StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Internal Auditing for Success of an Organization - Essay Example

Cite this document
Summary
The essay "Internal Auditing for Success of an Organization" focuses on the critical analysis of the major issues and role of internal auditing for the success of an organization. It allows the organization to monitor its quality management systems and identify areas that require improvements…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER95% of users find it useful
Internal Auditing for Success of an Organization
Read Text Preview

Extract of sample "Internal Auditing for Success of an Organization"

EFFECTIVE INTERNAL AUDITING] By Insert Presented to Location Due Introduction Internal auditing is an important process for the success of organisations. It allows the organisation to monitor its quality management systems and identify areas that require improvements. Effective internal auditing is necessary in enabling the organisation achieve its core purpose. The core business of any commercial organisation is to maximize the value for its shareholders. The auditing process in its comprehensive consideration facilitates the attainment of this purpose by deterring or detecting any fraudulent activities. Fraudulent activities may take the form of occupational fraud or its less prevalent but more impactful subset of financial statement fraud. By conducting a thorough review of the organisation’s management, through the examination of performance, records and statements; auditing allows for identification of pitfalls and their consequent rectification thereby facilitating maximization of shareholder’s value. Auditing usually occurs at the internal and external levels. The internal audit is conducted by an audit team that is part of the organisation, which reports to senior management team of the organisation. External auditors on the other hand report to the organisation’s shareholders with the main purpose being to improve the validity and reliability of the internal audit outcomes. Effective Internal Auditing Internal audit serves just as an important function to the shareholders as external auditing does. The process identifies organisational outcomes thereby facilitating the development of a framework and mechanisms through which organisational processes can be restructured and made more effective to facilitate the attainment of organisational objectives. However, in order to achieve this goal, the internal audit process must itself be an effective one. The effectiveness of internal auditing can be maintained by adhering to particular codes of conduct. One of the most important factors for effective auditing is that it must be independent from the activities and operations that it evaluates (CIIA, 2014). The CIIA prescribes that to facilitate the independence of the internal auditing team; the chief internal auditor should serve at a senior capacity within the organisation (2013). Such a position furnishes him/her with the standing and authority to challenge the executive. Moreover, the CIIA further contends that the audit team should have access to all managerial decision-making forums (2013). The independence of the internal audit team is facilitated by the recruitment of independent individuals. Such individuals are able to provide independent, objective and constructive views on organisational matters. Independent individuals are also not easily corruptible which places them at an improved position to deal with organisational issues. Where individuals are easily corruptible, then the likelihood of fraud is elevated and the same ceases to become a risk and morphs into a threat. Effective auditing is guaranteed by the presence of a team of effective auditors. Thus, in order to improve the effectiveness of internal audits, the organisation must recruit only the most competent team of internal auditors. Such auditors should possess a number of skills that will enable them to carry out their tasks efficiently. The skill set envisioned here differs from the techical on-the-job skills that are necessary to execute the auditing task. According to Chambers & McDonald, internal auditors must be agile and flexible, in order to cope with the dynamic nature of today’s world (2013). Another of the most important skills that internal auditors must have is integrity. This is underpinned by the fact that they operate at a lucrative position within the organisation, a role which accords them an opportunity to maximize their own personal benefit. Effective internal auditors should therefore possess integrity in order to dissuade themselves from taking advantage of their position. The failure of integrity is appropriately illustrated by some of the case studies on internal auditing failure. A suitable example is the case of Enron, whose internal auditor was Andersen. The auditing firm failed to expose financial statement fraud at Enron, an act that ultimately led to the collapse of Enron. Moreover, the utter lack of integrity at Andersen is portrayed by the fact that the company destroyed documents that would have served as evidence (Pickett, 2013). Had integrity been an underpinning value of Andersen, the entire scandal might have been avoided. Another trait that facilitates effective auditing is relation-ship building. According to Chambers & McDonald, relationship building allows the auditor to generate collaborative and mutually beneficial relationships (2013). Though this requires much time, it results in numerous benefits not just for the auditor, but also for the firm. PwC indicates that in one of its auditing endeavours, it took time to meet with executives in a series of workshops where they voiced their opinions and needs (PwC, 2013). This was important in assisting PwC understand the needs of its client. Moreover, it also facilitated the co-generation of a list of more urgent projects that required being undertaken. Relationship building is essential as it smoothen out the relationship between the auditor and the firm. For the auditor, relationship building reduces resistance, increases information delivery capacity and allows the business to understand the role of the auditor (Davies, 2009). This improves the overall effectiveness of the internal audit process. Internal auditing is also improved through the interrelated themes of partnership, teamwork and communication. Partnership and teamwork serve much the same role as relationship building. They allow the auditor and the firm to work together smoothly. Communication on the other hand facilitates these