WHAT IS INTERNAL AUDITING?
An effective way to begin this book about modern internal auditing is to refer to
the professional standards of the Institute of Internal Auditors (IIA). This internal
auditor professional organization defines the practice of internal auditing as
follows: Internal auditing is an independent appraisal function established within an
organization to examine and evaluate its activities as a service to the organization.
This statement becomes more meaningful when one focuses on its key
terms. Auditing suggests a variety of ideas. It can be viewed very narrowly, such
as the checking of arithmetical accuracy or physical existence of accounting or
other business records, or more broadly, as a thoughtful review and appraisal at
the highest organizational level. In this book, we use the term auditing to include
this total range of levels of service, from detailed checking of accounting balances
to higher-level operational appraisals.
The term internal defines work carried on within the organization by its own
employees. Internal auditing work is distinguished from such audit-related
work carried on by outside public accountants or other parties (such as government
regulators) who are not directly a part of an organization.
The remainder of the IIA’s definition of internal auditing covers a number of
important terms that apply to the profession:
• Independent means auditing that is free of restrictions that could significantly
limit the scope and effectiveness of the review or the later reporting
of resultant findings and conclusions.
• Appraisal confirms the need for an evaluation that is the thrust of internal
auditors as they develop their conclusions.
• Established confirms that internal audit is a formal, definitive function in
the modern organization.
• Examine and evaluate describe the active roles of internal auditors, first for
fact-finding inquiries and then for judgmental evaluations.
FOUNDATIONS OF INTERNAL AUDITING
4
• Its activities confirm the broad jurisdictional scope of internal audit work
that applies to all of the activities of the modern organization.
• Service reveals that help and assistance to management and other members
of the organization are the end products of all internal auditing work.
• To the organization confirms that internal audit’s total service scope pertains
to the entire organization, including all personnel, the board of directors
and its audit committee, stockholders, and other interested stakeholders.
Internal auditing can also be recognized as an organizational control that
functions by measuring and evaluating the effectiveness of other controls. When
an organization establishes its planning and then proceeds to implement its
plans in terms of operations, it must do something to monitor the operations to
ensure the achievement of its established objectives. These further efforts can be
thought of as controls. While the internal audit function is itself one of the types
of controls used, there is a wide range of other controls. The special role of internal
audit is to help measure and evaluate those other controls. Thus, internal
auditors must understand both their own role as a control function and the
nature and scope of other types of controls in the organization.
Internal auditors who do their job effectively become experts in what makes
for the best possible design and implementation of all types of controls. This
expertise includes understanding the interrelationships of various controls and
their best possible integration in the total system of internal control. It is thus
through the control door that internal auditors come to examine and evaluate all
organizational activities to provide maximum service to the organization. Internal
auditors cannot be expected to equal—let alone exceed—the technical and
operational expertise pertaining to the many activities of the organization. However,
internal auditors can help the responsible individuals achieve more effective
results by appraising existing controls and providing a basis for helping to
improve those controls.
An effective way to begin this book about modern internal auditing is to refer to
the professional standards of the Institute of Internal Auditors (IIA). This internal
auditor professional organization defines the practice of internal auditing as
follows: Internal auditing is an independent appraisal function established within an
organization to examine and evaluate its activities as a service to the organization.
This statement becomes more meaningful when one focuses on its key
terms. Auditing suggests a variety of ideas. It can be viewed very narrowly, such
as the checking of arithmetical accuracy or physical existence of accounting or
other business records, or more broadly, as a thoughtful review and appraisal at
the highest organizational level. In this book, we use the term auditing to include
this total range of levels of service, from detailed checking of accounting balances
to higher-level operational appraisals.
The term internal defines work carried on within the organization by its own
employees. Internal auditing work is distinguished from such audit-related
work carried on by outside public accountants or other parties (such as government
regulators) who are not directly a part of an organization.
The remainder of the IIA’s definition of internal auditing covers a number of
important terms that apply to the profession:
• Independent means auditing that is free of restrictions that could significantly
limit the scope and effectiveness of the review or the later reporting
of resultant findings and conclusions.
• Appraisal confirms the need for an evaluation that is the thrust of internal
auditors as they develop their conclusions.
• Established confirms that internal audit is a formal, definitive function in
the modern organization.
• Examine and evaluate describe the active roles of internal auditors, first for
fact-finding inquiries and then for judgmental evaluations.
FOUNDATIONS OF INTERNAL AUDITING
4
• Its activities confirm the broad jurisdictional scope of internal audit work
that applies to all of the activities of the modern organization.
• Service reveals that help and assistance to management and other members
of the organization are the end products of all internal auditing work.
• To the organization confirms that internal audit’s total service scope pertains
to the entire organization, including all personnel, the board of directors
and its audit committee, stockholders, and other interested stakeholders.
Internal auditing can also be recognized as an organizational control that
functions by measuring and evaluating the effectiveness of other controls. When
an organization establishes its planning and then proceeds to implement its
plans in terms of operations, it must do something to monitor the operations to
ensure the achievement of its established objectives. These further efforts can be
thought of as controls. While the internal audit function is itself one of the types
of controls used, there is a wide range of other controls. The special role of internal
audit is to help measure and evaluate those other controls. Thus, internal
auditors must understand both their own role as a control function and the
nature and scope of other types of controls in the organization.
Internal auditors who do their job effectively become experts in what makes
for the best possible design and implementation of all types of controls. This
expertise includes understanding the interrelationships of various controls and
their best possible integration in the total system of internal control. It is thus
through the control door that internal auditors come to examine and evaluate all
organizational activities to provide maximum service to the organization. Internal
auditors cannot be expected to equal—let alone exceed—the technical and
operational expertise pertaining to the many activities of the organization. However,
internal auditors can help the responsible individuals achieve more effective
results by appraising existing controls and providing a basis for helping to
improve those controls.
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