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8/6/2019 Internal Audit and Operational Audit
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Internal Audit &Internal Audit &Operational AuditOperational Audit
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Internal AuditingInternal Auditing
The Bursa Malaysia Stock ExchangeThe Bursa Malaysia Stock Exchange
best practice to havebest practice to havean internal audit function.an internal audit function.
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Internal AuditingInternal Auditing
It is an independent, objective assurance andIt is an independent, objective assurance and
consulting activity designed to add valueconsulting activity designed to add valueand improve an organizations operations.and improve an organizations operations.
It helps an organization accomplish its objectivesIt helps an organization accomplish its objectivesby bringing a systematic, disciplined approach toby bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of riskevaluate and improve the effectiveness of risk
management, control, and governance processes.management, control, and governance processes.
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Evolution of Internal AuditingEvolution of Internal Auditing
--Highly professional activity, extends to nonHighly professional activity, extends to non--
financial areasfinancial areas
--Financial fraud at WorldCom were found byFinancial fraud at WorldCom were found by
internal auditorsinternal auditors
--Today many companies have an internal auditToday many companies have an internal audit
departmentdepartment
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Professional bodiesProfessional bodies
In ala siaIn ala sia Instit te of Internal ditorsInstit te of Internal ditors
ala sia (II )ala sia (II )
WorldwideWorldwide -- Instit te of Internal ditors Inc.,Instit te of Internal ditors Inc.,
Florida, USFlorida, US
Certified Internal ditor (CI )Certified Internal ditor (CI ) examination +examination +3 ears experience as an internal a ditor3 ears experience as an internal a ditor
Global Partnership greement with CCGlobal Partnership greement with CC
follow Professional Practices Frameworkfollow Professional Practices Framework
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Institute of Internal AuditorsInstitute of Internal Auditors
Code of Ethics & Rules of ConductCode of Ethics & Rules of Conduct
IntegrityIntegrity
ConfidentialityConfidentiality
ObjectivityObjectivity
CompetencyCompetency
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Institute of Internal AuditorsInstitute of Internal Auditors
Professional Practice StandardsProfessional Practice Standards
Attri uteAttri ute
StandardsStandards
ImplementationImplementationStandardsStandards
PerformancePerformance
StandardsStandards
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Relationship of InternalRelationship of Internal
and External Auditorsand External Auditors
TheThe externalexternalauditor is responsibleauditor is responsible
to financial statement users.to financial statement users.
TheThe internalinternalauditor is responsibleauditor is responsible
to management.to management.
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Relationship of InternalRelationship of Internal
and External Auditorsand External Auditors
CompetencyCompetency
MethodologyMethodology
ObjectivityObjectivity
Audit risk model &Audit risk model &
materialitymateriality
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Internal AuditorsInternal Auditors
serving 2 mastersserving 2 masters
enior managementenior management
OperationsOperations
Internal AuditInternal Audit
Audit CommitteeAudit Committee
IndependentIndependent
assuranceassurance
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Operational AuditingOperational Auditing
The systematic process of evaluating anThe systematic process of evaluating an
organisations effectiveness, efficiency &organisations effectiveness, efficiency &
economy of operations under managementseconomy of operations under managements
control & reporting to appropriate personscontrol & reporting to appropriate persons
the results of the evaluation alongthe results of the evaluation along
with recommendations for improvements.with recommendations for improvements.
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Differences between OperationalDifferences between Operational
and Financial Auditingand Financial Auditing
Distribution ofDistribution ofthe reportsthe reports
Inclusion ofInclusion ofnonnon--financial areasfinancial areas
Purpose ofPurpose of
the auditthe audit
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EffectivenessEffectiveness refers to therefers to theaccomplishment of objectives.accomplishment of objectives.
EfficiencyEfficiency refers to the resources usedrefers to the resources usedto accomplish those objectives.to accomplish those objectives.
