Principles And Practices Of Internal Audit And Internal Controls: A Report To Mr. Oliver David

Principles and practices of internal audit

International Auditing and Assurance Standards Board (IAASB) provides guidance to the organizations as to whether they should have internal audit functions or not. The quality of internal audit and the internal audit functions often make huge difference to the overall functions and operations of corporate entities and business organization. An internal audit function provides independent reviews of internal controls and functions of organizations along with suggestions to strengthen the internal controls and improve the operations of the organizations. Internal audit is concerned with financial, non-financial control environment, internal processes within the organizations for different operations within the organization and governance processes.

Corporate governance principles and recommendations states that a listed entity should have internal audit functions and in case any such entities does not have internal audit functions they must explain the reasons for not having such internal audit functions. In addition such entities must explain how the risks and internal control processes within the organization are managed, evaluated and improved without internal audit functions.

It is important to understand that internal audit and external audit are completely different from each other must be conducted by different auditors. External auditors are responsible to conduct an audit on the financial statements to express their opinion on these statements as per the International Auditing Standards. Internal auditors on the other hand provides an independent review of the internal processes, controls and operations to suggest ways and method to improve these and subsequently the financial performance of the companies. It is not compulsory for the companies to have internal audit functions however, with the increase in size of entities it is desirable to have internal audit functions to improve the quality of internal controls, processes and operations of the organizations. In fact stock exchange has recommended the listed companies to have internal audit functions to improve the internal controls and processes within the organizations. In case listed entities do not employ internal auditors then the entities must explain the reason for such decision of not having internal audit functions and how the internal controls and processes are managed by these entities.

The reasons that entities should have internal audit functions can be understood from the benefits that are expected to accrue from internal audit functions to an organization. An organization will have number of benefits from internal audit functions; these are explained below:

Constant review of internal processes and suggestions for improvement: Internal audit functions constantly review the internal processes to assess whether these are in accordance with the objectives of the organization. Internal processes help an organization to achieve its objectives thus, these must be effective and efficient. Internal audit function will help an organization to improve the quality of internal processes by providing suggestions on these processes based on the findings from the review.

Internal auditor reviews the internal controls within the organization to assess whether these are appropriate for the risk within the organizations. Based on the assessment of the internal controls the auditor provides suggestions to improve these controls to make these more effective.

Benefits of internal audit function

Internal audit function identifies risks within the organization and monitor these risks to assess whether the internal controls instituted within the organization by the management are capable of managing the threat of risks effectively from damaging the internal processes and operations. Based on the review the internal auditor recommends the management necessary steps to improve the quality of internal controls to manage the risks effectively. Thus, monitoring and managing risks become far more effective subsequent to internal audit function.

Internal audit function independently review the governance processes of an organization. Based on the findings from such review internal auditors provide suggestions to the management to improve the governance processes. This helps the management to govern and manage and organization better in the future (Steinbart, Raschke, Gal & Dilla 2018).

In case the business is looking to expand its operations there bound to be number of challenges that the organization will face. Internal audit function will help an organization by improving the quality of internal processes, controls and governance processes to help in successfully implementing the expansion strategy in the future.

In this case the Oliver Trading is expected to have 100 employees within in next three years where as at present the organization has merely 50 employees. The management is looking to expand the business of the organization. Assuming that the scale of operations of the organization will also be doubled by the end of year 2020. The following forecasting income statement can provide significant idea as to scale at which the organization will operate by the end of year 2020.

Particulars	Amount ($)	Amount ($)
Expected sales (180000 x 200%)	360,000.00
Expenses
Advertisement (Assuming fixed cost)	1,000.00
Cost of goods sold (65000 x 200%)	130,000.00
Rent (Assuming fixed costs)	4,200.00
Salaries and wages (55000 x 200%)	110,000.00
Other (17460 x 200%)	34,920.00
		280,120.00
Net income before taxes	79,880.00
Less: Taxes @30% (79880 x 30%)	23,964.00
Net income after tax	55,916.00

As is already clear from the facts of the case that David Oliver is looking to expand the business of the company by diversifying into new markets and different industries. The company would be able to extract number of benefits from internal audit function as mentioned earlier in this document. Since David is also considering listing the company on to the stock exchange thus, it will be liable to explain to the Corporate Governing body in the country about not having an internal audit function in case the company decides to not have the internal audit function as suggested by Emma Oliver to David in her email. The observation of Emma is completely out of place where she suggests that internal audit function is a waste of money as the methods are old fashioned. Institute of Internal Audit always looks to improve the quality of internal audit by incorporating modern methods and processes to it. Internal audit function will independently review the internal processes, governance processes and internal controls to improve these for the benefit of the company. Thus, the company will be benefitted immensely from the suggestions of the internal auditors especially at the time of expansion of business (Demirakos 2018).

Also the bizarre claim of Emma to conduct internal audit of the company by the external auditor Pure and Fair is completely against the provision of the Corporations Act. The act mentions that external auditor shall only conduct external audit of a company and at no cost shall be involved in the internal auditing and internal processes of the company.     

Thus, at a time of growth and change the company would be benefitted immensely from internal audit functions and thus, should have internal auditors to conduct the internal audit of the company. The observations made by Emma about internal audit are completely wrong and without any basis.  

References: 

Demirakos, E. (2018). Internal Auditing: Assurance and Advisory Services, UL Anderson, MJ Head, S. Ramamoorti, C. Riddle, M. Salamasick, PJ Sobel, The Internal Audit Foundation (2017), 627 pages, $199.99, ISBN: 978-0-89413-987-1.

Steinbart, P. J., Raschke, R. L., Gal, G., & Dilla, W. N. (2018). The influence of a good relationship between the internal audit and information security functions on information security outcomes. Accounting, Organizations and Society.