ACCA F8 (INT) Audit & Assurance - 2010 - Study text

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Chapter 5: Internal audit

Efficiency means getting a high volume of output from the resources that are used.

The efficiency of employees is often referred to as ‘productivity’. Efficiency can be

achieved by making better use of equipment and machines (reducing non-use time),

improving employee productivity, making better use of available accommodation

or getting better use out of marketing spending, and so on.

Effectiveness means achieving the objectives of the entity with the resources that it

uses. Using resources efficiently has no value if the resources are not used in a way

that achieves objectives. For example, a manufacturing company may improve

efficiency and produce a larger quantity of output with its available machines.

However, if the extra output cannot be sold, the organisation will not achieve its

objective of increasing profit.

The 3Es are summarised in the table below:

Meaning Measurement

Economy

‘Doing it cheaply’ Compare money spent with inputs

acquired

Efficiency

‘Doing it well’ Compare inputs used with output

achieved

Effectiveness

‘Doing the right thing’ Compare output achieved with

objectives

Measuring the 3Es is important for the purpose of a VFM audit. The internal auditor

should measure each of the three Es in order to assess whether sufficient value for

money is being achieved, or whether improvements can be made.

The right hand column of the table shows that there are four variables involved in

the measurement of value for money:

 the money spent

 inputs acquired with the money spent, and inputs used

 output produced with the inputs used

 objectives achieved.

Overall, VFM therefore provides a link between money spent and objectives

achieved.

Good overall performance is dependent on a high level of achievement on all of the

3Es. For example, it is no good saving money by purchasing low grade materials

(good economy) if those materials break and are wasted in the production process

(poor efficiency).

VFM audits focus on the organisation’s performance in a given area by looking at

each of the 3Es with the objective of identifying areas where VFM might be

improved. The internal auditor can then make suitable recommendations to

management.

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Example

Consider a VFM audit approach to employee and payroll costs. Questions which the

auditor could consider in this area might include the following:

 Does the organisation recruit staff with a sufficient, but not excessive level of

competence for the tasks which they will be performing?

 Do staff go through appropriate training and development programmes?

 Are staff rewarded and motivated in an appropriate way?

 Are staff effectively supervised and managed in their day-to-day work?

The VFM audit will consider these issues in terms of achieving value for money:

 Are employment costs unnecessarily high?

 Are employees sufficiently productive in the work that they do?

 Does the work done by employees enable the entity to achieve the purposes for

which they are employed?

3.3 Problems with VFM audits

The VFM concept and VFM audits have proved to be a useful tool in assessing

organisational performance, but there are problems involved in applying the

principles in practice. These include the following:

Measurement difficulties

It is not always possible to measure efficiency or effectiveness. Whereas it is

relatively easy to measure the output of a manufacturing activity, it is not so easy to

measure the output of a service department in an organisation, such as the human

resources department, the training department or even the internal audit

department itself.

Some functions in an organisation may not have quantified objectives. Again, this is

typically a problem with service departments. Without clear objectives, it is not

possible to measure effectiveness.

Possible over-emphasis on cost savings

VFM audits often focus on ways of reducing costs. It is often possible to reduce costs

by finding ways to improve economy and possibly efficiency. However, this is

likely to lead to a quality problem. Effectiveness may be overlooked. By cutting

costs, the quality of output may fall, and customers may stop buying the products

that the entity makes.

Calculating VFM measures

VFM auditors may assess economy, efficiency and effectiveness by making

comparisons with other organisations, or with other departments in the same

organisation. In order to have meaning, all performance measures should be

calculated on a comparable basis. Whereas the calculation of profit is tightly

Chapter 5: Internal audit

regulated by accounting standards, there are no regulations about the measurement

of the 3Es. This can make it difficult to undertake meaningful performance

comparisons between organisations and possibly between units in the same

organisation.

3.4 Best value audits

‘Best value’ is a relatively new concept, introduced into local government

authorities by the UK government. There is some evidence that the concept of best

value is now used by some private sector organisations as a means of measuring

performance.

The fundamental concept of best value is ‘continuous improvement’. Organisations

can attempt to achieve continuous improvement by focusing on the ‘4Cs’, as set out

below:

 Challenge – Ask how a service is provided and, more importantly, why it is

provided. If there is no satisfactory answer to these questions, consider

withdrawing the service. In other words, challenge the need to provide any

service and challenge the way in which it is provided.

