Internal Audit Resources - Research Paper Example

Internal Audit Resources Abstract Focusing on a globalized economy, businesses need a tool that can identify their state to be either progressive or retrogressive; internal auditing is then established to act as an efficient ways for precise management of all business economic resources (Swinkels, 2012). Corporate governance has simultaneously received robust consideration recently in both academic research and in practice as a result of giant scandals related to accounting and failure of large scale corporations. With this perception, the main aim of this present article is to find out in a theoretical stage the impact of internal audit to corporate governance. This paper further aims at examining the interaction between several factors of corporate governance like the audit committee, the internal audit process, board of directors, audit committee and the external auditor. Through an expanded literature review, the originality of the study is the establishment of an incorporated conceptual framework concerning business corporate governance and internal audit. The outcome of this literature review depicts that internal audit holds a major position in essential corporate governance. Introduction Internal auditing is a fundamental segment of corporate governance medley in both private and the public sectors (Russell, 2007). For purposes of best examining the relationship between corporate governance and internal audit diachronically, this investigation extends to an historical and after scrutiny of internal audit accomplishments, the next segment discusses the meaning of internal auditing, the next one states the background of corporate governance theoretically. Additionally, the following part evaluates the contribution of internal audit to corporate governance. The final part has the conclusion and the necessary recommendations for additional research regarding internal audit. Organizational independence In as much as internal auditors are not basically independent of the firms that do employ them, independence together with objectivity are a basis of the IIA professional ethics (Cascarino & Van, 2007). They are mostly discussed deeply in the supporting practice and standards guides and practice main advisories. Most professional internal auditors are assigned by the IIA principles to appear independent of any business records they happen to audit all the time. This objectivity and independence are both achieved via the organizational reporting and placement lines of the internal audit subdivision. Publicly traded companies’ internal auditors in United States of America are supposed to report functionally to the board members straight, or a designated sub-committee - typically the audit committee - of partly board of directors, but not to the management not unless for administrative reasons. The needed independence of the organization from management permits open evaluation of management operations and workforces and lets internal auditors to accomplish their task in a more effective manner. Though internal audit is part of a company management and is paid by the organization, the chief client of internal audit operation is the entity tasked with management's activities oversight. This is classically the audit committee which is a sub-committee of board members. In order to provide impartiality, several Chief Audit Executives usually report to the main accountant and may only be substituted with the coincidence of that particular individual. Conceptual Framework of Internal audit Internal audit has always been regarded as a monitoring factor, the ‘watchdog and policeman’ of an organization, accepted as a vital module of organizational control and reckoned subservient to the attainment of crucial corporate objectives (Ridley, 2008). Though the institute of internal auditors outlines internal auditing to be an autonomous appraisal function, founded within an organization to evaluate and examine its operations deemed to be a service offered to the organization as a whole. By evaluating and measuring the efficacy of organizational controls, in its nature, internal audit is a necessary managerial control tool which is linked directly linked to the overall rules of the business and the organizational structure. In this era, internal audit has been defined as a practice which avails ultimate security to the business regarding financial affairs credibility. The report outlines internal control and defines an internal control framework. Though, the main difference of this report stands that it also avails some principles for the management to apply so as to monitor controls. A very important move was the current definition of internal audit which clearly clarifies that internal audit task should assess and contribute to the enhancement of risk management, governance and control. The new description shifts the main focus from assurance to seemingly that of value added and tries to dislocate the profession in the direction of a standard driven technique with a heightened distinctiveness. In recent times, the Institute of Internal Auditors by mentioning that the internal audit tasks should asses and contribute to the progression of risk management, governance and control; it identifies consulting and assurance role of internal auditing in any kind of corporate governance. Internal control revolves within a larger sphere of practical application and management philosophy, and as well adds more value; at the same time offering a systematic scientific tactic on assessing and improving effectiveness of any kind of a business (Institute of