Audit Theory and Assurance: Assessing Internal Audit Performance

This report provides an executive summary and detailed analysis of the internal audit department's performance based on Auditing Standard ASA 610. It assesses the functions of the internal audit department, considering factors like independence, competence, and the scope of work. The report evaluates the department's role in risk management, internal controls, and corporate governance. It recommends criteria for evaluating the work of the internal audit department, including objectivity, professional care, technical competence, and communication between internal and external auditors. The report concludes by emphasizing the importance of internal auditors in safeguarding the organization and ensuring compliance with laws and statutes. It also discusses the external auditor's role in evaluating the internal audit function for the purpose of the external audit.

Running head: Audit Theory and Assurance
Audit Theory and Assurance

Audit Theory and Assurance 1
Executive Summary
ASA 610 pertains to utilizing the work of Internal Auditors. It is associated with the
accountabilities of the auditors concerned with the work of internal auditors and the relevant
internal audit functions. The operations of the internal audit are governed by the management
and corporate governance.
In this context, the external auditors determine the adequacy of work of internal auditors and
evaluate the independence of the internal audit function and their competence .The cope and
nature of the work of internal auditors are also assessed by the external auditors.
So, in this report, the overall performance of the internal audit department would be
assessed .Furthermore the criteria for evaluating the work of the internal audit department would
also be recommended.

Audit Theory and Assurance 2
Contents
Introduction.................................................................................................................................................3
Assessment of the Internal Audit Department.............................................................................................3
Recommendations whether the work of the internal audit department should be relied upon.....................5
Conclusion...................................................................................................................................................7
References...................................................................................................................................................8

Audit Theory and Assurance 3
Introduction
The internal audit department provides an independent and objective consulting and assurance
in order to add value and improve the performance of the organization. It assists the organization
to achieve its goals and objectives by implementing an organized and systematic approach. It
helps in improving the efficiency of risk management, internal controls and corporate
governance procedures (Marquette University, 2018).
In this context , Auditing Standard ASA 610 which pertains to ‘Using the Work of Internal
Auditors ‘ deals with the accountability of the internal auditors . The goals of the internal audit
function are evaluated by the management and assessed on the parameters defined by corporate
governance (Auditing and Assurance Standards Board, 2013).
So, in this report, the assessment of the functions of internal audit department would be
evaluated. Additionally, the criteria regarding the performance of the internal audit department
would also be recommended.
Assessment of the Internal Audit Department
According to IIA Netherlands (2018) internal auditing can be defined as an independent and
objective consulting and assurance activity which is performed for enhancing the worth and
improving the activities of the company. It assist the organization to achieve its goals by
implementing an organized and systematic approach in order to assess and improve the
effectiveness of its operations, risk management activities , internal controls and corporate
governance practices.
Furthermore, the assessment of the performance of internal auditors should be done on the basis
of the code of ethics which says that integrity, confidentiality, objectivity and competency are the
main pillars on which the performance of internal audit is based. The code of ethics is the
essential part of the system of quality assurance in the internal audit department.
It should be verified that an appropriate audit plan is being implemented in the internal audit
department which is in accordance with the overall strategy of the organization. The internal
audit department should assess the appropriateness of the internal controls and verify the

Audit Theory and Assurance 4
existence of the assets of the organization. It should suggest proper safeguards for their
protection (Al-Matari , Al-Swidi and Fadzil , 2014).
The internal audit department should evaluate that the company complies with the policies,
procedures and sound business practices as stated by the corporate governance. It should further
assess whether the organization is complying with the relevant laws and regulations of the state
as well as with the contractual obligations. It should verify several operations and programs of
the organization to assess whether the results are aligned with its objectives and the programs are
being executed as per the schedule.
It should analyze the repetitive happening of frauds, theft, wastage processes and embezzlement
in the organization and report the same to the management (Abdullah, 2014).
While the external auditors are responsible for auditing the financial statements of the company
and presenting their view regarding the truth and fairness of the fiscal documents, the internal
auditors are accountable for assuring that the risk management and control framework are
adequate and effective to protect the organization from possible threats and frauds.
As per HM Treasury (2013) the framework for assessing the competence of the internal audit
function should comprise of four sections –the first being evaluating the appropriateness of the
role, status and independence of internal audit function so that it can fulfill its professional
obligations. Its structure and resources should also be evaluated so that it can deliver the
expected services. The impact which it creates on the corporate governance, risk and controls in
the organization should be assessed along with analyzing the efficiency of the processes so that
it can deliver quality auditing services to the company.
In the process of performing the evaluation, it should be considered that the internal audit service
is in accordance with the statement of best practices. The evolution should be with combination
of interviews with the stakeholders, questionnaires to be completed by the consumers and the
staff, verification of the sample of completed audit files and reviewing any other supporting
documents.
The independence of the internal auditor which comprise of the authority to access the records,
the concerned personnel and the physical properties appropriate to the performance of the audit

