Topic 2: Role of Internal Auditing in Corporate GovernanceDefinition:a group of people getting together as one united body with the task and responsibility to direct, control and rule with authorityTo ensure that:Information are accurate, reliable and timelyCompliance to rules and regulationsAssets are safeguardedOptimum use of resourcesGoals are accomplishedCorporate Governance

Meaning of good corporate governanceIs a system of structuring, operating and controlling a company in order to achieve the following objectives:Fulfilling long term strategic goals and building shareholders valueConsider and care for the interest of employeesTake into consideration of the needs of the environment and local communityMaintain an excellent relationship with customers and suppliersMaintain proper compliance with all legal and regulatory requirements

Areas of activitiesFormulating strategic directions for future of the enterprise in the long runExecuting the actions through the involvement of key executive decisionsSupervising and monitoring the management processAccountability to those who are legitimately responsible and demand for such accountability

Main elements in corporate governanceManagementAudit committeeInternal audit

Roles of Internal Auditors in enhancing Corporate Governance(Dato Megat Najmuddin Khas Akauntan Nasional, May 1999)Internal Auditors should widen their roles and enhance their array of expertise in dealing with complex issues of company transactions and changing control environment a good internal control is a prerequisite for effective corporate governance and management.

Internal Auditing as part of controlInternal auditing is designed to add value and improve an orgns operations.Its functions include:Examining, evaluating and monitoring the adequacy and effectiveness of the accounting and internal control system.Its responsibilities towards control system:Reviews all controls to ensure they are being operated effectively, efficiently and economicallyMake recommendations for improvement to the operation of controls and ensures that management takes acceptable corrective action.Bring major weaknesses in control procedures to the attention of senior management and the Audit CommitteeDeters and detects errors, abuse and fraud

Corporate Governance FrameworkIf mgt is about running business, governance is about seeing that it runs properly Professor Bob TrickerThe Corporation in relations to:The Cos Act 1965The Memorandum & Article of AssociationThe Securities Comm. Act 1993International Stds. Of AuditingEXTERNAL AUDITINTERNAL AUDITAUDIT COMMITTEEEXTERNAL AUDITINTERNAL AUDITSTAKEHOLDERS

Internal Auditing as aid to managementHow internal auditor can serve the management?Internal auditor can assist them by:Monitoring activities top mgt cant itself monitorIdentifying and minimizing risksValidating reports to senior mgtProtecting senior mgt in technical areas beyond its kenProviding information for decision making processReviewing the past, present and futureHelping line mgrs manager manage by pointing to violations of procedures and of mgt principles

Internal Auditing and Audit CommitteeAudit CommitteeComposed exclusively outside members of the Board, serve as an intermediary between the auditor and management; oversight responsibilities for the financial reporting and auditing process.An effective Audit Committee should:Maintain independenceCombine a balance of skillsMake necessary time commitmentBe tough mindedDevelop a clear charterDevelop a list of specific duties and responsibilitiesPlan the years agendaDocument the committees work

Internal Auditing and Audit Committee - continuationResponsibilities of Audit Committee:Assists the Board of Directors in carrying out their responsibilities as they relate to the orgns accounting policies, internal control and financial reporting practicesEstablish and maintain lines of communication between the board and external auditors, internal auditors and financial managementSpecific areas of responsibilities:Financial reportingCorporate GovernanceCorporate Control

Internal Auditing and Audit Committee - continuationFinancial reportingAudit Committee should seek reasonable assurance that financial disclosure made by management show the orgns financial condition, result of operations and both plans and long term commitments.Audit Committee should:Recommend the independent accountantsOversee the external audit coverageReview accounting policies and policy decisionExamine the Financial Statement (interim, annual and other reports)

Internal Auditing and Audit Committee - continuationCorporate GovernanceAudit Committee should provide reasonable assurance that the corporation comply with pertinent law and regulations, conduct affairs ethically and maintain effective controls to deter employee conflicts of interest and fraudAudit Committee should:Review corporate policiesReview current/pending litigationReview significant cases of employees conflict of interest, misconduct or fraudRequire internal auditors reportCorporate ControlAudit Committee should understand the orgns key financial and operating risk areas and internal control system as well as put reliance on duty carry out by Internal Auditing Department

Internal Auditing and Audit Committee - continuationRelationship with Internal Auditors:Reporting relationshipsThe Chief Audit Executive (CAE) should attend audit committee meetings and meet privately with audit committee at least once annually.Oversight relationships which includes:Review and approve Internal Auditing charterConcur the appointment and removal of the CAEReview internal audit plans and budgetsReview audit resultsRequire audit projectsRequire quality assurance reviews

Audit of Board of DirectorsA review of audit of the Board of Directors and activities relative to strategies, structure and style in the light of orgns needsCritical areas such as:Basis of corporate governanceAppropriateness of the board structure and sizeThe board membershipThe Boards efficiency and effectiveness

Coordination between internal and external auditorsInternal AuditorExamines, evaluate and monitors the adequacy and effectiveness of the Internal Control Structure.In conducting test of controls; they are likely to influence the nature, timing and extent of external auditors audit proceduresExternal AuditorIts responsibilities amongst other things are to study and evaluate Internal Control Systems and to make recommendations on the weaknesses of Internal Controls noted during the course of audit

Coordination between internal and external auditors - continuationThus; the External Auditor has a close working relationship and direct interest in the work of Internal Auditor that pertains to the entitys Internal Control structure.Internal Auditors work cannot be used as a substitute for the External Auditors work; but it could be an important complement.STANDARDS RELATED TO THE COORDINATION:ISA 610: Considering the work of Internal AuditingRequires the External Auditor to assess the work of the Internal Auditor for the purpose of planning the audit and developing an effective audit approach

Coordination between internal and external auditors - continuationIn determining the effect of such work on the audit; the External Auditor should:Consider the organizational statusThe scope of workThe technical training and proficiencyDue professional care of the work of Internal AuditingBENEFITS derived from coordination: increases the economy, efficiency and effectiveness of total audit activities