internal auditors www.theiia.org/?doc_id [accessed 28/8/204]). According to the mentioned definitions, it is evident that internal control is not only a partisan tool used in controlling the rightness and order of some situations, but it is a way of noticing added value to a company. Theoretical Background of CORPORATE Governance In as much as corporate governance has been viewed since Modern Corporation begun, definitely it has increasingly received scrutiny and attention in the past decades. Currently, corporate governance matters have turned to be more crucial, not only in academic set up but public policy debates as well. Generally, corporate governance issues are receiving much attention due to increased recognition that any firm’s corporate management affects both its ability to access long term or low investment capital as well as economic performance in the market niche. Corporate governance varies throughout firms and countries as well. Corporate governance of high quality enables a firm to have access to capital markets easily, which is very significant for a firm since their funds are definitely boosted (Charted institute of internal auditors (www.iia.org.uk ) Accessed 28/8/2014). In this aspect, corporate governance is outlined as the total of controls and activities of an organization or as a general arranged system of principles, according to which a venture is organized and operates, controlled and managed. Some propose more ample definition that this kind of governance deals with contrivances by a corporation stakeholders exercise control over the insider with a corporation and the management such that protection is given to their interests. They involve as stakeholders not only shareholders, but debt holders as well, and further non-financial stakeholders such suppliers, employees, and other parties who are interested. Issues of corporate governance arise whenever two conditions are available. Firstly, there is the problem of agency or interest conflict that involves organization members; these may be the owners, consumers, managers or the employees. Secondly, transactions worth are such that the problem of agency cannot be possibly dealt with through an agreement. Corporate governance has also been outlined as the process and structure among the shareholders, board of directors, other stakeholders and the top management which entails the roles of stewardship process and demonstrating strategic leadership, with an objective of ensuring improving performance and maintaining accountability. At the same time, some critics, applying the perspective of the Public Oversight Board, outlines corporate governance as ‘oversight tasks performed by the board of directors and the audit committee to warrant the integrity of financial reporting approach ’. This aspect of governance focuses on control activities and the control environment (AuditNet® Internal Audit Resources – AuditNet www.auditnet.org accessed 28/8/2014). Though, the most efficient way to outline the concept is by adopting the main definition, ‘corporate governance is a structure where by a business entity or nonprofit organization is managed and directed, at the level of seniors, for it to achieve its stated objectives, financial and performance management, but as well accountability, openness and integrity ’. In recent times, corporate governance has also been defined as the relationship at the top of the organization including board members, top managers and the stakeholders. Corporate governance institutions are those mechanisms that have been repeated to allocate authority within the three and that affect, control and modulate decisions that have been made at the top level of the firm. The given definition indicates the notion of objectives correspondence, monitoring, incentives and control. According to the above, it is open that corporate governance regulation is government’s tries to warrant that corporation attains its outlined aims and protects the owners’ interest. Internal Audit and Corporate Governance It is generally accepted that the correlation existing between corporate governance and internal audit has an effect in all natures of economic activity and also that the alleged consequences and implications of this kind of interaction have considerably changed recently. Corporate governance and internal audit have recently become an issue that majorly concerns the public at large. In this notion, international guidelines conclude that effective cooperation of internal audit and corporate governance expands performance and is a root of competitive advantage. The effect of internal audit to corporate governance is revealed through demarcation of the relationship existing between key elements of corporate governance and the internal audit. In this context, it is a clear fact that the Board of Directors has been given recognition as a major participant in corporate governance by the governance committee and the regulators globally. The new version of internal audit gives more attention to corporate governance, more especially the board members. This definition has emphasized on the role of internal audit as aiding the venture to attain its major objectives (Verschoor, 2008). Every member of the board is responsible ultimately for the entity to accomplish its objectives, the contribution of internal auditor is providing info to that particular group. Leaving out the above role of internal auditor, its role is very essential as it assist the Board of Directors in self-assessment governance. The internal control mechanism is like a human nervous system which is evenly spread out in the entire enterprise