Audit Theory and Assurance 5
function should be evaluated in this regard. The internal audit services should be free of
executive accountabilities so that it can provide quality and independent assurance to the
management. The internal audit function should identify the potential conflict of interest,
regulate and avoid those.
According to The Institute of Internal Auditors Australia (2017) the internal audit should be in
confirmation with core principles for the professional practice of internal auditing and the
internal standards for the professional practice of internal auditing. The core principles state that
integrity, competence and professional care should be practiced while conducting internal audits.
Recommendations whether the work of the internal audit department should be relied
upon
According to IAASB (2014) the quality of the audit can be assessed by the engagement team by
analyzing that appropriate values, attitudes and code of ethical conduct have been implemented
while conducting internal audit. The internal auditors should possess appropriate knowledge,
skills and expertise while conducting audits and they should be allotted sufficient time for
performing the audit function.
It should be assessed that the auditors had applied rigorous auditing and quality control
procedures which are in compliance with the applicable laws, regulations and standards. They
should provide timey auditing reports which are relevant and useful. They should interact
appropriately with the relevant stakeholders prior to the finalization of the audit reports.
The accountability for performing quality audits lies upon the internal auditors so quality audits
are best achieved in a supportive environment where there are appropriate interactions amongst
the stakeholders in the reporting supply chain. The auditors are required to comply with the
applicable standards of accounting and quality control along with following the code of ethics
and other relevant laws and regulations.
Certain factors which must be considered while determining the work of internal auditors are
objectivity, due professional care, technical competence and communication. Objectivity can be
referred to as determination of the status of the internal audit function within the organization
and impact of the status on the capability of the auditors to be objective. It determines that the

Audit Theory and Assurance 6
internal auditors report the matters to the officials responsible for corporate governance and if
they can directly access those officials. The internal auditors should be relieved from any
conflicting responsibilities (Mustafa et al., 2016).
There should be no constraints on the internal auditors and the corporate governance officials. It
should be evaluated that up to what extent the management acts on the suggestions of the internal
auditors and the method through which such action is recorded. Due professional care should be
practiced while planning t, supervising, reviewing and documenting the internal audit activities.
The accuracy and the existence of the audit manuals, work programs and documents related to
internal audits should also be evaluated.
Technical competence refers to assessing if the internal auditors are members of the relevant
institutions and they should possess appropriate training and proficiency as internal auditors. It
should also be analyzed that the organization should have appropriate policies for recruiting and
training of such auditors (Njoroge, 2013).
With the help of communication amongst the internal and external auditors, it should be
evaluated that if the internal auditors are free from communicating with external auditors. It
should be analyzed that the meetings are held appropriately at regular intervals and the external
auditors are authorized to access the internal audit reports. The external auditors are informed
about the crucial matters which might influence their work .The external auditors should also
inform the internal auditors in cases where the relevant issues may affect their work (Tijani,
2014).
The external auditors should evaluate that to who does the internal auditors are reporting in the
organization and verify their appropriateness. The head of the internal audit department should
be free from impact of the operational management which can affect his objectivity. The head of
the internal audit department should have direct access to the administrating body and its
chairman, the chief executive and to the head of the audit committee.
It should be assessed whether the internal audit regularly verifies the control over the crucial
accounting operations which have an impact on the financial reporting. The head of the internal

