Role of Internal Auditor in Financial Auditing | Auditing and Attestation | CPA Exam

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And welcome to this session. This is professor farhad and the session. Were gonna gonna look at the role of internal auditors in the financial auditing.
So what is role of this group of people who are called internal auditor when it comes to the financial auditing. Remember the financial auditing is done by external auditors. Who are usually not usually who are cpas okay.
So what does the internal auditor play what role do they play so. The first thing. We want to know is who are the internal auditors.
Okay first thing you need to know is they are employees employees of the company. What does that mean it means they work for the company they get their paycheck from the company. Theyre just like any other employee.
They are not outsiders. So internal auditors not like external. Auditors you have to differentiate external auditors is an outside firm coming to order the company.
Internal auditors are employees of the company itself they get paid for them they get paid from the company and this creates an independence issues create a bias issue. Because now you are trying to audit your yourself. So this is the first thing you want you want to know the role of internal auditor expand dramatically recently for many reasons.
One size of the companies are getting larger. The complexity is getting larger and specifically current events and what do i mean by current events here. Were talking about enron were calm when when the sec and when the government conducted their investigation.
They find out that that if the internal auditors were properly doing their job if the internal auditors were properly doing their job then fraud could have been prevented so what did they do and thats why sarbanes oxley sucks they emphasize internal auditing a lot because they want to strengthen the role of internal auditors. So current events placed a more important role on the shoulders of internal auditors to be more objective to be more stern to have a larger role and accompany the internal auditors generally speaking they are more knowledgeable about the company than the external auditors think about it they work for the company. They know the ins and outs of everything theyre there every single day 365 days.
A week in theory versus deep stonewater of the external auditor could be there for three six nine months but not every day and they are not looking at everything internally. Internal auditors. They know more about the company than the external auditor.
The internal auditors they play a big role in corporate governance. Corporate governance is how is the company how is the company or how is the who runs the company. Okay the management is a demand with is the board of director.
The whos whos in charge. So the internal auditors play a major role in a sense that they look over management make sure management are doing their job. And they report to the board of directors.
And this is important who they report to the reporting role is important why because of the internal auditor reports the management. Then kind of a defeat. The purpose of the role of internal auditors.
So youre you are reporting to mate about management to management. If management doesnt like something they can dismiss it. But if you if you go ahead and allow the internal auditor to report directly.
So lets think about it this way. Lets lets assume those are the internal auditors. And lets assume management is here management is here and above management.
You have the board of directors now the internal auditors are monitoring management and operation if they report to management well thats not really good because if management again doesnt like something they may kind of dismiss it so if the internal auditors can report directly have access to the board of directors. Then thats gonna strengthen the corporate governance. Its gonna strengthen how the how the company is being run and then the corporate.
The board of directors whos supposed to be independent once again this is an assumption we are making supposed to be independent. They will put pressure on management to fix money whatever they need to fix or deal with in it whatever problem. We are dealing with whether its an operational problem or an accounting or a finance problem also to tell you how important is the role of internal audit is the nysc.
The new york stock exchange companies thats listed on the nys e nysc registrant mandate that internal audit function for listed companies so simply put if you want your company to be listed on the exchange on the nysc which is one of the most prestigious stock exchanges in the world you have to have an internal function and it has to be functioning right has to be functioning. What do i mean functioning you remember the external auditor will have to report on your internal audit so you have you have to get that internal audit function certified by an external auditor so thats why its very important the organization. The the that oversees internal auditing profession is the institute of internal auditors and through professional guidance for internal auditors provided by the i ight a the institute of internal auditor.
Which is i am a member of the iia. The institute of internal auditor. The highest certification you can get as an internal auditor is something called ci a and thats not central intelligence agency.
Its stands for certified internal auditor which i am is cia certified internal auditor in addition to being a cpa now how do you become a cia. What im going to show you on the website real quick you have to pass a four part exam you have to have a certain type of experience. But if you want to be an internal auditor thats the thats its a highly regarded designation in the industry.
And thats not the only designation. There are more specialized certification available from the ira which i will show you shortly so the institute of internal auditors provide the following definition of internal auditing. So this is what internal auditing is internal auditing is an independent again here we have question mark about independence.
But its supposed to be independent. Why because the company are paying the internal auditors.

an independent accountant who performs financial audits is a-0
an independent accountant who performs financial audits is a-0

