinion, shall use all reasonable care to obtain sufficient factual evidence to warrant such expression. In their reporting, materials facts known must be revealed, if not, it could distort the report of the result of operations under review or conceal unlawful practice.

23. CODE OF ETHICS… Members, 7. Shall continually strive improvement in the proficiency and effectiveness of their service 8. Shall abide by the laws and uphold the objectives of the Institute of Internal Auditors, Inc. In practice of their profession, they shall be ever mindful of their obligation to maintain the high standard of competence, morality, and dignity which the Institute of Internal Auditors, Inc and its members have established.

24. Case illustration- code of ethics

25. Scope of service • Audits of financial reports and accounting control systems (present fairly the financial position and the results of operation in accordance with GAAP; compliance with laws and regulations that may have a material effect on the financial statement • Reviews of control systems that ensure compliance with company policies, plans, and procedures, and with laws and regulations. • Appraisal of the economy and efficiency of operation- (managing and utilizing its resources, ie: personnel, property, space economically and efficiently; the causes of inefficiency or uneconomically practice; compliance with laws in matter of econony & efficiency

26. Scope of service • Reviews of effectiveness in achieving program results in comparison to pre-established objectives and goals- (the desired results or benefits established by the legislature or other authorizing body are being achieved ; that the agency has considered alternatives that might yield desired results at a lower cost.

27. STATEMENT OF INTERNAL AUDIT STANDARDS Compliance depends on the acceptance and adoption and implementation by practicing internal auditors who by standard requires to be skilled in dealing with people and in communicating effectively because the auditors believe it is their own responsibility to see that their reports are understood properly Internal Audit Standard also require follow up to ascertain that appropriate action is taken on reported audit findings or ascertain that management or the board of directors has taken the risk of not taking actions on reported findings.

28. GENERAL & SPECIFIC STANDARDS FOR PROFESSIONAL PRACTICE OF INTERNAL AUDITING Organizational status INDEPENDENCE Objectivity Staffing Knowledge, skill, & discipline PROFESSIONAL PROFICIENCY Supervision Compliance with standards of conduct Human relations, & communication Continuing Education Due professional care

29. GENERAL & SPECIFIC STANDARDS FOR PROFESSIONAL PRACTICE OF INTERNAL AUDITING SCOPE OF WORK Reliability & integrity of information Reviews Examination and evaluation of the adequacy & effectiveness of the organization’s system of internal control & the quality of performance in carrying out assigned responsibilities Compliance w/ policies, plans, procedures, laws, & regulation Safeguarding of assets Economic & efficient use of resources Accomplishment of established objective & goals for operation or program

30. GENERAL & SPECIFIC STANDARDS FOR PROFESSIONAL PRACTICE OF INTERNAL AUDITING PERFORMANCE OF AUDIT Planning the audit Includes planning the audit, examining & evaluating information, communicating results, & following up. Examining & evaluating information by collecting, analyze, interpret, & document information to support audit results Following up Communicating results

31. GENERAL & SPECIFIC STANDARDS FOR PROFESSIONAL PRACTICE OF INTERNAL AUDITING MGT OF INTERNAL AUDIT DEPT Purpose, authority,& responsibility Manage the internal Auditing Department.. Planning External auditor Policies, & procedures Personnel mgt, & development

32. EXAMINATION AND EVALUATION (FIELD WORK AND REPORTING STANDARDS FOR FINANCIAL COMPLIANCE AUDITS Generally accepted auditing standards shall apply/adopted, & incorporated unless otherwise stipulated… Expanded standard for financial and compliance audit- as part of the scope of work • Standards on examination & evaluation: • Planning shall include consideration of the requirement of all levels of dept • A review is to be made of compliance with applicable laws & regulation • A written record of auditor’s work shall be retained in the form of working papers • Auditor shall be alert to situation or transactions that could be indicative of fraud, abuse, and illegal expenditures and acts and if such evidence exists, extend audit steps and procedures to identify the effect on the entity’s financial statement

33. EXAMINATION AND EVALUATION (FIELD WORK) AND REPORTING STANDARDS FOR FINANCIAL COMPLIANCE AUDITS • Standards on reporting • Written audit reports are to be submitted to the appropriate of the organization audited & to the appropriate officials of the organization requiring or arranging for the audit unless legal restrictions or ethical consideration prevents it. Copies of the report shall should also be sent to other authorized to receive such reports. Unless restricted by law or regulation, copies should be made available for public inspection • A statement in the auditor’s report that the examination was made in accordance with generally accepted internal/government auditing standards for financial and compliance audit will be acceptable language to indicate that the audit was made in accordance with these standards

