UAEU Internal Auditing: Chapter 1 Introduction and Key Components

This document provides a comprehensive overview of internal auditing, drawing from Chapter 1 of the Internal Auditing: Assurance and Consulting Services textbook. It begins by outlining the learning objectives, which include understanding the internal audit process, its relationship to accounting, and the distinction between internal and external auditing. The document traces the historical development of internal auditing, from its origins as an extension of external audits to its evolution into a critical function focused on assurance and consulting. It delves into the various services offered by internal auditing, including transaction-based, system-based, and risk-based approaches, and clarifies the role of internal auditing within the framework of corporate governance, risk management, and control. The definition of internal auditing, as provided by The Institute of Internal Auditors (IIA), is examined, highlighting its key components such as adding value and improving operations, independence, and objectivity. The document also explores the objectives, strategy, and functions of internal auditing, including assurance and consulting services, and the three fundamental phases of the internal audit engagement process: planning, performing, and communicating outcomes. The differences between internal and external auditing are clarified, as are the procedures employed by internal auditors. Finally, the document touches upon co-sourcing in internal auditing.

Copyright: Internal Auditing: Assurance and Consulting Services, by The Institute of Internal Auditors Research F
Avenue, Altamonte Springs, Florida 32701-4201 U.S.A.
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Chapter 1
Introduction to Internal
Auditing
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Chapter 1 Learning Object
 Obtain a basic understanding of internal auditing and the internal
audit process.
 Understand the relationship between auditing and accounting.
 Distinguish between financial reporting assurance services
provided by internal auditors and those provided by independent
outside auditors.
 Become familiar with the internal audit profession and The
Institute of Internal Auditors.
 Understand the competencies needed to excel as an internal
auditor.
 Be aware of the various internal audit career opportunities it is
possible to pursue.
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Copyright: Internal Auditing: Assurance and Consulting Services, by The Institute of Internal Auditors Research F
Avenue, Altamonte Springs, Florida 32701-4201 U.S.A. Slides compiled by: Prof. Esam Hussein, UAEU

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The Development of IA
 Started as an extension of the external audit.
 Progressed to non-financial areas as assurance. it
weakened control systems!
 Became a policing job done by accountants on behalf of
management.
 Developed outside accounting departments, allowing
independence and formation of own purpose.
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Copyright: Internal Auditing: Assurance and Consulting Services, by The Institute of Internal Auditors Research F
Avenue, Altamonte Springs, Florida 32701-4201 U.S.A. Slides compiled by: Prof. Esam Hussein, UAEU

The Development of IA
 Introduction of the “Chief Internal Auditor” job
with high organizational status.
 The introduction of the “audit committee” for
the IA function to report to it as highest level.
 The introduction of the professionalism.
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Copyright: Internal Auditing: Assurance and Consulting Services, by The Institute of Internal Auditors Research F
Avenue, Altamonte Springs, Florida 32701-4201 U.S.A. Slides compiled by: Prof. Esam Hussein, UAEU

The Development of IA Services
 Internal check (double-check accounting transactions)
 Transaction-based approach based on detailed continuous
program.
 Statistical Sampling approach.
 Probity-based (testing honesty) approach (detailed
investigations)
 Spot Checks (deterrent sudden checks on any spot).
 Risk analysis (restricting the previous approaches based on
risk analysis / fear).
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The Development of IA Services
 System-based approach (advise management on type of control
needed). Testing the controls not for errors. Problems linked to method of
control.
 Operational audit: attention to efficiency and effectiveness, value for
money and savings.
 Management audit: control issues arising from managing an “activity”.
Concerned with “processes” that are needed to achieve objectives.
Understand & evaluate complex managerial systems controls.
 Risk-based auditing: starts with understanding objectives, risks, design
controls based on risks, control environment and framework are
fundamental.
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Copyright: Internal Auditing: Assurance and Consulting Services, by The Institute of Internal Auditors Research F
Avenue, Altamonte Springs, Florida 32701-4201 U.S.A. Slides compiled by: Prof. Esam Hussein, UAEU

Is IA part of IC
 IA needs to be outside the system IC
 IA reviews and evaluates the systems of control
while not being an integrated component within the
actual control routine.
 The IA has dual role of assurance and consulting.
 IA is not responsible for designing, maintaining and
implementing IC systems.
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Copyright: Internal Auditing: Assurance and Consulting Services, by The Institute of Internal Auditors Research F
Avenue, Altamonte Springs, Florida 32701-4201 U.S.A. Slides compiled by: Prof. Esam Hussein, UAEU

The IA framework
 Three concepts form the IA framework: Corporate governance Risk management, and Control.
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Copyright: Internal Auditing: Assurance and Consulting Services, by The Institute of Internal Auditors Research F
Avenue, Altamonte Springs, Florida 32701-4201 U.S.A. Slides compiled by: Prof. Esam Hussein, UAEU

to survive and thrive internal audit, must
justify its existence through adding value.
The three components of the value
proposition are defined below:
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Copyright: Internal Auditing: Assurance and Consulting Services, by The Institute of Internal Auditors Research F
Avenue, Altamonte Springs, Florida 32701-4201 U.S.A. Slides compiled by: Prof. Esam Hussein, UAEU 9 Assurance = Governance, Risk, and Contro
Internal audit provides assurance on the
organization’s governance, risk management, a
control processes to help the organization achie
its strategic, operational, financial, and complian
objectives.

■Insight = Catalyst, Analyses, and Assessme
Internal audit is a catalyst for improving an
organization’s effectiveness and efficiency by
providing insight and recommendations based on
analyses and assessments of data and business
process.
■Objectivity = Integrity, Accountability, and
Independence. With commitment to integrity an
accountability, internal audit provides value to
governing bodies and senior management as an
objective source of independent advice
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IA Definition (Read P. 12)
 The IIA’s definition: “Internal auditing is an
independent, objective, assurance and consulting
activity designed to add value and improve an
organization’s operations. It helps an organization
accomplish its objectives by bringing a
systematic, disciplined approach to evaluate and
improve effectiveness of risk management,
control, and governance processes.”
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Copyright: Internal Auditing: Assurance and Consulting Services, by The Institute of Internal Auditors Research F
Avenue, Altamonte Springs, Florida 32701-4201 U.S.A. Slides compiled by: Prof. Esam Hussein, UAEU

The key components of this definition are listed here
and discussed in turn below:
■Helping the organization accomplish its objectives.
■Evaluating and improving the effectiveness of risk
management, control, and governance processes.
■Assurance and consulting activity designed to add
value and improve operations.
■Independence and objectivity.
■A systematic and disciplined approach (specifically,
the engagement process).
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Copyright: Internal Auditing: Assurance and Consulting Services, by The Institute of Internal Auditors Research F
Avenue, Altamonte Springs, Florida 32701-4201 U.S.A. Slides compiled by: Prof. Esam Hussein, UAEU 12