Audit Theory and Assurance 7
audit should act in accordance with the suggestions of the external auditor and he should apply a
professional approach to the audit assignments.
With the help of above mentioned criteria, it can be evaluated whether the work of the internal
auditors can be relied upon or not (Laković, Smolović and Stanovčić, 2016).
Conclusion
Hence to conclude, it can be said that internal auditors play a very important role in the
organization. They are accountable to verify the business processes of the organization and for
assessing the efficiency of the risk management framework which are currently implemented in
the organization.
Their function is to safeguard the organization against potential threats posed to the assets of the
organization and ensure that it is complying with the relevant laws and statutes. The work of the
internal auditors is evaluated by the external auditors regarding the assistance of their work in
the external audit function and determining the adequacy of the work for the audit purpose.

Audit Theory and Assurance 8
References
Abdullah, R. B. (2014) Redefining internal audit performance: Impact on corporate governance
[online] Available from: http://ro.ecu.edu.au/cgi/viewcontent.cgi?article=2568&context=theses
[Accessed 17th May, 2018].
Al-Matari , E.M., Al-Swidi , A.K. and Fadzil , F.H.B.( 2014) The Effect of the Internal Audit
and Firm Performance: A Proposed Research Framework. International Review of Management
and Marketing.4(1),pp. 34-41.
Auditing and Assurance Standards Board(2013) Auditing Standard ASA 610 Using the Work of
Internal Auditors [online] Available from:
http://www.auasb.gov.au/admin/file/content102/c3/Nov13_ASA_610_Using_the_Work_of_Inter
nal_Auditors.pdf [Accessed 17th May, 2018].
HM Treasury (2013) Internal Audit Quality Assessment Framework[online] Available from:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/
file/204214/internal_audit_quality_assessment_framework.pdf [Accessed 17th May, 2018].
IAASB(2014) Framework for Audit Quality: Key Elements that Create an Environment for Audit
Quality Audit [online] Available from:
https://www.ifac.org/system/files/uploads/IAASB/Framework-for-Audit-Quality-Outline.pdf
[Accessed 17th May, 2018].
IIA Netherlands (2018) Internal audit functions assessed [online] Available from:
https://www.iia.nl/SiteFiles/IIA%20Internal%20audit%20functions%20assessed.pdf [Accessed
17th May, 2018].
Laković, T. , Smolović, J.C. and Stanovčić, T.(2016) The Internal Audit Function and the
Quality of Financial Reporting: Empirical Evidence from Montenegro. Management
International Conference [online] Available from: http://www.hippocampus.si/ISBN/978-961-
6984-81-2/71.pdf [Accessed 17th May, 2018].
Marquette University(2018) Role Of Internal Audit [online] Available from:
http://www.marquette.edu/riskunit/internalaudit/role.shtml [Accessed 17th May, 2018].

Audit Theory and Assurance 9
Mustafa, G., Fatima, S., Saleem , S. and Ain, N.U.(2016) An Empirical Study of Internal Audit
and Firm Performance: A Proposed Research Framework. International Journal of Information
Research and Review.3(3),pp. 1952-1956.
Njoroge, K.N.(2013) Factors Affecting the Performance of the Internal Audit Function in
Government Ministries in Kenya [online] Available from:
http://erepo.usiu.ac.ke/bitstream/handle/11732/2510/Factors%20Affecting%20the
%20Performance%20of%20the%20Internal%20Audit%20Function%20in%20Government
%20Ministries%20in%20Kenya.pdf?sequence=1&isAllowed=y [Accessed 17th May, 2018].
The Institute of Internal Auditors Australia (2017) Quality Assessment of Internal Audit [online]
Available from: http://iia.org.au/sf_docs/default-source/quality/pdf-toolkit/report-template-
external-assessment.pdf?sfvrsn=2 [Accessed 17th May, 2018].
Tijani , G.(2014) Analyzing the importance of internal auditors for John Holt Nigeria Plc.
[online] Available from:
https://www.theseus.fi/bitstream/handle/10024/83223/TIJANI_GBENGA.pdf?sequence=1
[Accessed 17th May, 2018].