The auditor will make a difference

Audit Committee strategies to activate the Internal Audit Activity

Abstract

This paper aims proposing a research on how the internal audit can impact on the performance of an organization. It discusses the strategies that Internal Audit Committee can adopt to ensure that the internal auditors perform their roles in internal controls, risk management and governance.  The research will involve both qualitative and quantitative research methodologies. The research design will involve both primary and secondary data sources, with a stratified sampling technique. The research instrument to be used in the research is questionnaires.

Introduction

Major financial scandals that have occurred in organizations, both private and public can be attributed to failure on the part of internal audit to carry its roles adequately to ensure that there are minimal cases of fraud and thus mitigate such risks. The internal audit should be an independent activity that is objectively and confirmatory determined to improve the operations of the organization and add value it.  The internal auditors should help the organization achieve their objectives by way of a disciplined and systematic method that evaluates and enhances the risk management effectiveness, internal control processes and general governance. However, the auditors’ functions are performed best under the supervision of internal audit committee whose major role involves overseeing the function of internal audit in the organization. The role of the internal committee involves the ensuring that the internal audit activities are carried out strategically to attain objectivity and a common direction towards achieve the set goals. The committee should have a road map that lays out the various strategies to be applied in ensuring that the internal auditors do not neglect their responsibilities which can have great ramifications on the shareholders and stakeholders’ confidence and trust issues.  The strategies to be adopted by the internal audit committee should cover the role of internal audit governance processes and risk management, responsiveness to change and flexibility so as to deal with possible risks and use of technology to facilitate monitoring and audit activities. The strategies should also focus on the overall strategic plan and vision of the audit department which encompasses the value the firm receives from the department, strong communications and relationship between the committee and the internal audit department. The audit committee also needs to have in place strategies that ensure that there is enough training and talent development for the internal auditors so that the audit activities conform to the shareholders’ and regulatory expectations.  Thus the issue at hand is which strategies the audit committee should adopt to ensure that internal audit in the organization makes a noticeable difference in the achievement of the laid out goals and objectives.  The role of such strategies in promoting adequate internal audit activities is a vital aspect that should take much consideration in the management plans and objectives.

Literature review

Having an effective committee audit committee is very beneficial to management and the organization at large since it improves on the contact between the external auditors, management and internal auditors (Moeller, 2013). The committee plays an important role of imposing risk management and control, strengthening the credibility and objectivity of financial reporting and thus reducing errors and fraudulence and thus enhancing the overall process of governance.  Corporate governance is a main foundation of the organization that comprises of the executive management, board of directors, internal and external auditors. The audit department works with the other three parties in achieving the objectives of the organization while ensuring that good principles on governance are exercised (Leblanc, 2007). There has been an increasing need for the internal auditors to focus on the governance processes and risk management as part of assessment and auditing activities. There is also an increased need for the audit committee to tailor their efforts so that they can embrace the management of risks and participation in the process of corporate governance. This can be attributed to the heightened necessity for oversight in these areas on the part of both the supervisory and regulatory bodies in the private and public sectors. Due to the importance of these areas, the audit committee can assess the current and expected scope of internal audit activities in the coverage of governance and risk management. This is a strategy that augurs well with firms that are in their initial stages of implementing risk management. The role to be played by the internal audit is to act as the catalyst to assist in the development of the various processes that can be applied in management of the said risks. The knowledge the auditors have concerning the organization can be of great assistance since they are capable of assessing the best internal control measures that can act as good techniques for mitigating and managing any possible risks. The audit committee can prevail upon the internal audit to act as the assurance capacity through the provision of audit coverage for any risk practices that may have been adopted (Moeller, 2013). The internal audit can thus offer assurance and advice over the governance’s processes that are aimed at ensuring that the risks that the firm is exposed to are brought under control. The internal audit under the guidance of the audit of audit committee can carry out an audit plan on risks by use of various approaches which can include an annual assessment on risks. In a world whose global markets are faced with dynamic and complex risks, the internal audit departments can update their audit plans and risk assessment strategies more frequently and timely than just doing it on a yearly basis. Therefore, the internal audit groups can roll out their audit plans that will cover periods of six months or even quarterly ones. By adopting a more timely strategy to the audit planning, firms can ensure that the plan focuses at the issues that are most critical in a certain period. The work of audit committee is to ensure that internal auditors give a rundown on the different changes to the emerging risks driving the alterations in the audit plans.  The audit committee can then review the audit plans and be satisfied that the changes will make a difference in addressing the current and projected risks (Moeller, 2013).