Effectiveness VersusEffectiveness Versus
EfficiencyEfficiency
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Types ofTypes of
inefficiencyinefficiency ExampleExampleAcquisition of goods andAcquisition of goods and
services is excessively costly.services is excessively costly.Bids for purchases ofBids for purchases of
materials are not required.materials are not required.
Raw materials are notRaw materials are notavailable when needed.available when needed.
An assembly line was shutAn assembly line was shutdown for lack of materials.down for lack of materials.
A duplication of effort byA duplication of effort byemployees exists.employees exists.
Production and accountingProduction and accountingkeep identical records.keep identical records.
Effectiveness Versus
Efficiency
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Relationship between OperationalRelationship between Operational
Auditing & Internal ControlsAuditing & Internal Controls
Internal control evaluationInternal control evaluation
to evaluate efficiency & effectiveness,to evaluate efficiency & effectiveness,
make recommendations to managementmake recommendations to management
ScopeScope concerns any control affectingconcerns any control affecting
efficiency & effectiveness,efficiency & effectiveness,e.g. policies, procedurese.g. policies, procedures
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Types of Operational AuditsTypes of Operational Audits
FunctionalFunctional
OrganizationalOrganizational
Special assignmentsSpecial assignments
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Another way of looking atAnother way of looking at
Operational AuditsOperational Audits
RiskRisk--based auditsbased audits
VFM auditsVFM audits
Process auditsProcess audits
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PublicPublicaccountingaccounting
firmsfirms
GovernmentGovernment
auditorsauditors
InternalInternalauditorsauditors
Who PerformsWho Performs
Operational AuditsOperational Audits
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The two most important qualities forThe two most important qualities foran operational auditor are:an operational auditor are:
Independence and CompetenceIndependence and Competence
of Operational Auditorsof Operational Auditors
IndependenceIndependence CompetenceCompetence
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Specific Criteria for EvaluatingSpecific Criteria for Evaluating
Efficiency and EffectivenessEfficiency and Effectiveness
Were all plant layoutsWere all plant layouts approved by home officeapproved by home officeengineering at the time of original design?engineering at the time of original design?
Has home office engineering done a reevaluationHas home office engineering done a reevaluationstudy of plant layout in the past five years?study of plant layout in the past five years?
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Specific Criteria for EvaluatingSpecific Criteria for Evaluating
Efficiency and EffectivenessEfficiency and Effectiveness
Is eac piece of e uip ent operatingIs eac piece of e uip ent operating
at % of capacity or ore forat % of capacity or ore forat least t ree ont s eac year?at least t ree ont s eac year?
Does layout facilitate t e ove ent ofDoes layout facilitate t e ove ent of
newnew aterials to t e production floor?aterials to t e production floor?
Does layout facilitate t e productionDoes layout facilitate t e production
of finis ed goods?of finis ed goods?
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Specific Criteria for EvaluatingSpecific Criteria for Evaluating
Efficiency and EffectivenessEfficiency and Effectiveness
Does layout facilitate the movement ofDoes layout facilitate the movement of
finished goods to distribution centers?finished goods to distribution centers?
Does the plant layout effectively useDoes the plant layout effectively use
existing equipment?existing equipment?
Is the safety of employees endangeredIs the safety of employees endangered
by the plant layout?by the plant layout?
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Sources of CriteriaSources of Criteria
Historical performanceHistorical performance
BenchmarkingBenchmarking
Engineered standardsEngineered standards
Discussion and agreementDiscussion and agreement
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Phases in Operational AuditingPhases in Operational Auditing
PlanningPlanning
Evidence accumulation and evaluationEvidence accumulation and evaluation
Reporting and followReporting and follow--upup
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PlanningPlanning
Scope of engagementScope of engagement StaffingStaffing
Background informationBackground information
Understand internal controlUnderstand internal control
Decide on appropriate evidenceDecide on appropriate evidence
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Evidence AccumulationEvidence Accumulation
and Evaluationand Evaluation
DocumentationDocumentation
ClientClient
ObservationObservation
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Reporting FollowReporting Follow--upup
Report usually sent to managementReport usually sent to management Tailored reportsTailored reports
FollowFollow--up on recommendationsup on recommendations
with management, see whether changeswith management, see whether changeswere madewere made
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Examples of OperationalExamples of Operational
Audit FindingsAudit Findings
Inventory optimisation reviewInventory optimisation review
optimises cost savings:optimises cost savings:An industrial products manufacturerAn industrial products manufacturer
consolidated its multiple distributionconsolidated its multiple distribution
centers into one facility to reducecenters into one facility to reduce
overall freight and outside manufacturingoverall freight and outside manufacturingcostscosts to ensure the effectiveness ofto ensure the effectiveness of
implementation.implementation.
