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THE EFFECTIVENESS OF INTERNAL AUDIT AND INTERNAL CONTROL
A Thesis Proposal
Presented to St Paul School of Business and Law
In Partial Fulfilment
of the Requirements for the Degree of
Bachelor of Science in Accountancy
ncina! "aiser #$
#ante! %al&in Rey '$
(y! Leo&igildo )r D$
Section code* +,,
,*-- . /*-- #0F
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Chapter 1
THE PROBLEM
This chapter presents the 1ac2ground of the study! statement of the
pro1lem! scope and delimitation! the significance of the study to inform users! the
conceptual paradigm! the assumptions or hypothesis of the study and definition
of terms$
Introducton
3&er the past years! the scope of auditing has 1roadened due to the dramatic
changes in its impact to organi4ations$ It has always 1een carried out in di&erse
en&ironment within organi4ation depending on the structure! si4e and purpose
5Faud4iah! 6aron 7 )antan +--/8$ %ompulsorily! all registered companies under
the %ompanies and Allied #atters Act in 9igeria must audit their financial
statements after a certain period of time$ %ompanies 1enefit from the audited
financial statement in a large &ariety of ways$ (sers of financial information such
as in&estors! stoc21ro2ers and financial e:perts sees the audited financial
statement as a ma;or thing to loo2 out for when deciding on a choice of company
to in&est$ These people rely on the auditor
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does not generate re&enue! some regard it as a unit whose &alue is not
appreciated$
Therefore! while some appreciate the ad&antages that are deri&ed from ha&ing
internal auditors others 1elie&e they are irrele&ant and waste of money$ 'one are
the days when auditing is ;ust a1out re&iewing records or detecting irregularities
and frauds$ #odern auditing has de&eloped and has thus increased the need of
in&estors in requesting for credi1le financial statements$
According to Adeni;i 5+-=+8! Auditing is defined as an independent! o1;ecti&e
assurance and consulting actions esta1lished to add &alue and help to impro&e
an organi4ation8$ There must not 1e any form of
interference with the independence of an auditor in discharging his or her duties$
An auditor should 1e gi&en freedom in planning! e:ecuting! analy4ing and
reporting his findings without 1een 1iased$
The nature of the internal audit function is also an important consideration that
may potentially affect its &alue to an organi4ation$ %ompanies may use their own
staff 5insource8! use an e:ternal firm 5outsource8 or a com1ination of the two$
0hile outsourcing the internal audit function does not significantly affect users8 found that auditors are more li2ely to 1e sued
when they fail to detect common misappropriations that would result to
decreased re&enues! and the e&aluators 1elie&e that the fraud could ha&e 1een
detected 1y other auditors$ The auditor s accounta1ility for detecting fraud is
e:tended 1y Reffett s 5+--E8 study which predicted that auditors are more li2ely
to 1e held accounta1le 1y e&aluators when the auditors fail to detect fraud after
they had identified the fraud occurrence as a fraud ris2$ The result of Reffett s
study shows an increase in auditors lia1ility when an audit fails! after the
auditors had identified the perpetrated fraud as a fraud ris2 and performed
procedures to in&estigate the identified fraud ris2$ The findings support Reffett s
prediction$
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Attri1ution theory thus ad&ocates for auditors to report on the effecti&eness of
firms internal control$ Auditors are therefore e:pected to gain a 1etter
understanding of the internal controls in =? place! assess the design and
implementation of the internal controls! and test the operating effecti&eness of
the internal controls$ This is deemed necessary for the auditors reliance and
possi1ly scaling 1ac2 of other su1stanti&e audit procedures for the required
re&enue generation$
According to Bonner 5+-->8! e&aluators can use the audit processes as a
1asis to determine negligence if auditors fail to detect internal control related
fraud that may occur$ The attri1ution theory suggests that when fraud occurs!
identified parties should 1e held accounta1le and auditors! 1eing the pu1lic
watch dogs are most li2ely to 1e held accounta1le if e&aluators determine
su1standard audit ser&ices were pro&ided 5Reffett! +--E8$
Relia1ility theory simply descri1es the pro1a1ility of a system completing its
e:pected function during an inter&al of time 5'a&rilo& and 'a&rilo&a! +--=8$ It
was originally a tool used to help nineteenth century maritime insurance and life
insurance companies in computing profita1le rates to charge their customers$
According to the relia1ility theory! an internal control system comprises of
components that are interrelated and each for component! there needs to 1e a
defined measure of success$ As such! the state of a component is determined
1y whether the component is Msuccessful or Mnot successful $ The relia1ility of a
component is defined as the pro1a1ility of the component 1eing found in the
Msuccess state$ In addition! the relia1ility of the entire internal control system is a
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1inary com1ination with two possi1le &alues! Msuccess and Mfailure $ This study
considered the part of the relia1ility theory which relates the internal control
system to component relia1ilities$
The tracta1ility of relia1ility theory to the e&aluation and design of internal
control systems ha&e appeared in the professional literature 1ut no applications
ha&e 1een reported that draw upon the su1stantial power of the theory of
relia1ility 5"inney! +---8$
The two potential users of the =, relia1ility theory are the e:ternal auditor and
organi4ation management$ "inney 5+---8 states thatC during the e:ternal audit!