34. EXAMINATION AND EVALUATION (FIELD WORK) AND REPORTING STANDARDS FOR FINANCIAL COMPLIANCE AUDITS • 3. Either the auditors’ report on the entity’s financial statement or a separate report shall contain a statement of positive assurance on those items of compliance tested and negative assurance on those items not tested. It shall also include material instances of non compliance and instances or indication of fraud, abuse, or illegal acts found during or in connection with the audit • 4. The auditors’ shall report on their study and evaluation of internal accounting controls made as part of the financial and compliance audit. They shall identify as a minimum • a. entity’s significant internal accounting controls • b. controls identified that were evaluated • c. controls identified that were not evaluated- auditor may satisfy this requirement by identifying any significant classes of transaction and related assets non included in the study & evaluation • d. material weaknesses identified as a result of evaluation

35. EXAMINATION AND EVALUATION (FIELD WORK) AND REPORTING STANDARDS FOR FINANCIAL COMPLIANCE AUDITS • 5. Either the auditors’ report on the entity’s financial statements or a separate report shall contain any other material deficiency findings identified during the audit not covered in report 3# • 6. If certain information is prohibited from general disclosure, the report shall state the nature of the information omitted and the requirement that makes the omission necessary

36. EXAMINATION AND EVALUATION STANDARDS FOR ECONOMY & EFFICIENCY AUDITS & PROGRAM RESULT AUDITS • Work is to be adequately planned • Assistants are to be properly supervised • A review is to be made of compliance with applicable laws & regulation • During the audit, a study and evaluation shall be made of internal control system-admin control ) applicable to the organization program, activity, or function under audit • When audits involved computer based systems, the auditor shall: • a. Review general controls in data processing systems to determine whether 1)controls have been designed according to management direction and known legal requirements and 2)the controls are operating effectively to provide reliability of, and security over the date being processed • b. Review application controls of installed data processing application on which the auditor is relying to assess their reliability in processing data in a timely, accurate, and complete manner.

37. EXAMINATION AND EVALUATION STANDARDS FOR ECONOMY & EFFICIENCY AUDITS & PROGRAM RESULT AUDITS • 6. Sufficient, competent, and relevant evidence is to be obtained to afford a reasonable basis for the auditors’ judgments and conclusions regarding the organization, program, activity, or function under audit. A written record of the auditors work shall be retained in the form of working papers • 7. The auditors shall: • a. Be alert to situation or transactions that could be indicative of fraud, abuse, and illegal acts • b. if such evidence exist, extend audit steps and procedures to identify effects on the entity’s operations and programs

38. REPORTING STANDARDS FOR ECONOMY & EFFICIENCY AUDITS & PROGRAM RESULTS AUDIT • Written audit report are to be prepared giving the results of each dept/government audit • 2. Written audit reports are to be submitted to the appropriate officials of the organizations requiring or arranging for audit unless legal restrictions or ethical considerations prevent it. Copies of the reports should also be sent to other officials who may be responsible for taking action on audit findings and recommendations and to others authorized to receive such reports. Unless restricted by law or regulation, copies should be made available for public inspection • 3. Report shall include: • a. A description of the scope and objective of the audit • b. A statement that the audit( economy & efficiency or program results is made in accordance with generally accepted internal or auditing standards

39. REPORTING STANDARDS FOR ECONOMY & EFFICIENCY AUDITS & PROGRAM RESULTS AUDIT 4. The report shall include: d. A statement of positive assurance on those items of compliance tested and negative assurance on those items not tested. This should include significant instances of noncompliance and instances of or indicating of fraud, abuse or illegal acts found during or in connection with the audit. However, fraud, abuse or illegal acts normally should be covered in a separate report, thus permitting the overall report to be released to the public e. Recommendations for actions to improve problem areas noted in the audit and to improve operations. The underlying causes of problems reported should be included to assist in implementing correction actions f. Pertinent views or responsible officials of the organization, program activity, or function audited concerning the auditors findings, conclusions, & recommendation. When possible, their views

40. REPORTING STANDARDS FOR ECONOMY & EFFICIENCY AUDITS & PROGRAM RESULTS AUDIT 4. The report shall include: f. contn: should be obtained in writing g. A description of noteworthy accomplishment, particularly when management improvement in one area may be applicable elsewhere h. A listing of any issues and questions needing further study and considerations i. A statement as to whether any pertinent information has been omitted because it is deemed privileged or confidential. The nature of such information should be described, and the law or other basis under which it is withheld should be stated. If a separate report is issued containing this information, it should be indicated in the report 5. The report shall: a. Present factual data accurately and fairly. Include only information, findings, and conclusion that are adequate supported by sufficient evidence in the auditors’ working papers to demonstrate or prove the bases for the matters reported and their

