INTERNAL AUDITING, PERFORMANCE & COMPLIANCE AUDIT

CHAPTER 8

LEARNING OBJECTIVES
Explain the role of internal auditors in financial

audit i.e. scope, objective and nature of internal auditing Discuss the similarities and differences between internal and external auditor Explain the concept, objective and scope of performance audit Discuss criteria for evaluating efficiency and effectiveness Discuss the objective and scope of compliance audit

1. INTERNAL AUDIT

1.1 Explain The Role of Internal Auditors in Financial Audit

IIA Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organizations 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. From the definition, IA are expected to identify potential problem areas & recommend ways of improving risk mgmt & int. control: Review of the economy, efficiency and effectiveness of operation Reviewing the reliability and integrity of information Ensuring compliance with policies and regulation, and Safeguarding assets
Objectives of IAs are broader than external auditors, which

provides flexibility to meet company needs. Different company vary in the extent and area of focus of int. auditing

1.2 Relationship between Internal and External Auditor

The main difference is whom each party is responsible to:
External auditor to users of financial statement Internal auditor to management However, both must be competent, objective, follow similar

methodology in performing audits, and use audit risk model and materiality in deciding the extent of their test and evaluating results

External auditor (EA) significantly reduces control risk and substantive test if internal auditor are effective. EA typically consider IA effective if they are independent, competent & well trained, and have performed relevant audit tests of the internal control and financial statement.

2. PERFORMANCE AUDIT

2.1 Performance vs Financial Auditing

Performance auditing is related to testing and evaluating effectiveness and efficiency of internal control and operation. Also known as operational, value for money (VFM) or management auditing
Purpose of audit financial audit emphasizes whether

historical info was correctly recorded while performance audit on effectiveness and efficiency of operation Distribution of report financial audit report goes to user of fin statement, performance audit goes only to mgmt Inclusion of non-financial areas financial audits are limited to matters that affect the fairness of presentation, performance audit cover any aspect of efficiency and effectiveness.

2.2 Types of Performance Audit

Functional Audits deals with one or more function in an

organization. E.g. cash disbursement, cash receipt, and payroll functions. Advantage - permitting specialization by auditors. Disadvantage failure to evaluate interrelated functions.
Organizational Audits deals with an entire organizational

unit, such as department, branch or subsidiary. Emphasis on how efficiently and effectively function interact.
Special Assignments arise at request from mgmt, e.g.

reducing non value added activities, determining the cause of ineffective IT system, investigating possibility of fraud or making recommendations for reducing the cost of manufacture product.

2.3 Efficiency vs. Effectiveness

Effectiveness refers to the accomplishment of objectives Efficiency is related to the resources used to achieve those

objective
The major difficulty found in performance auditing is in deciding on specific criteria for evaluating efficiency and effectiveness. This criteria is also known as key performance indicator (KPI). Sources of criteria: Historical performance Benchmarking Engineered standards Discussion and agreement

2.3 Efficiency vs. Effectiveness

Common areas for performance audit include: System of budgeting, controlling revenue and capital expenditure and income and allocation of scarce resources Quality and robustness of strategic and business planning and forecasting Monitoring of tendering arrangement for large capital, service or supply contracts. Personnel management deciding and reviewing staff levels for recruiting, training, etc Assets management ensure contribute to efficiency of operations, include introduction of efficiency policies Quality and accuracy of management and performance info

3. COMPLIANCE AUDIT

The objective of compliance audit is to determine whether an auditee complies with specific procedures established by higher management within an entity or by some regulation authority.
Purpose of audit to determine the extent to which rules,

policies, laws, covenants, or governmental regulations are followed by the party or entity being audited The criteria used for evaluating compliance would be based on the set of rules that the audited needs to comply with and would therefore vary from case to case.