e&idence is gathered to support a professional opinion$ Internal control systems
ha&e a primary purpose of assessment and control of ris2sC that a material error
was not 1e pre&ented or detected on a timely 1asis 1y the system lea&ing to
losses$ 0ea2 internal control systems result in more su1stanti&e wor2 and hence
greater cost$ According to 'a&rilo& and 'a&rilo&a 5+--=8! the determination of the
Nwea2nessN of any internal control system is primarily ;udgmental$ (pon the
formulation of the process and system relia1ility estimates! comparison with data
from the organi4ation s past performances or other firms may pro&ide a more
solid 1asis for ;udgment of the impact of an internal control system on the firm s
income ris2 and hence pro&ide for more rational allocation of the auditors time
and effort$ #essier )r$ and Austen 5+---8 state that one of the primary
ad&antages of the relia1ility theory is its close relationship to the auditors needs
regarding understanding the internal control system and control ris2 assessment$
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According to Stratton 5+--E8! recent de&elopments ha&e increased the &alue to
management of o1;ecti&e methodologies for the e&aluation of internal control
systems$ Firm managers are therefore required to assure the accuracy of these
systems$ Stratton 5+--E8 also adds that the process of e&aluation of the internal
control system 1y 1oth management and e:ternal auditors is ;udgmental in
nature$
6owe&er! the few attempts at modeling internal control systems ha&e not
1een implemented 1y firms due to the lac2 of realism! difficulty of modelling
1eha&ioural systems! lac2 of cost effecti&eness! and lac2 of understanding 1y
practitioners$
Parad%! o" the Stud&
Evaluation
Efectiveness ointernal audit
Efectiveness ooperation
Analyse odata throughquestionnaire
, andstatisticaltreatment
Prole o internalauditors
a. Se
!. Age
c. "or#ingEperience
d. $ield o study
$actors afecting %nternalAudit efectiveness
a. &anagementSupport
!. &anagementPerception o internal
audit unction
c. 'rgani(ational%ndependence
d. adequate competent
internal audit staf
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F%ure 1) E""ect(ene** o" nterna$ audt and nterna$ contro$*
H&pothe** o" the Stud&
In order to achie&e the o1;ecti&es raised a1o&e 1ased on the statement of the
pro1lem! the following hypothesis were formulated$
The management supports are positi&ely related to the internal audit
effecti&eness
The 1etter the management
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A**u!pton* o" the Stud&
The following assumptions are enumerated 1y the researcher*
=$ Fraud can 1e pre&ented when internal control system is in place
+$ Independence is a critical component of an effecti&e internal audit acti&ity$
?$ sta1lishing a culture of integrity is a critical component of fraud control$
,$ Ris2 and control assessment is an important tool in detecting fraud$
/$ The audit recommendation of internal auditors can help management in
ma2ing decisions
De"nton o" Ter!*
Ter!* that are de"ned conceptua$$&-
Audt)An un1iased e:amination and e&aluation of the financial statementsof
an organi4ation$ It can 1e done internally 51y employees of the organi4ation8 or
e:ternally 51y an outside firm8$ 5Spyroo! +--=8
Contro$ en(ron!ent$ Is a term of financial audit!internal
auditand nterprise Ris2 #anagement$ 5Aguilar! +-=?8$
http://www.investopedia.com/terms/f/financial-statements.asphttps://en.wikipedia.org/wiki/Financial_audithttps://en.wikipedia.org/wiki/Financial_audithttps://en.wikipedia.org/wiki/Internal_audithttps://en.wikipedia.org/wiki/Internal_audithttps://en.wikipedia.org/wiki/Enterprise_Risk_Managementhttps://en.wikipedia.org/wiki/Financial_audithttps://en.wikipedia.org/wiki/Internal_audithttps://en.wikipedia.org/wiki/Internal_audithttps://en.wikipedia.org/wiki/Enterprise_Risk_Managementhttp://www.investopedia.com/terms/f/financial-statements.asp7/24/2019 internal audit benefits
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E""ect(ene**) Is a1out doing the right tas2! completing acti&ities and
achie&ing goals$
Interna$ Audt)is designed to review what a company is doing in order to identify
potential threats to the organization's health and profitability, and to make
suggestions for mitigating the risk associated with those threats in order to minimize
costs. ( Yuri, 2000)
Mana%e!ent Support) This is when high le&el managers in a corporation
see2 to help lowerle&el employees to de&elop entrepreneurial 1eha&ior$ 5Da&is!
