Origin of Audit:
Audit originated because of the need to separate ownership and management and still protect the interest of the owners by ensuring that the financial statements is true and fair. Audit is derived from the Latin term ‘audire’, which means ‘to listen’. In an organisation such as a Bank, the business cannot be wholly run by the owners but by managers and over the years, these business activities have increased.
There was need for the shareholders to be assured of the activities of the managers and that was how the role of the auditor evolved. Meanwhile, the audit function is divided into two, internal audit and external audit. Internal Audit Roles and Responsibilities The internal auditor is saddled with the responsibility of ensuring that the bank’s policies especially on risk management are operating effectively.
The risk assessment procedure review is one of the functions of the internal auditor just as internal audit is also centred on the following activities:
Monitoring the controls put in place by the management of the Bank Give assurance on the effectiveness of the controls of the Bank.
Make recommendations on how to improve internal controls and governance processes.
Ensure compliance with laws and regulation.
Protect the Bank against fraud and theft of the its assets.
Offer consultation and advisory services relating to such areas as new or modified products and services, third-party risk management, and significant bank projects and initiatives.
The internal audit function is often carried out by employees of the bank even though this function can be outsourced, they report to the audit committee and/or directors. Therefore, the employees should act independently and objectively in carrying out the internal audit function.
In summary, the auditors are expected to:
Work with integrity, integrity implies not mere honesty but fair dealing and truthfulness.
Strive for objectivity in all professional and business judgements. Objectivity is the state of mind which has regard to all considerations relevant to the task at hand but no other.
Be professionally competent by not accepting or performing work which they are not competent to undertake unless they obtain advice and assistance that will enable them competently carry out their work.
Carry out their professional work with due skill, care and diligence and with proper regard for the technical and professional standards expected of them as members.
Have a questioning mindset. Behave with courtesy and consideration towards all those with whom they come into contact during performing their work.
The internal audit function is a significant part of the overall internal control environment. It provides assurance to the board of directors and senior management on the quality and effectiveness of a bank’s internal control, risk management and governance systems and processes.
Who is an External Auditor?
An external auditor is expected to give reasonable and not absolute assurance that the financial statements have been prepared and presented in accordance with the applicable International Financial Reporting Standards (IFRS). Basically, the external auditors are expected to provide assessment of the internal control systems as a basis for preparing accurate financial statements for the working of the bank. In other words, the external audit provides an independent assessment of the overall condition of the bank at some point.
The proper application of the external audit gives confidence on the bank’s solvency through accurate financial information to shareholders and other users of the financial information. Though the external auditors are not staffs of the banks, and therefore they are not part of the internal control process, they have an important role on the quality and the improvement of the systems of internal controls.
The external auditors provide an important “feedback” for the effectiveness of the internal control systems. Given the fact that the primary function of the external auditors is to provide an opinion on the financial statements, they need to decide whether during the performance of the external audit they can rely on the efficiency of the internal control processes in the bank.
Hence, it follows that they should have a working knowledge of the internal control system in the bank.
The Differences between the Internal and the external auditors:
There are three main differences in the activities of internal and external auditors:
Appointment Internal auditors are usually employees of the organisation while the external auditors are appointed by the shareholders of the Bank, although this usually comes through discussion with directors.
Objectives – The main objective of internal audit is to protect the value of the assets of the bank, while the external auditor is to confirm whether the financial statements are presented objectively.
Reporting Line Internal auditors report to the audit committee and/or directors while the external auditors report to the shareholders.
The Handshake between the Internal Auditors and the External Auditors
In order to have a more comprehensive view of operations and risks whilst eliminating areas of possible duplication of audit effort there must be a handshake between the internal auditors and external auditors whereby the external auditor may use the work of the internal audit function in planning and conducting an external audit.
Most of the work performed by the internal audit function can overlap with the work performed by the external auditor, especially in areas of the assessment of control processes. It is likely that in carrying out detailed work evaluating and reviewing the company’s internal control framework, internal audit perform procedures on financial controls relevant to the external audit. As such, the external auditor, rather than duplicating these procedures, may place reliance on the work carried out by the internal auditor.
There are ways in which internal auditors may be used by the external auditors in the audit of financial statements and they are listed below: The work of the internal auditors can be used as audit evidence. Internal auditors can provide direct assistance to the external auditors by performing audit procedures under the direction, supervision and review of the external auditor.
However, when considering the use of the internal audit function in obtaining audit evidence, the external auditor is required to evaluate: The objectivity of the internal audit function. The technical competence of the internal auditors. Whether the work of the internal auditors is likely to be carried out with due professional care; Whether there is likely to be effective communication between the internal auditors and the external auditor. When considering the use of internal auditors to provide direct assistance, the external auditor should evaluate: Whether internal auditors can be used and to what extent.
Using the internal audit function in obtaining audit evidence The external auditor who decides to use the internal audit function in obtaining audit evidence will have to discuss the intended use after which the external auditors will read the reports of the internal audit function as it relates to the functions of the external audit.
The external auditor should re-perform some of the audit work especially the body of work that the external auditors intends to use in obtaining audit evidence while assessing the internal auditor’s objectivity, technical competence and independence. Using the Internal Auditors to provide direct assistance The external auditor may obtain direct assistance from the internal auditors to carry out audit procedures that otherwise would be performed directly by the external auditors themselves. The external auditor evaluates whether internal auditors can be used and to what extent by assessing the existence and significance of any threats to the objectivity and level of competence of the internal auditors who will be providing direct assistance on the audit before assigning them to specific tasks. The external auditor will communicate to those charged with governance their intention to use the internal auditors to provide direct assistance.
Acknowledgement from those charged with governance will be sought before the external auditors will proceed with the planned use of internal auditors to provide direct assistance. In summary, the internal auditors are important to the Bank and they are also important to the external auditors. As internal auditors, we should always exhibit the following characteristics: 1. Professionalism 2. Integrity 3. Independence 4. Confidentiality 5. Objectivity.