 Compare – Make comparisons with other (similar) organisations. Use comparisons

to look for ways of improving.

 Consult – Discuss the services provided with the users of those services. Meet

with your customers. Make sure that the services provided meet the needs of

their users.

 Compete – Use fair competition as a means of improving performance. For

example, when two companies would like to provide a service, use fair

competition between the two companies to obtain best value. The two

companies may be asked to tender for the work, and the contract should be

awarded to the company offering the best value (which may be the lower price).

The internal auditor’s role in best value auditing is to establish:

 whether the organisation has best value procedures in place, and

 whether those procedures are achieving their objective of promoting continuous

improvement.

3.5 Financial audits

Performing financial audits is the traditional role of the internal auditor. Internal

auditors may be asked by management to review accounting records and other

records to substantiate figures appearing in financial statements and management

accounts.

This work overlaps with the work of the external auditor. Consequently this aspect

of internal audit work is now seen as a relatively minor part of the total work of an

internal audit department.

However, it is important to remember that by performing financial audits, the

internal auditor is able to look at the internal controls that are in place to minimise

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risks, to identify weaknesses and to recommend improvements in the internal

control system.

3.6 Information technology (IT) audits

IT audits are a specific application of one of the key roles of the internal audit

function, which is to assess internal controls. In the case of IT audits, the controls

involved are those that operate within the organisation’s computer systems.

IT systems are a key aspect of the modern business environment, and assessing and

monitoring computer controls is often a key role for the internal auditor.

Organisations may employ one or more computer specialists in their internal audit

department to perform this role.

The general audit approach to computer-based systems is covered in a later chapter.

Chapter 5: Internal audit

Internal audit reports

 Status of internal audit reports

 Structure of the internal audit report

4 Internal audit reports

4.1 Status of internal audit reports

Internal auditors are employees of the entity, who therefore work on behalf of

management. When they prepare an audit report, they report their findings to

management.

Reports by auditors to management are sometimes called ‘private reports’. There

are no legal requirements or other formal requirements regulating internal audit

reports. A report from the internal auditors may therefore take any appropriate

form. Internal audit reports should be prepared in the same way as any other

internal business report.

4.2 Structure of the internal audit report

A possible structure for an internal audit report is the same as for any other business

report, and may therefore be as follows:

 Introductory items

− Title of the report

− The person or group of people to whom the report is addressed

− The person or department that has prepared the report (the internal auditor)

− Date of the report

− Possibly its status (for example, ‘Confidential’)

 Executive summary. The executive summary of a report sets out the purpose of

the report, the main points in the report, and the conclusions and

recommendations.

For example, an internal audit report should set out the purpose of the report.

This will involve an explanation of the purpose of the audit. It should then go on

to describe how the audit was conducted, in order to achieve its objective. The

main findings of the audit should be explained, together with any conclusions

the auditor reached and recommendations about what should be done as a

result of those conclusions.

The purpose of an executive summary is that any person reading the report

should be able to understand the main content of the report by reading the

summary. This means that a ‘busy executive’ can save time and does not have to

read the entire detail of the report in full.

Another reason for having an executive summary is that a person intending to

read the report in full can get an idea about what the main part of the report will

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contain. This can make it easier to understand the detail of the report, because

the executive summary puts the detail of the report into a structured context.

 Main text of the report. The main text of the report follows the executive

summary. This goes into more detail than the executive summary, and so is

longer. However, it should be structured in the same way as the executive

summary, presenting findings and conclusions in the same order.

The main part of the report should avoid excessive detail. Supplementary details

should be provided in appendices.

 Appendices. Appendices provide additional detailed information and analysis

that the reader of the report can refer to if he or she wishes. Appendices may

include valuable detailed information, but should not contain vital information

that is not also included in the main body of the report and the executive

summary.

Chapter 5: Internal audit

Regulation and ethics of internal audit

 Regulation of internal audit

 Ethics of internal audit

5 Regulation and ethics of internal audit

5.1 Regulation of internal audit

There are no specific legal requirements regulating the internal audit process.