41. REPORTING STANDARDS FOR ECONOMY & EFFICIENCY AUDITS & PROGRAM RESULTS AUDIT 5. The report shall: a. cont’n…or prove the bases for the matters reported and their correctness and reasonableness b. Present findings and conclusions in a convincing manner c. Be objective d. Be written in language as clear and simple as the subject matter permits e. Be concise, but at the same time clean enough to be understood by users f. Present factual data completely to fully inform the users g. Place primary emphasis on improvement rather than on criticism of the past; critical comments should be presented in a balanced perspective considering any unusual difficulties or circumstances face by the operating officials concerned.

42. BODY OF INTERNAL AUDIT REPORT Address Scope of audit work/ Date Audit Highlights Department name Prior audit- Findings noted Audit scope coverage- Particular work to be done/Nature of audit Overall opinion- Positive and Negative inputs noted Executive Action required- Action made by the Department audited

43. Summary Report Foreword: includes the profile of the company department to be audited Purpose: Specifically mentioned the scope of work to be audited in compliance with the company control procedures, policies and governing laws Opinion and Findings: Include positive and negative findings noted during the operation and compliance audit Summarize per department/areas audited by mentioning the control measures, weaknesses and strength, and the audit procedure done Signed by : Auditor in-Charge Supervising Auditor Manager of Internal Audit

44. Supplemental report This body covers the more detail report of deficiency findings per area or scope of work, and detailed audit procedure done for each weaknesses noted, and to whom discussed for action to be made Summary of findings requiring corrective action Summarize the findings that require management actions

45. Reporting case: The internal audit department have just concluded the operation and compliance audit of their company- MALUSOG Inc- a construction company handling heavy equipments as one of major accounts with a total cost of P10 Million, depreciation are computed on a straight line method with an estimated useful life of 5 years. With the capital outlay for equipments, the company has the policy to safeguard its assets through proper maintenance to include, fuel and oil, repair parts and services, that as of audit date it reach about P900,000. The employees is around 50 assigned and charged as part of operating cost. The construction operates for the a period of 2 years now. For this year internal audit operation and compliance examination the focus is on: a. the equipment maintenance and vehicle dispatching to sites including preventive maintenance and inspection; performing regular maintenance and repairs

46. b, Ordering, receiving, and disbursing fuel and parts and obtaining equipment repairs. Controls are satisfactorily provided on the activities pertaining to inspections and preventive maintenance schedule, dispatched log for equipment are properly monitored as to location and driver involved. Parts received are well inspected as to purchase requests, purchase order and receiving report; disbursement of parts are done in volume without specifying the part number, qty pieces, purpose and equipment needing parts. Receiving and withdrawal of parts, dispatching of vehicles are done by the department supervisor or any of his staff. However for withdrawal of and surveillance of gas and oil by vehicle operators are inadequate are inadequate where the vehicle operator serves himself and records his own withdrawals of gasoline and oil without surveillance thereby making no assurance that records are maintained accurately Samples of documents such as preventive maintenance reports and related control records and found to be in order, likewise the documents for vehicle dispatch log and observation of its operations was being adequately controlled and performed.

47. Despite of the weaknesses though, it is concluded that on the basis of the test made that the functions are being performed in a reasonably satisfactory manner. Sample test on the fuel pump meter records vs amount of fuel recorded by vehicle operators produce minimal or tolerable variance. Findings have been discussed to management team and are responsive to the recommendations made as crucial for the operation if not given corrective actions. Recommendation as to proper segregation of duties and must be reviewed by the management, and of the management to consider some means of surveillance even of a spot check basis to provide minimum element of control as it danger the operation by manipulating and misappropriation increases.

48. RESPONSIBILITIES OF INTERNAL AUDIT

49. RISK PROCEDURES Needed for audit plan Obtain information Is sufficient -Procedures: 1.Inquries(go- vernance,em- ployees,legal counsel, mktg/ sales.. 2.Analytical proce dures 3.Observation, inspection 4.Other procedure relevant to timing and extent of audit, ie prior period examination Needed for audit eviden ce

50. INTERNAL AND EXTERNAL AUDITING The CONTRAST