transporting orders and feedbacks to and from the management. With this notion, through measuring and analyzing the benefits of an organizational control, internal audit, in its nature, is a vital managerial control tool which has been directly connected to the structure of the organization and the rules of the business in general. In current business arena, internal audit now provides the management with an extended range of information regarding the organization’s operation, financial and compliance tasks to ensure effectiveness, the efficiency and the economy of management enactment and activities. Based on the committee concerned with audition, one part is that internal audit contributes to governance by; Getting best practice ideas regarding internal controls and risk management procedures to the committee concerned with audit. Availing information about any duplicitous activities or indiscretions. Performing yearly audits and giving feedback results to the committee that is responsible for audit. Encouraging the audit committee members to perform periodic reviews of its operations and practices contrasted with current best practices to ensure that its major activities are in line with the current leading practices. On the other hand, an effective audit committee gives strength to the position on any internal audit by availing an independent and supportive atmosphere and overlooks the effectiveness the function of an internal audit. External audit is as well recognized to be a vital cornerstone of corporate governance, especially with respect to detection and prevention of errors and frauds in most financial statements. The relationship existing between the external and internal audit should be a kind of mutual support and a firm corporation for the purposes of strengthening the quality of overall audit and ways of corporate governance. Finally, internal audit helps corporate governance through reviewing the code of conduct of the organization and the organizational ethics policies to make sure that they are recent and the employees know about them. Having all these, it is clear that internal audit develops endless modern approaches to internal auditing; come up with new auditing services and products, and aids fulfill additional complex demands that most management team face in the present days. In relation to that, it may be expected that internal audit will be additionally oriented towards giving the management advice regarding better corporate governance (Rittenberg, Johnstone, & Gramling, 2012). Summary and Conclusions Internal audit is probably one of the most robust and also an important subject to be given much attention. Currently, internal audit is at a very crucial phase in its developments since there is an increased demand for audit services. Consensus among theories and practice is what is yet to be formed. This specific research did not bear that intention of summarizing the discussion over this issue; though, it is anticipated to be one extra element that can help in the formation of views and to prolix other discussions on the subject matter. This research has made the first and successful effort to find the positive relationship existing between the robust attributes of internal auditing and corporate governance. The major disadvantage of this research work is that it has not specifically given attention to a specific industry sector or any organizational size to any further extent within its context. Considering that this field interest of research is somehow new, it is important that future academic orientations and that of the practitioners be majorly focused on evaluating those governance apparatuses which will eliminate these challenges. Due to this reason, further research is recommended to take place with much focus placed on matters reported in this article in dissimilar sections of industry sectors and size of the organization, and measures the development of single steps and elements of that approach in particular (Nigrini, 2012). As well, deep research might beneficially refine the potential and actual impacts of internal auditing in the field of corporate governance, through examining scenarios of internal audit task in real application. To crown it all, internal audit will see its great achievement in various fields of management. As it is normally phrased, ‘ the future is bright but the way ahead is torturous’; realizing main importance of the internal audit in competent management sets the internal audit to be a priceless backing in the effort of business management. References AuditNet® Internal Audit Resources – AuditNet (www.auditnet.org ) Cascarino, R., & Van, E. S. (2007). Internal auditing: An integrated approach. Lansdowne, South Africa: Juta. Charted institute of internal auditors (www.iia.org.uk ) Institute of internal auditors (www.theiia.org/?doc_id) Nigrini, M. J. (2012). Benford's law: Applications for forensic accounting, auditing, and fraud detection. Ridley, J. (2008). Cutting edge internal auditing. Chichester, England: Wiley. Rittenberg, L. E., Johnstone, K. M., & Gramling, A. A. (2012). Auditing: A business risk approach. Melbourne, Vic.: South-Western Cengage Learning. Russell, J. P. (2007). The internal auditing pocket guide: Preparing, performing, reporting, and follow-up. Milwaukee, Wis: ASQ Quality Press. Swinkels, W. (2012). Exploration of a theory of internal audit: A study on the theoretical foundations of internal audit in relation to the nature and the control systems of Dutch public listed firms. Delft: Eburon. Verschoor, C. C. (2008). Audit committee essentials. Hoboken, N.J: John Wiley & Sons. Read More