Rather than being controlled by statute, internal audit is controlled by management

in the same way that other functional departments in the organisation are controlled

by management.

ISAs do not have mandatory authority for internal auditors. However, they can be

seen as indicative of good audit practice, and are therefore frequently adopted by

internal audit departments.

Internal auditors are not required to be a member of a regulatory body such as the

ACCA. However, in recruiting internal auditors, management will often look for

qualified accountants (or will expect recruits to the internal audit department to

become student members of an accountancy body and obtain a professional

qualification).

The Institute of Internal Auditors (IIA) is a global body to which internal auditors

may belong. However, membership is not mandatory.

5.2 Ethics of internal audit

All members of the ACCA are bound by its ethical guidelines. Therefore, matters

such as objectivity and confidentiality are just as important to an ACCA member

working as an internal auditor as they are to a member acting as an external auditor.

Clearly, there is a potential problem with objectivity and independence in the case

of an internal auditor, because he is (usually) an employee of the company.

In order to operate effectively, internal auditors need a degree of independence

within the structure of the organisation. This may be achieved in any of the

following ways:

 The internal audit department should be responsible to and accountable to

members of senior management who have no financial responsibilities. For

example, the internal audit function might report directly to the audit

committee. Alternatively, the internal audit department may report to a senior

executive manager such as the finance director, but in addition should be

required to report periodically to the audit committee.

 Internal auditors should not be involved in carrying out non-audit tasks. Their

independence can be protected to some extent by making them audit specialists.

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 Internal auditors should have unrestricted access to the information necessary to

their audit work.

 The internal audit department should have the support of management at all

levels.

The IIA has issued ethical guidance for its members that are broadly similar to the

guidance issued by the ACCA.

Chapter 5: Internal audit

Outsourcing internal audit

 The nature of outsourcing

 Benefits of outsourcing

 Possible problems of outsourcing

6 Outsourcing internal audit

6.1 The nature of outsourcing

In some circumstances, a company may decide to outsource its internal audit

function. Outsourcing means giving the work that was previously done by the

entity’s own employees to an external entity. When internal audit work is

outsourced, the work is usually given to the audit firm that does the external audit

for the company, or to another firm of accountants.

The main reasons for outsourcing internal audit work are as follows:

 The cost of maintaining a permanent internal audit function may be very high.

 Smaller companies may have a need for an internal audit function, but not on a

permanent basis.

6.2 Benefits of outsourcing

There are several advantages of outsourcing internal audit work:

 Staff recruitment. There is no need for the company to recruit and train its own

internal audit staff. An internal audit function can be instantly available by

hiring the services of an accountancy firm.

 Auditor skills. The outside supplier is likely to have specialist staff available,

such as computer audit experts. Internal auditors with an IT specialisation may

be difficult to recruit as full-time employees.

 Costs and flexibility. The cost of the internal audit function is a variable cost

rather than a fixed cost. A company therefore only pays for the internal audit

time that it uses.

 Outsourcing is likely to be more economical for a small entity that does not have

enough audit work to justify a full time internal audit team.

6.3 Possible problems of outsourcing

If internal audit work is outsourced to the company’s external auditors,

independence problems may arise for the external auditor. These should be assessed

and managed in accordance with the ethical rules described in an earlier chapter.

There are also other problems with outsourcing internal audit work:

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 Changing personnel. The internal auditors provided by an external firm may

change continually, and there may be a lack of continuity as a consequence. The

internal auditors who are used may not have an understanding of the client’s

business.

 Cost. An accountancy firm will charge high fees for internal audit services.

 Confidentiality. The internal auditors provided by an external firm will be

expected to maintain complete confidentiality about the client’s affairs.

However, the risk of a ‘leak’ may be higher than if full-time internal auditors are

employed.

 Control. An entity may not have the same control over its internal audit work if

the work is outsourced.

 Conflict of interest. If internal audit work is carried out by the entity’s firm of

external auditors, the internal auditors and external auditors may have a conflict

of interest (affecting their independence and objectivity).

ACCA F8 (INT) Audit &amp; Assurance - 2010 - Study text - Emile Woolf Publishing

Подождите немного. Документ загружается.

ACCA F8 (INT) Audit & Assurance - 2010 - Study text - Emile Woolf Publishing