The internal audit committee can adopt technology as strategy of facilitating the auditing and monitoring activities in the organization. The technology tools are important in enhancing the effectiveness and efficiency of the internal auditing committees. For instances, adopting powerful tools for data mining makes it possible for the auditors to carry out audit tests on the whole data populations rather than just testing the data samples . The tools for data mining also makes it possible for the auditors to check on the fraud and risk indicators , internal controls and  the overall performance metrics. The scope of the above capabilities makes it easy for the internal auditors since the tools provide great opportunities for enhancing the audit efforts (Leblanc, 2007). The audit committee can determine the manner in which the technology is being applied by the auditors, the plans that can further leverage technology and the support that is needed for the functions of internal audit to be successful(Chorafas, 2008)l. This is possible if the audit committee is aware of the budgetary support and skills necessary for auditors to achieve these technology objectives. In addition, for the internal audit to contribute to performance of the organization, it has to focus on new strategic planning in the midst of rapid changes in current markets and commerce. The internal audit committee has to develop a strategic plan and vision that will enable the organization to keep pace with the new developments in business and technology especially in the field of auditing. The committee can evaluate the strategic orientation for the functions of internal audit through the determination of the mid-term and near future audit visions together with the long-term vision.   The committee has to determine the strategic plan of the audit that ensures that it keeps pace with processes and risks in the organization, by assessing the gaps that exist between the internal audit’s activities and processes are currently and where they are intended to be in the future. The committee also has to ensure that the strategies for the internal audit are in line with the major strategic plans of the organization.

For organizations to experience the impact of the internal audit, the internal audit committee has to make sure that the firm derives value from the activities of internal auditing. The adoption of strategies that align the audit activities to the general operations in the organization will enable the internal auditors to give value to those operations through control measures and assessments (Moeller, 2013). Ensuring that the stakeholder’s expectations are considered in any such strategies will ensure that the impact of the audit activities is felt across board. Proper definition of what adding value means enable the tailoring of internal audit processes to meet the stakeholder’s expectations. The driver in the expected value to be offered by the function of internal audit is the assurance given by the audit committee. The internal audit has to be aware of the value expected from them (Moeller, 2013). For instance, the stakeholders may desire the audit committee to provide talent of high quality to their firms, help the management through provision of data mining and monitoring capabilities that will have a general effect of  enhancing the performance of the a business unit or facilitating the management of risk and processes of governance.  The audit committee should ensure that there is clarity and agreement between itself, the internal auditors and the management in regard to what is expected of the audit activities whose values are ascribed to by the stakeholders. The internal audit has to address the expectations, value drivers and monitor how well it’s delivering on them. Such a strategy will shape the perception of the stakeholders so that they become real and substantial and enhance the possibility of the internal audit activities delivering on the value expected. Moreover, strong communications build good relationships between the internal audit committee and the internal auditors. To achieve and sustain such a relationship means that the activities of internal audit will be more transparent and open. The issue that the internal committee should address is how to enhance both the formal and informal communications. The informal communication will ensure that this relationship is not only established but maintained in for the overall good in the organization (Chorafas, 2008).  The relationship will thus ensure that issues such as succession planning are achieved without disrupting the audit activities.

For internal audit activities to provide value to the organization there should be full compliance with the regulatory authorities and supervisory bodies that sets standards (Rezaee, 2007). The role of the committee is to come up with strategies that ensure that internal audit activities are conducted as per the provisions of internal audit function charters.  The audit committee should expect that internal auditors are fully compliant with professional standards by requesting periodic confirmation which indicates that the auditors are actually complying with the standards such as IIA Standards that hold that external assessment must be carried out for every five years in the minimum. By receiving an external reviewer report the audit committee will ensure full compliance. Audit functions that match professional standards go a long way in preventing corporate scandals that cripples the performance of even the most stable organizations (Rezaee, 2007). Thus the adherence to the standards will act as control measures that offer buffer to fraudulent cases due to lack of transparency.  In addition, adequate training for internal audit will make it possible for the internal audit to achieve its mission. The internal committee has to ensure that internal auditors keep pace with current changes in the business, risks and technology through a thorough and continuous training. The adopted training program should surpass basic auditing or accounting skills in order to address critical aspects like risk management, data analysis and mining, marketing of new products and applications of new and current technology.  This should also extend to strategic decision making which will ensure that audit activities are conducted appropriately in line with the organization’s expectations. This also involves the internal audit assessing its skills and determining the existing gaps. Audit committee should consider holding a critical discussion with leadership of internal audit and address the question of the skills needed to address the control and risk management needs of the organization.

