CHAPTER 5

MANAGEMENT OF
INTERNAL AUDIT FUNCTION
Learning Objectives
After going through this chapter, you should be able to:
Understand the importance of managing the internal
audit function
Identify areas that affects the internal audit function
Relate the relevant practice standards on managing
the internal function
Comprehend the issues in managing internal audit
conflicts
Understand the different ways of outsourcing the
internal audit function

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 Introduction
• Internal audit is part of an organisation’s component
and can be divided into three main functions:
 Staffing and skills
 Managing internal audit conflicts
 Outsourcing.
• These functions are important and necessary to ensure
that an internal auditor
 functions effectively and efficiently and
 serves as an added value to the organisation

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STAFFING AND SKILLS
 Staffing and Skills
Human capital – competition for human resources is
a reality.
IAD should be adequately staffed in terms of:
Number of staff
Skill sets possessed by the staff (proficiency and adequate
knowledge)
Requirements by IIA:
Attribute Standards 1210 – Proficiency (knowledge, skills
and other competencies)
Performance Standard 2030 – Resource Management
(resources should be appropriate, sufficient, effective)
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 Staffing Quality
Ideal characteristics that auditors should posses:
Professionalism
“eyes” and “ears” of the AC
Technical skills, analytical mind, consultative outlook,
enquiring disposition, communication skills
Staffing Quality
Professional Ability
 Prerequisite – first degree level
 Technical skills + audit skills
Personality Traits
 Cognitive and behavioural skills
 Versatility, enquiring disposition, independence, trustworthiness,
integrity

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 Organisation Function
 Hierarchical structure of internal audit
department:
i) Chief Audit Executive (Audit Director/Head of
Audit/Chief Internal Auditor)
ii) Audit managers
iii) Audit supervisors
iv) Team leaders/senior auditors
v) Auditors

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 Position Descriptions
Position Job Descriptions
CAE/CIA  Ultimate responsibility for internal audit function – prepare
reports for AC
 Directing comprehensive program of internal auditing
 Ensure adequate resources to achieve annual audit goals

Audit Manager  Reports directly to CAE

 Responsible for planning and coordinating audit
assignments/projects
 Vetting and approving working papers + other docs
 Different audit manager for different fields of company’s
operations

Audit Supervisors  Reports directly to Audit Manager

 Ensure audit team conduct field audit as per schedule and
within planned manhours
 Review interim working papers, logistics, ensure
comprehensive audit, adhere to predetermined formats

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 Position Descriptions
Position Job Descriptions
Team Leaders  Responsible to conduct field audit under direction of audit
supervisors
 Detailed supervision of the auditors
 ‘Bottom up” conduit – changes to audit program to suit
auditee

Auditor  Responsible for detailed audit work onsite

 Works directly under supervision of Team Leader

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 Training
Essential at all levels of internal audit function – continuous
training
Update and upskill audit resources with new development in
internal auditing + technical skills
On-the-job and formal classroom/lecture
Different modules for different levels of staff
Hard skills + soft skills
For entry level auditors – orientation (new staff should be
oriented to the firm, its general policies, organizational set
up, audit standards, manuals and short/long-term audit
plans)
Training providers – internal + external (e.g IIA)

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 Performance Measurement of IAD
 Appraisee/IA – need to know own performance,
strengths, weaknesses
 Supervisor – gauge performance, objective and
unbiased assessment
 Types of performance measurement:
Key Performance Indicators (KPIs)
 Covering quantitative + quantitative
 Involved setting up goals/target and whether these are achieved
Balanced Scorecard
 Assess performance based of 4 perspectives:
Financial perspective
Customer perspective
Internal process perspective
Learning and growth perspective
Benchmarking
 Process of comparing performance of IAD with other organizations –
internal audit costs, qualification/experience, training and
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11 development, audit methodologies, etc.
 Some notes…
The success of IA function is dependant on the
hiring of the right people for the job.
A diverse group of auditors with differing technical
backgrounds will bring several skill sets to the
function
Continuous training is important to enhance skill
for the auditors
A good performance evaluation system to record
achievement will serve as an important feedback
tool to keep the various levels of staff in the audit
function

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 MANAGING CONFLICTS IN
INTERNAL AUDIT FUNCTION
 Types of Conflicts:
Inherent conflicts
Avoidable conflicts