themes. Effective communication in today’s dynamic scene demands that auditors take advantage of powerful visual communication tools (Chambers & McDonald, 2013). This allows them to get their findings and their message across to their audience more effectively. The result is that this will improve the outcome of the internal auditing goal of facilitating improvements in organisational processes. Through teamwork and partnership, the organisation and its internal auditing team are able to generate trust. Building on this trust, both can then assist one another to carry out their tasks without either feeling as though their function is being undermined. There is a danger that is however attached to teamwork and partnership. With increased trust and improved teamwork, the chances of fraud are likely to increase. This is especially the case where the risk of getting caught is substantially obviated as illustrated by the case of Enron. Since the internal auditor was also the external auditor (Pickett, 2013), the chances of the scandal coming to light were significantly diminished. This is probably the reason why the fraud at Enron was committed with so much impunity. Continuous learning is another imperative characteristic of effective internal auditing teams. Auditors must constantly and continuously update their knowledge base of key business components and affairs. This is important in light of the already noted nature of today’s world, which has been identified as a dynamic one. Continuous learning demands that internal auditors furnish themselves with information and knowledge on happenings within their company as well as those within others. Through continuous learning, auditors are able to learn from the mistakes of others and avoid making the same. Perhaps the most important method through which the effectiveness of the internal audit process can be maximized is through the separation and independence of this function. Independence in this context means that the internal audit team or firm is committed solely to the internal auditing task. As noted, the Chartered Institute of Internal Auditors requires that the internal auditing team operates at a level within which it can challenge the executive. Another significant manner through which the internal audit should be independent is that it should not perform the task of external auditing. The imperative for this separation is illustrated by the case of Enron. Andersen, its internal auditor, was also its external auditor. Andersen was an outsourced internal auditor. The implementation of the above themes should also fall in line with appropriate acquisition methods of auditors. Before the SOX act, organisations had a number of options including outsourcing. This was one of the most-widely absorbed alternative which however proved not be as effective after the Enron saga. Consequently, other methods have been suggested. For example, (Aldhizer, Cashell, & Martin, 2006) argues that co-sourcing is the most viable alternative. Within this framework, the firm usually has an in-house audit department whose activities are supplemented by the occasional consultation with external services for non-routine tasks requiring specialized capabilities. This has both cost and task benefits for the organisation. While effective auditing mainly serves to protect shareholders, such protection should be extended to include other organisational stakeholders. Key among them is employees. Employees suffer the greatest impact of fraud exposure after shareholders. This is because they lose their jobs, their source of income and possible their source of livelihood. For example, the case of Enron led to the loss of thousands of jobs. This was a sudden outcome and probably left many employees stranded, not knowing what action to pursue. A comprehensive protection scheme should be developed to protect employees. Such protection may include compensation. Conclusion Internal auditing serves an important function for organisations. The outcomes of internal audits allow management to implement changes that allow the organisation to improve its processes. Effective internal auditing also safeguards the interest of an organisation’s shareholders from losses occasioned by fraudulent transactions. In order to achieve effective internal auditing, it is pertinent that the auditing team should operate independently from the firm’s management and with such authority as to enable it to review activities at all levels. Effective auditing can be achieved by co-sourcing, which entails having a fulltime in-house team and only outsourcing when specialist services are required. While the protection provided by internal auditing mainly covers shareholders, it should be extended to cover employees since they experience significant losses when fraudulent schemes lead to company collapse. List of References Aldhizer, G. R., Cashell, J. D., & Martin, D. R. (2006). Internal Audit Outsourcing. The CPA Journal . Chambers, R., & McDonald, P. (2013). 7 Attributes of Highly Effective Internal Auditors. New York: Robert Half International. CIIA. (2013). Effective Internal Audit in the Financial Services Sector. About the Chartered Institute of Internal Auditors . CIIA. (2014). What is internal audit? Retrieved November 26, 2014, from Chartered Institute of Internal Auditors: https://www.iia.org.uk/about-us/what-is-internal-audit/ Davies, M. (2009). Effective working relationships between audit committees and internal audit--the cornerstone of corporate governance in local authorities, a welsh perspective. Journal of Management & Governance , 13 (1), 41-73. Pickett, K. (2013). The internal auditing handbook. Hoboken, N.J.: Wiley. PwC. (2013). Improving the effectiveness of an internal audit function case study. Retrieved November 26, 2014, from PwC: http://www.pwc.com/ca/en/energy-utilities/improving-effectiveness-internal-audit-function-case-study.jhtml Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Corporate Governance and Global Financial Ethics Essay”, n.d.)
Corporate Governance and Global Financial Ethics Essay. Retrieved from https://studentshare.org/finance-accounting/1668473-corporate-governance-and-global-financial-ethics
(Corporate Governance and Global Financial Ethics Essay)
Corporate Governance and Global Financial Ethics Essay. https://studentshare.org/finance-accounting/1668473-corporate-governance-and-global-financial-ethics.
“Corporate Governance and Global Financial Ethics Essay”, n.d. https://studentshare.org/finance-accounting/1668473-corporate-governance-and-global-financial-ethics.
  • Cited: 0 times