Proposed research Methodology

The research proposes a qualitative method of data collection based on the available literature and quantitative methods. This framework is expected to elaborate more on the extent of variance in performance of organizations that consider the role of internal audit in its operations.

Research design

The research paper will involve an assessment and evaluation of the role played by the internal audit committee in ensuring that internal audit has a significant impact in the performance of the organization. Therefore, the research design will involve the use of primary data in form of   research questions that will address the why and how the internal control can be make a difference in the fulfillment of stakeholder’s organizational expectation. The research questions will touch on the extent to which the internal audit covers the organization’s governance and the management of risks, flexibility and responsiveness to change, the use of technology to enhance auditing activities, role of plan and strategic vision in internal audit, the values the organization derives from the activities of internal audit and the effect of strong communication on the relationship between internal audit committee and the internal auditors. The questions will also touch on the development of internal audit skills and talent in organization. The research will also source data from secondary sources such as publications, journals and other internet sources.

Population

The collection of data will target the various management teams, internal audit departments’ staffs and heads and internal audit committees and chief directors. These participants will be sought from both the public and private sectors and will involve the large and medium sized organizations.  

Sampling and sampling technique

Due to the nature of the population described above, the research will have to adopt the use survey type of research with descriptive research questions that are aimed at eliciting adequate information from the participants. The researcher will select a sample of 200 elements from a population of about 350 which will be targeted. A stratified sampling method will be adopted in the selection of the desired elements. The population will be divided into various levels of management in the departments so as to capture the overall opinions of the participants.  This will include first dividing the population into large or small organizations and then the various departments and finally the various levels of management in the departments. The research will endeavor to involve majority of the departments since auditing activities touches on the entire operations of the various organizations whether public or private. This division will ensure there is a fair representation for every group of participants.

Data collection instruments

The collection of data will be done through a questionnaire that will involve structured questions of about 20 questions that will allow the participants to properly give a description.

Discussion and conclusion

The department of internal audit plays a major role in ensuring that internal control on accounting systems and risk management efforts are in place in any organization. The basic concern is the internal audit has the necessary capabilities for providing assurance and coverage over the organizations processes of risk mitigation and management and the various controls needed  to ensure the achievement of laid down objectives. The success of over any organization can depend on the function of internal edit in ensuring that the risks of scandals relating to fraud are managed. This issue can be specifically critical to small and medium sized organizations that lack an expansive budget to can ensure they can adopt wide range of skills required for addressing changing and unpredictable risk profiles (Leblanc, 2007). It’s there for necessary to determine how the audit committee can be entrusted by such firms with the responsibility of ensuring that any risks that may result to instability of the firms are checked. This will ensure that the contribution of internal audit to the performance of any public or private organizations is not undermined. The research will also aim at determining the strategies that can be adopted by the audit committee to ensure that internal audit add value to the firms, so that its operations are improved considerably.

In conclusion, it would be unnecessary to have an internal audit department if it does not bring about value addition in the operations of the firm. Therefore, the presence of internal auditors can have a very significant impact on the management processes that are aimed at ensuring the organizations are finically viable.

 

 

References

Rezaee, Z. (2007). Corporate governance post-Sarbanes-Oxley: Regulations, requirements, and integrated processes. Hoboken, N.J: John Wiley & Sons. 281-297

Chorafas, D. (2008). IT Auditing and Sarbanes-Oxley Compliance: Key Strategies for Business Improvement. CRC Press.73-80

Moeller, R. R. (2013). Brink's modern internal auditing: A common body of knowledge. Hoboken, N.J: Wiley.516-521

Leblanc, R. (2007).Ten ways to enhance the effectiveness of the audit committee. Ivy Business School. Retrieved from: http://iveybusinessjournal.com/publication/ten-ways-to-enhance-the-effectiveness-of-the-audit-committee/