Richard M.

Duran BS in Accountancy 4-1 Accounting 11 – Internal Auditing

Reflection Paper

(Introduction to Internal Auditing)

Our subject is about Internal Auditing, but before that we first discuss
“What is an Auditing?” According to Philippine Standards of Auditing (PSA),
auditing defines by stating objective of a financial statement, audit, that is to
enable the auditor the auditor to express and opinion whether the financial
statements are prepared, in all material aspects, in accordance with an
identified financial reporting framework while according to American
Accounting Association (AAA), “An audit is a systematic process of objectively
obtaining and evaluating evidence regarding assertions about economic
actions and events to assertain the degree of correspondence between these
assertions and established criteria and communicating the results ti interested
user.”

You will notice that these definition of Audit is only generalized on External
Auditing, first is because of academic purposes and the pre-existing technology
second. Academic purposes because of having two subjects, the Auditing
Theory and Auditing Problem. Pre-existing technology because in the past few
years, we don’t have enough technology that’s why we are having an Audit
manually.

Now, what is Internal Auditing? It is an independent appraisal function

established within an organization to examine and evaluate its activities as a
service to the organization. Internal auditors perform a wide range of activities
on behalf of the organization, including conducting financial audits, examining
an operation’s compliance with organizational policies, reviewing the
organization’s compliance with legal obligations, evaluating operational
efficiency, and detecting and pursuing fraud within the firm.

What are the difference between an External and Internal Audit? The
difference between the External and Internal Audit is that, external auditors
represent outsiders, meaning to say you do not know that you are transacting
already with an auditor while internal auditors represent the interest of your
organization, which means they are your employees. If an entity conducts an
audit, internal auditors must be cooperate and assist external auditors in
conducting in performing aspects of financial audits. This cooperation is done to
achieve audit efficiency and reduce audit fees. External audit is based on the
financial reporting standards (PAS or PFRS) while internal audit is based on
objectives set by the management. External Audit’s content on the audit report
tells about the opinion about whether the financial statements are fairly
Richard M. Duran BS in Accountancy 4-1 Accounting 11 – Internal Auditing

presented in accordance with an identified financial reporting framework while

internal audit’s content tells about the recommendations on how to improve the
operations.

What I learned about the first chapter? First Chapter is all about the
Introduction to Internal Auditing. I learned about the nature and role of Institute
of Internal Auditors (IIA), which are they are the guidance-setting body of
internal audit profession. I learned also the main attributes and performance
standards of IAA such as Purpose, Authority and Responsibility then
Independence and Objectivity; Proficiency and Due Professional Care and so
forth. I learned then interestingly, the development of Internal Auditing which
was started by “Lawrence Sawyer” known as the Godfather of IA, then it was
developed in 1941 which the IA has now a major objective which was to
discover fraud. They afterwards they are now the Extension of External Audit
because of testing the reliability of accounting records that contributes to
published financial statements. Also IA was now applicable in Internal Checks
which large number of transactions was double-checked to provide assurance
that they were correct and properly authorized by laid-down procedures. Probity
Work where auditors would arrive unannounced at various locations, purpose is
to linked to view that the chief accountant needed to check on all remote sites
to ensure that accounting procedure were compiled and the books were
correct, meaning we auditors must crash their internal control system in order to
know if how it works and how it is efficient and effectively for their day to day
transactions. In the aspect of Professionalism, even though IA, are part of
management, they must know that they are professional in their work like if they
are against the decision of the management. Also it has in the field of Non-
financial systems, Chief Auditors and Audit Committees. In the first chapter also is
the Moving IA out of Accountancy, for me IA is very broad it has a wider scope
that’s why this subject is not discussed too much because of focusing more on
external audit. Some lessons in IA are in part of Information Technology, and
whatsoever. Additionally learning about the influences of the Internal Audit Role
such as in Contracting out Internal Audit, we all know that Internal Auditors are
expensive and sophisticated because of the big responsibility them working
which is developing an internal control system. It is not mandatory, it depends on
your business if it is big and you have so many branches, then you must acquire
internal auditor to have an internal control on how you operate your business.
They making you a system which embodies the establishment and maintenance
of a system of internal control are an important management obligation. A
fundamental aspect of management’s stewardship responsibility is to provide
users with reasonable assurance that the business is adequately controlled.
Additionally, management has a responsibility to furnish shareholders and
Richard M. Duran BS in Accountancy 4-1 Accounting 11 – Internal Auditing

potential investors with reliable financial information on a timely basis. Then in

the field of Globalization, they have the uniform standards (IIA) in practicing
auditing profession then they can work across the world. In the field of Quality
Management, Internal Auditors are well versed in the principles and practice of
the management, which is examined by IAA. In field of having Independence,
even though they are part of the management they must establish policies and
procedures designed to provide it with reasonable assurance that the members
of the engagement team, the firm maintain independence when providing
assurance services, meaning to say you have the right to decide in favor or
against the management because you know what is the best for the
organization and you have the basis for that decision through your audit report.

Why do we study Internal Auditing? For my own perspective we need to

study this subject because, auditing is not only focused in financial statements, it
is also in compliance and in operational which is my focus for further
explanation. Operational Audit is the study of organization’s activities that are
conducted efficiently and effectively and the Internal Auditors the one who
generally conduct the audit, meaning to say they are part of management. Also
we must study this subject because of future technology which will be more
modernized than today; everything can do now by computers. Example, in a
financial statement audit they can generate financial statements by putting only
the inputs then of course it can also be audit by only checking the assertions on
the computer. In Compliance audit same also; they can generate income tax
returns by putting only the corresponding information in the computers, and the
Government Auditors can check it in their assertions which are also in their
computers. While in internal auditing, they can’t invade by computers because it
never evaluates the activities of organization which means computers can’t do
activities in behalf of organization. Many years from now, that will be the future
work of an Accountant.