PART II - I

1. PART II - I INTERNAL AUDITING DEFINITION, SCOPE AND OBJECTIVES

2. INTERNAL AUDITING DEFINITION 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 systematic, disciplined approach to evaluate and improve the effectiveness of risks management, control and governance processes.

3. Overview MANAGEMENT RESPONSIBILITIES Governance Risk Management Control

4. SCOPE OF INTERNAL AUDITING The internal audit activity must assist the organization in maintaining effective controls by evaluating their effectiveness and efficiency and by promoting continuous improvement.

5. SCOPE OF INTERNAL AUDITING The internal audit activity must evaluate the adequacy and effectiveness of controls in responding to risks within the organization’s governance, operations and information systems regarding the: • Reliability and integrity of financial and operational information; • Effectiveness and efficiency of operations; • Safeguarding of assets; • Compliance with laws, regulations, and contracts.

6. DUTIES, FUNCTIONS AND RESPONSIBILITIES OF IAS As mandated by Malacañang Administrative Order No. 278, Series of 1992

7. 1. The IAS activities shall include the following: • Ascertaining the reliability and integrity of financial and operational information and means used to identify measures, classify and report such information; • Ascertaining the extent of compliance with established policies, and applicable laws and regulations, and reviewing the system established to ensure compliance with government policies, plans and procedures, laws and regulations which could have a significant impact on operations;

8. Ascertaining the extent to which the assets and other resources of the institutions are accounted for and safeguarded from losses of all kinds; • Reviewing and evaluating the soundness, adequacy and application of accounting, financial and other operating controls and promoting the most effective control at reasonable cost; e. Reviewing operations or programs to ascertain whether or not results are consistent with established objectives and goals and whether or not such programs are being carried out as planned;

9. Evaluating the quality of performance of groups/individual in carrying out their assigned responsibilities; and g. Recommending corrective actions on operational deficiencies observed.

10. In addition to its above duties, the IAS may be called upon to perform special assignments by the Head of the Agency. However, it shall not be responsible for or required to participate in procedures which are essentially a part of a regular operating activities or in operations which are primarily responsibility of another unit in the organization. The IAS shall be detached from all functions of routine operating character, such as the following: • Pre-audit of vouchers and counter-signature of checks;

11. b. Inspection of deliveries, although the internal auditor may, as part of his examination, observe inspection; c. Preparation of treasury and bank reconciliation statements d. Development and installation of systems and procedures; however, in exceptional cases, the internal auditor may assist by way of giving suggestions preferably during the development stage;

12. Taking physical inventories; however, the internal auditor may review the plans in advance and observe the test-check the accuracy of counting, costing and summarizing; • Maintaining property records; and • All other activities related to operations.

13. AUDIT FUNCTIONS AND TOTAL QUALITY APPROACHES Today, more and more audit functions are implementing quality improvement programs which are a significant departure from the traditional approach. These total quality approaches are characterized by: • Focusing on the areas of highest risk to the organization.

14. Audit team approach using facilitators, subject-matter-experts from the organization being audited, etc. • Working paper documentation that meets the evidence requirements of the IIA’s Standards but which are quickly prepared and are often computer-based. • Reporting methods and styles that better fit the needs of those for whom the reports are intended. • Encouraging management to request internal audit reviews rather than have to impose them on an organization. • Self-assessment reviews where the organization being reviewed performs the review as a team facilitated by internal auditors

15. Purpose, Authority and Responsibility The purpose, authority, and responsibility of the internal auditing activity must be defined in an internal audit charter, consistent with the Definition of Internal Auditing, the Code of Ethics and the Standards. The Chief Audit Executive should seek approval of the charter by senior management and final approval by the board. The internal audit charter establishes the internal audit activity’s position within the organization; authorizes access to records, personnel, and physical properties relevant to the performance of engagements; and defines the scope of internal audit activities.

16. Purpose, Authority …continued… Throughout the world internal auditing is performed in diverse environments and within organizations which vary in purpose, size and structure. In addition, the laws and customs within various countries differ from one another . These differences may affect the practice of internal auditing in each environment. The implementation of the Standards for the Professional Practice of Internal Auditing, therefore, will be governed by the environment in which the internal auditing department carries out its assigned responsibilities.

17. Purpose, Responsibility …continued… Compliance with the concepts enunciated by the InternationalStandards for the Professional Practice of Internal Auditing is essential before the responsibilities of internal auditors can be met. As stated in the Code of Ethics, members of the Institute of Internal Auditors, Inc. and Certified Internal Auditors shall adopt suitable means to comply with the International Standards for the Professional Practice of Internal Auditing.

18. Similarities between Internal Auditing and Public Accounting • Both follow the same auditing principles Both internal auditor and the public accountant adhere to accepted auditing principles and standards on audit preparation, field audit, reporting and others. • Both use similar auditing techniques The internal auditor and the public accountant utilize the same auditing techniques, namely: techniques of interview, observation, inquiry, inspection, analysis, computation, comparison, confirmation, working paper preparation and others.

19. Both are fact-finding activities Both give comments about the areas audited and these are not based on mere assumptions but are supported by facts and backed by tangible evidences. • Both have attained professional status, with respective titles for their practitioners CPA for public accounting (National) CIA for internal auditing ( International)

20. Differences between Internal Auditing and Public Accounting • As to nature Internal auditing is conducted by employees of the organization, while public accounting is performed by certified public accountants who are not employees of the organization being audited but are only engaged in by the business on a fee basis.

21. As to objective The objective of the internal auditing is to render service to its management in order to achieve an effective, efficient and economical business operations. On the other hand, the objective of public accounting is to comply with the audit engagement, which in most cases, is the rendition of an opinion as to the financial condition of the business at a given date and the results of its operations during a given period.

22. As to scope The scope of internal auditing is unlimited. It can cover all phases of activities in the organization to achieve its objective of services to management. The scope of public accounting is limited to the nature of the engagements which usually cover only the audit of financial statements.

23. As to approach Generally, internal auditing is auditing in the reverse. It starts from the source documents and ends at the financial statements. However, it also follows the public accounting approach. Public accounting is more of analysis. It goes backward from the financial statements to the source documents.

24. As to reporting responsibility Internal auditing reports are utilized for management purposes while audit reports of public accountants are submitted to management and other entities and are intended not only for management , but also for the government, the public and other entities.

25. Internal Auditing Distinguished From • Pre-auditing. It is the checking of actions or transactions before they are consummated or paid. • Post-auditing. It is the examination of actions or transactions after they are consummated or paid.

26. Internal Auditing Distinguished From • Private accounting. It is accounting practice employed within the accounting unit of an entity. • Government auditing. It is auditing conducted by government auditors in the Commission on Audit. • Management Services. It is the unit charged with the responsibility to develop and implement systems and procedures.

27. THE ORGANIZATION STRUCTURE OF THE INTERNAL AUDIT DEPARTMENT WITHIN A GIVEN COMPANY WILL DEPEND ON THE FOLLOWING FACTORS • Authority delegated and responsibility charged to the internal auditor by management; • Size and components of the particular business; • Number and other kind of other control units established; • Characteristics of the industry or organization; and • Number of employees in the internal audit department.