CHECK THESE SAMPLES OF Internal Auditing for Success of an Organization

The Effectiveness of Internal Auditing in Saudi Arabian Local Government

Variables used to measure the efficiency include the competence of the staff in the audit department, the size of the department, the independence and autonomy of the audit department, the management support of the audit process, relationship of the internal practitioners with the internal auditors and eventually, the relationship between the audit council and the auditing department (Kamrava, 2010).... internal audit is a requirement for all the organizations in King Abdullah Empire and as such, this research looks into internal audit efficiency in the local governments and zeroes in on the Al Sharqiyah emirate....
15 Pages (3750 words) Essay

Operational Auditing

n operational audit is a review of any part of an organization's operating procedures and methods for the purpose of evaluating efficiency and effectiveness.... perational Auditing is a non-financial audit that involves a systematic process of evaluating an organization's (or part of an organization's) effectiveness, efficiency, and economy of operations under management's control, and reporting to appropriate persons the results of the evaluation along with recommendations for improvement....
20 Pages (5000 words) Essay

Auditing and Accounting Ethics

The Code of Ethics for auditors state that auditor must not have his membership in an organization affect the independence of the auditors.... The auditors auditing standard no.... auditing theory and practice states that auditors must not sign as external auditors if their self interests affects the independence of auditors.... The auditing rule states that the auditor must not have any material self interest in the clients....
12 Pages (3000 words) Essay

Objectives of Management Auditing

anagement Auditing is applied at the core and structure of an organization with its basic emphasis on comprehensively examining the structure, functionalities and governing bodies, departments, division heads and all the major operations of an organization.... It further ensures that a sound and foolproof management is being conducted internally and strengthens on the enhanced relationship with the outside world only if the internal operations of an organization are run smoothly (Leonard)....
11 Pages (2750 words) Essay

International Auditing: Environmental and Social Audits

Subject to this case, auditors provide assurance services to the social and environmental operations of the organization.... Antenatal auditing helps organizations achieve their objectives.... The development of social and environmental auditing led to more transparent reporting of business organizations.... According to Deegan (2009), Social and environmental audit implies the auditing of organizations environmental and social reporting requirements and reporting thereon going beyond auditing of financial statements....
11 Pages (2750 words) Term Paper

The Role of Auditing and Assurance

The vices are very costly to the organization and sometimes may be the beginning of the downfall of an organization.... It analyses the books of account of an organization critically.... Secondly, they are mandated with the responsibility of verifying the assets and liabilities of an organization.... he work of auditing should be conducted by independent professionals who demonstrate a high level of integrity....
12 Pages (3000 words) Assignment

The Role of Internal Auditors in the Corporate Governance Framework

Indeed, in a relevant definition, the term 'is defined as the total of operations and controls of an organization' (Fama and Jensen 1983, in Karagiorgos et al.... internal auditing, as a framework, has been established for serving the particular organizational need.... On the other hand, the accountability of internal auditors for the tasks assigned to them is full; this means that failures and mistakes while performing the internal auditing can lead to severe consequences for the auditors even if the latter has taken all appropriate measures for avoiding such outcome (Ridley 2008)....
12 Pages (3000 words) Essay

Extent to Which Firms Communicate Their Business Strategy with the Internal Audit Department

266), as defined by the Institute of Internal Auditors in their 1995 statement of standards for the professional practice of internal auditing, internal audit refers to an 'independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization'.... 22) state that an 'internal audit's objectives and activities must be aligned with the strategic objectives of the organization'.... According to Simone and Brown (2010), the over -increasing competition within the global business environment has significantly affected the role of internal audits within organizations....
36 Pages (9000 words) Research Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us