logo

(PDF) The Role of Internal Audit in Fraud Prevention

   

Added on  2021-05-25

2 Pages729 Words132 Views
Aldi Brian Pratama12030117190228AI-X-IA11-G6Long back internal audit objective was to prevent and detect financial frauds in locationsaway from the central operating location of the firm. Subsequently, internal audit was used toachieve another objective, which was to reduce the cost of mandatory financial audit by an externalauditor. In order to achieve both those objectives, the internal audit’s focus was on internal checkand internal controls relating to financial transactions. It used to apply the same audit proceduresand techniques that are used by the external financial auditor. Even today, as a service to the management, internal audit pursues the above twoobjectives. The external financial auditor designs his audit strategy and formulates audit plan andprogramme only after evaluating the adequacy and effectiveness of the internal audit. Much later,the concept of operational audit emerged. Now, almost every firm includes operational audit in thescope of internal audit. However, internal audit continues to allocate major part of its resources infinancial audit. Therefore, till recently, in most firms, the Chief Internal Auditor (CIA) used to reportto the CFO. Contemporary internal audit is ‘eyes and ears’ of the Board, which is responsible forgoverning the firm. Whenever there is governance failure, the Board is held responsible for thesame. The Board sets the ‘tone at the top’. It provides strategic direction to the management. It isresponsible for ensuring that the firm complies with applicable laws and regulations and thatexternal reporting is correct and not misleading. The Audit Committee of the Board, among otherthings, is responsible for: •Ensuring that the risk management system is adequate and operating effectively; •Ensuring that internal controls are adequate and operating effectively; •Ensuring that financial statements provide true and fair view; •Approving ‘related party transactions’; and •Evaluating the enterprise performance. The Board sets the ethical policy and approves the ‘code of conduct’. It depends on theinternal audit for providing an assurance that every employee in the firm has understood the ethicalpolicy and implements the same. The management owns the strategy of the firm. The Boardapproves the same. It critically evaluates proposed strategies when the management presents a newstrategy before it for approval. In some occasions, particularly when the firm is passing through acrisis, the Board and the management cocreates new strategy. Board periodically reviews the current strategy. The Board also oversees the strategyexecution, including allocation of resources to different activities. In order to carry out this taskeffectively, Board needs deep insights into the business and its internal and external environmentand this requires analysis of internal and external data. The internal audit provides assurance to theBoard that the data and reports presented before it are reliable. The Board expects the internalaudit to provide an assurance that feed back mechanism to help managers to evaluate outcome oftactical decisions, for example decisions on debt, investment, product portfolio and target markets,which are based on certain assumptions, is adequate and effective. An effective mechanism helpsmanagers to take corrective actions, if required, well in time and help them in reviewingassumptions.The Audit Committee cannot perform its tasks effectively without the support of the internalaudit. Independent monitoring by the internal audit is necessary for the Audit Committee to get anassurance that the risk management systems and internal controls are adequate and effective. Theinternal audit provides the assurance that all decision-makers understand the risk-appetite and riskmanagement is embedded in the decision model. The Audit Committee depends on the internalaudit to get an assurance thataccounting estimates, particularly, judgement-based estimates are

End of preview

Want to access all the pages? Upload your documents or become a member.

Related Documents
Objectives, Relevance, and Importance of Corporate Governance
|6
|1279
|48

Auditing: Evaluation of Ethical Responsibilities of Management and Auditors in One Tel Case Study
|13
|2933
|130

Audit Committee Function, Benefits and Membership of Audit Committee
|10
|2560
|184

ACC 301 - Assignment On Audit & Factors That Affects
|11
|2503
|65

Written Report to the Board in Companies
|6
|1240
|48

Audit Committee Functions, Advantages and Membership
|9
|2580
|59