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Examples of OperationalExamples of Operational
Audit FindingsAudit Findings
1.1. Find integration issues, recommend processFind integration issues, recommend process
improvementsimprovements
2.2. Physical inventory controls, effectiveness ofPhysical inventory controls, effectiveness of
systems at the facility, procedures in handlingsystems at the facility, procedures in handling
damaged products, interdamaged products, inter--plant transfers, physicalplant transfers, physical
security.security.
3.3. RecommendationsRecommendations monitor inventory levels,monitor inventory levels,
improve controls over physical storageimprove controls over physical storage
4.4. Fixed cost savingsFixed cost savings USD 7.9 millionUSD 7.9 million
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The role of internal auditingThe role of internal auditing
in risk managementin risk management-- Business organisations face many risksBusiness organisations face many risks interest rate,interest rate,
FOREX, liquidity, labour market, skills, taxation, naturalFOREX, liquidity, labour market, skills, taxation, natural
disasters, processes, etcdisasters, processes, etc
-- Risk managementRisk management a proactive & ongoing processa proactive & ongoing process
involving the identification, assessment, control,involving the identification, assessment, control,
monitoring, & reporting of risk exposures.monitoring, & reporting of risk exposures.
-- Effective risk management meansEffective risk management means key stakeholders cankey stakeholders can
make informed decisions, daily business decisions aremake informed decisions, daily business decisions are
made within the orgns risk tolerance level, risks relating tomade within the orgns risk tolerance level, risks relating to
intangible assets are optimised, management is accountableintangible assets are optimised, management is accountable
for its decisions.for its decisions.
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The role of internal auditingThe role of internal auditing
in risk management (Contd.)in risk management (Contd.)-- Role of internal auditors: To assist management &Role of internal auditors: To assist management &
Audit Committee by examining, evaluating, reportingAudit Committee by examining, evaluating, reporting
& recommending improvements on the adequacy && recommending improvements on the adequacy &
effectiveness of managements risk processeseffectiveness of managements risk processes
-- IAs should identify & evaluate significant riskIAs should identify & evaluate significant risk
exposures in the normal course of their dutiesexposures in the normal course of their duties
-- If mgt has not established a risk assessment process,If mgt has not established a risk assessment process,
then IA should bring this to the mgts attentionthen IA should bring this to the mgts attention maymay
play a proplay a pro--active role in the setting upactive role in the setting up
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The role of internal auditingThe role of internal auditing
in risk management (Contd.)in risk management (Contd.)-- Test & check adequacy of risk management processes,Test & check adequacy of risk management processes,
models & systemsmodels & systems
-- Ensure accuracy of data used for risk mgt initiativesEnsure accuracy of data used for risk mgt initiatives
-- Act as inAct as in--house consultant by organising a workshop on riskhouse consultant by organising a workshop on risk
& control issues& control issues
-- Educate & create awareness among mgt & staff wrt internalEducate & create awareness among mgt & staff wrt internal
control issuescontrol issues
-- Champion the issues on soft controls (behaviours, attitudes,Champion the issues on soft controls (behaviours, attitudes,
values, integrity)values, integrity)
-- Encourage a knowledgeEncourage a knowledge--sharing culture, e.g. re: criticalsharing culture, e.g. re: criticalinformationinformation
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