So think about it your boss is paying you and youre supposed to look to look over their shoulders. So they are really independent youre supposed to be independent. Its supposed to be objective provide objective assurance and consultancy activity designed to add value and improve organizational operation.
So that all of the auditors to make the organization organization run better it helps an organization accomplish its objective by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management control and the court prep coverage. This is the definition of internal auditing lets go to the iia website. Which is already pulled a website to go there.
The address is the the aia dot or the institute of internal auditing vii aorg and again. I am a member and let me show you their certification here certification cia. The cia certification is the certified internal auditor you can click on it and see what you need to do if you want to be as cia that is the cg ap.
The certified government auditing professional. If you if you were in government or if youd like to work in government. This is a good certification if your industry interested in financial services.
There is the certified financial service. Auditors cfsa. Theres the certification and control self assessment.
And they used to have a certification called sisa. I think now its independent its about information information system. But this is if you look at the cia requirement you could go in here.
If youre interested and look at why becomes why become a certified eligibility and pricing cpe requirement. Which is continuous professional education thats especi what the eligibility requirements are cia because they change i ive been cla for a few years now they constantly change the education you must hold three or four year post secondary degree or hire an associate degree on an a level certificate this is the educational requirement acceptable copy copy of the degree letter from the university confirming the degree that a character reference from another cia. One of those individuals work experience.
If you have a masters degree. Only need 12 months of the auditing experience or its equivalent. If you have a bachelors degree you need 24 months if you have an associate degree you need 60 month of internal auditing experience.
And there is obviously an exam that you have to take so on and so forth. But this is basically how the how you get obtain your certification once again its a highly highly highly regarded certification in the industry. So lets keep going here and internal auditors are expect to provide value to the organization to improve operation effectiveness while also performing traditional responsibilities.
Such as reviewing the reliability and integrity of information. Make sure the information is correct. Ensuring compliance with policies and regulation make sure that the employees are following the companys policies and procedures in terms of buying material pricing competition as well as actually accounting make sure theyre following.
The proper accounting. So as an internal auditor you need to know some accounting you need to know some management. We have to be really well rounded individual because you are looking at the company from all different perspective.
And thats why they are they are highly valued because theyre your skills are pretty diversified and the third thing is safeguarding of assets again make sure your assets are safeguarded your aza are protected. Whats the relationship of internal and external auditor. Now.
This is important because this isnt this is an auditing course and in order thing course we focus on the external auditor so. Internal auditors are responsible to management and the board of directors. This is what internal auditors are responsible for so they report they report about management to the board of directors.
Thats what they are responsible for whereas. External auditors are responsible and theory the financial statement users so notice the responsibility. Internal auditors are responsible for someone whos inside the company they report some of those inside the company.
The external users and they really are responsible for people who are outside the company outside the company financial statement. Users external auditors rely on internal auditor. When using the audit risk model to assess control risk now when the external auditor start to do an audit.
Well. If there is an internal audit department in that company. The first thing theyre going to look at is they wont look at see see how well they manage the risk.
What is the risk model can they rely on that risk model and if so they may be able to reduce substantive testing okay so if the internal auditor are effective the external auditor can significantly reduce control risk. Which is means we reduce substantive testing simply put if your controls are good. If you have good accounting information system.
Youre capturing appropriately. The transaction appropriately recording the transaction appropriately making sure all your ts are crossed. And is are dotted then.
If thats your role as internal auditor. Its gonna make it much easier for the external auditor to conduct the audit. So its gonna its turn it reduce and theory reduce see that the external auditor charged to the company now how do they determine if the internal auditor function is effective.
So how does the external auditor makes that determination well they need to know if sdf. The internal auditor are independent of the operation. Youre not being evaluated.
Independent means. No one is controlling you in other words.

an independent accountant who performs financial audits is a-1
an independent accountant who performs financial audits is a-1

You have no vested interests to tweak the rules because you work under someone whos being audited. If if the internal auditor is it is an independent division then they carry more value to the external auditors. Oh.
Also are they competent and well trained to do they know what theyre doing okay three applying is systematic and disciplined approach. Including quality control. Do they have quality control do they review their work on a regular basis.
What is the role of internal auditor inside the company. What is the role. How does the company define the role of the internal auditor are they just like basically like an added function or a value added function does the company really value the role.
Okay. Whats the experience with the internal auditor. Whats the auditors experience with the internal auditor over the years now if this is the first year or that you really have no experience with them.
But over several years youre gonna know if your experience with the internal auditor is good or not good you would know if they are reliable or not. And whats important is the company culture and this nice the role of the internal auditor. How many people do they have in the internal auditing department.
Is it one person operation. What does that tell you it tells you that the company doesnt really value internal auditing. What is that percentage of the budget is there percentage one percent of the budget or is it five percent or is it ten percent.
Obviously the higher your percentage of the budget. The more value the company puts on the role of the internal auditor then the external auditor can rely more on the internal auditor when they are performing their work. So those are the things that the external auditors look at to determine the effectiveness.
How well or how important is the internal auditors job. Okay. What are some similarities between the internal and the external auditor bosma.
Both must be competent as auditor and remain objective and independent in performing their work and reporting. The results so they have to tell basically the truth in the most objective way both follow a similar methodology and performing the audit. Including planning and performing tests of control and interesting.
Now when i was studying for the cia exam. A lot a lot of topics that comes in auditing in the regular. Only thing course is covered again at the cia because you are an auditor.
The only difference is you are an internal audit or not not an external auditor. So the same the way you you perform the test of control. The way you perform substantive testing.
Its basically the same the same way you do things so the role are basically the same. We do the same type of work both consider risk and materiality and deciding the extent of their tests. And evaluating the results.
However their decision about materiality and risk may differ. Because external auditor have different needs than management or the board. So that the materiality for the way.
External auditor. Said. Materiality is different than the way.
The internal auditor. Said materiality. The internal auditor should tolerate less mistakes because their job is to make sure.
The company is running properly making. Sure everything is being carried 100 percent. If thats the case.
Then they should then they should they will tolerate less mistake also the risk is different than the risk of the external auditor because if they are if they are giving an opinion. They are giving a penny into management and you are given opinion to the board of directors. Theres not really a lot of risk because they can always go back basically inside the company and fix things.
But the risk of the auditor is is higher if they issue the wrong report. Then they are liable for outside parties. Which is much much riskier for external auditor.
So fully this session. Helps you kind of look at the role of internal auditing. The role of internal auditing visit a financial financial everything.
If you have any questions any comments by all means email. Me or see me in class. If youre studying for your cpa exam.
As always study hard. Its worth it .

an independent accountant who performs financial audits is a-2
an independent accountant who performs financial audits is a-2

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