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 Conflicts/challenges Faced by IA:
Misconception of internal audit process
Intolerance of ambiguity and uncertainty
Inability to perform strategic and systems thinking
Discomfort working in a new team
Inability to solve problems without constant supervision and
direction
Inability to understand the importance of client service
Lack of understanding of the importance of internal audit in
relation to the organization and the overall community
Lack of understanding of the trends and challenges faced by
the profession and increasing demands of the profession

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 Other Conflicts in IA Function
Friction and strained relationship between internal auditor
and auditee
Poor or inaccurate reporting of findings, e.g., report having
factual errors which may lead to wrong recommendation and
financial loss
Unsupportive top management who perceive audit as a
sheer waste of time and expenses
Uncooperative line function who does not implement the
recommendations of an audit report resulting in wasted
resources and perpetuation of unnecessary exposure and
financial loss
Inability of CAE to spearhead an effective internal audit
team

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 Conflict with Auditee
Not well communicated audit objective resulting in
misperception of auditee – fault finder, outsiders who
interrupt normal process, take glory from the spoils
Auditee with personal agendas
 Can this audit make me look good?
 To ensure that evidence is covered so that the defalcation not
detected by auditors
 To protect job from being redundant by the audit findings

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 How to Manage Conflict with Auditee?
Understanding the business
 Understand the objectives, process and risks involved
 Able to provide guide to help improve business
Communicating auditor’s value proposition
 Balanced view on strengths and weaknesses,
 Informed of any control gaps
 Collaborative discussion for suitable solutions
Demonstrating professionalism
 Structured approach made transparent to the auditee
 Based on facts and not sentiment
Obtain and maintain credibility
Auditor need to be credible in performing their work, then
only auditee will have confidence
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OUTSOURCING
 What is outsourcing?
 Use or employment of independent party to
perform a function within an organization
 Lead IA to add more values to the
organization
 Organization can gain competitive advantage
in essential yet non-core function
 Traditional – IA function was as a department
internal to the organization
 Must be treated with utmost care – or else
could lead to impairment of independence

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 Who Can Provide the Outsourced
Function?
 Individual or independent firm with special knowledge,
skill and experience
 Includes:
 Accountants
 Actuaries
 Engineers
 Lawyers
 Environmental specialists
 Fraud investigators
 Security specialist

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IA Activities That Can be Outsourced
 Areas where specialized skill and knowledge
are required
 Valuations of assets
 Determining WIP
 Fraud and security investigation
 Mergers and acquisitions
 Risk management consultancy

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 Outsourcing Arrangements
Full outsourcing
Partial outsourcing
Co-outsourcing
subcontracting

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 Objectives of Outsourcing
To reduce management work on internal audit
function
To reduce cost of having an in-house IA function
Assisting management to reduce or manage risk
of competitive demand from shareholders,
customers and other market participants

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 Reasons for Outsourcing
Improve the internal audit product/output for audit
skills NOT available form current audit staff
Save the organizations’ budget
In need of additional staff to meet deadlines
Assignment in remote geographical locations
Special skills on special assignments
Follow the trend

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 Issues Relating to Outsourcing
Independence – have to be
considered to ensure no impairment
to independence especially when the
same public accounting firm , for
example, served both internal and
external audit services

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Arguments in Favour of Outsourcing
 Outsourcing allows management to focus on core
competencies
 Economies of scale should result in cost savings for same
services
 Flexibility in staffing leads to better resource allocation
 Access to leading/best practices
 Clear customer focus
 Better international and cultural coverage – for MNC esp
 Better use and access of specialised skills
 Organizational size – benefits smaller organization
 More credibility

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 Arguments against Outsourcing
 Outsourcing providers may command or demand
ever-greater premium for their services
 The external provider lacks the intrinsic
knowledge about the business
 Valuable training ground for management is lost
 Loyalty is in question
 Corporate governance cannot be outsourced?
 Internal audit + external audit provider =
independence is questionable

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 Decision to Outsource
 Issues to be considered by the management:
 Human resource – composition, cost
 Objectivity
 Quality assurance and control

 Outsourcing is seen more as a short-term rather

than a long-term strategy

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 Choosing Outsourced Provider
 Management need to search for the
best provider to serve the
organizations’ needs
 Factors to be considered:
 Experience in related field
 Audit approach used
 Costs involved

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END CHAPTER 5