The synergy of efficient and ethical corporate governance and internal audit function is not only vital but also fatal for shareholders and the various stakeholders. This synergy compromise recently echoed when a case of Flying Squad intercept Ksh.2 billion in a safe inside Barclays Bank Kenya, nevertheless, two bank officials being the key players were arrested therefore stipulating a breach on the internal control overhaul.
The role Internal Audit plays in Corporate Governance.
Internal audit involves examining, evaluating and monitoring internal control policies and procedures. Internal auditors provide assurance to the management regarding the effectiveness of a company’s risk management and internal control systems.
Generally, companies are not required to carry internal audit arrangements; however, it is a part of good corporate governance practice to establish a separate internal audit department or simply outsource this function if more appropriate. Consequently, internal audit is typically a feature of large corporations.
Main responsibilities of internal auditors include the providing of assurance regarding the following:
- Internal controls are effective;
- Financial and key managerial information in the reports is fair and reliable;
- Systems are running effectively;
- Implemented internal control procedures are adhered to.
Contrast between external and internal audit.
Although some of the work carried out by internal auditors is similar to that performed by external auditors, particularly in areas dealing with the internal controls assessment, there are a range of important distinctions:
Internal auditors report to the directors or the audit committee, while external auditors report to the shareholders.
The objective of the internal audit department is to add value to the company by improving the company’s operations and internal controls, while the aim of the external audit is to provide independent opinion on the financial statements of the company.
In relation to the company, internal auditors are usually employees (or the function is outsourced), whereas external auditors are independent of the company.
In contrast to external auditors, there are no legal requirements regarding qualification of the internal audit specialists.
Regarding publicity, reports produced by internal auditors are private, whereas those of external auditors are publicly available.
Consequently, the work of internal auditors differs from the work of external auditors in term of strategic planning, materiality and procedures used to obtain the required level of evidence. For instance, in order to obtain assurance over a company’s revenue, external auditors are likely to test efficiency of key controls and request several counterparties (based on the materiality level) to confirm annual turnovers with the company. In contrast to that, internal auditors may not set any materiality level, but they are likely to test all relevant controls implemented and review a rather large sample of internal invoices. As the latter may be too time consuming, it may be decided to follow a schedule for internal audit reviews by locate.