+-==8
Ter!* that * de"ned operatona$$&*
Independence) This is the a1ility if an auditor to carry out his wor2 o1;ecti&ely
without any 1ias or influence from any1ody$
Interna$ audtor) This is the staff that heads the Internal Audit Department or
(nit in an organi4ation$
Interna$ Audt Depart!ent.Unt)This is the department that is set up to carry
out the internal audit wor2 in an organi4ation$
Interna$ Contro$) This is the whole system of controls! financial and
otherwise! esta1lished 1y the management in order to carry on the 1usiness of
the enterprise in an orderly and efficient manner! ensure adherence to
management policies! safeguard the assets and secure as far as possi1le the
completeness and accuracy of the records$
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Mana%e!ent Contro$) This is the means 1y which organi4ation carries out its
o1;ecti&e effecti&ely and efficiency$
Chapter II
RESEARCH METHODOLO'/
This chapter presents the research design! research su1;ects which
include their characteristics! sample si4e! sampling methods! research locale of
the study$ It co&ers research instrumentation! and statistical techniques applied in
the treatment of data$
Re*earch De*%n
This study utili4ed the descripti&e method of research$ As widely accepted!
the descripti&e method of research is a factfinding study that in&ol&es adequate
and accurate interpretation of findings$ Descripti&e research descri1es a certain
present condition$ Relati&ely! the method is appropriate to this study since it aims
to descri1e the effecti&eness of internal audit and internal control$ The technique
that was used under descripti&e method is the normati&e sur&ey approach and
e&aluation! which is commonly used to e:plore opinions according to
respondents that can represent a whole population$ The sur&ey is appropriate in
this study 1ecause it ena1les the researcher in formulation of generali4ations$
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The direct data included in these study is questionnaire sur&ey$ The
questionnaire sur&ey respondents were gi&en ample time to assess the factors
that affect the effecti&eness of internal audit and the components of internal
control in the selected national go&ernment agencies in Leyte$
The purpose of employing the descripti&e method is to descri1e the nature
of a condition! as it ta2es place during the time of the study and to e:plore the
cause or causes of a particular condition$
The researcher opted to use this 2ind of research considering the desire to
acquire first hand data from the respondents so as to formulate rational and
sound conclusions and recommendations for the study$ According to %reswell
5+--,8! the descripti&e method of research is to gather information a1out the
present e:isting condition$ Since this study is focused on the effecti&eness of
internal audit and internal control! the descripti&e method is the most appropriate
method to use$
In terms of approach! the study employed quantitati&e approach$ The
quantitati&e approach focused on o1taining numerical findings was used with the
sur&ey method$
Re*pondent* o" the Stud&
The study will ha&e respondents directly from the chosen national
go&ernment agencies in Leyte 5D3ST8$ This include internal audit staffs$ All of
these participants were selected through random sampling$ This sampling
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method is conducted where each mem1er of a population has an equal
opportunity to 1ecome part of the sample$ As all mem1ers of the population ha&e
an equal chance of 1ecoming a research participant! this is said to 1e the most
efficient sampling procedure$ In order to conduct this sampling strategy! the
researcher defined the population first! listed down all the mem1ers of the
population! and then selected mem1ers to ma2e the sample$ For this purpose! a
selfadministered sur&ey questionnaire in Li2ert format was gi&en to the
respondents to answer$
In*tru!ent o" the Stud&
The sur&ey questionnaire was used as the main datagathering instrument for
this study$ The questionnaire was di&ided into two main sections* a profile and
the sur&ey proper$ The profile contains sociodemographic characteristics of the
respondents such as age! gender! the num1er of years they had ser&ed the
company and field of study$ The sur&ey proper e:plored the perceptions of
internal audit staff on personality questionnaire! particularly on its usa1ility and
relia1ility as an employment selection and appraisal tool$ The questions were
structure using the Li2ert format$ In this sur&ey type! four choices are pro&ided for
e&ery question or statement$ The choices represent the degree of agreement
each respondent has on the gi&en question$ The scale 1elow was used to
interpret the total responses of all the respondents for e&ery sur&ey question 1y
computing the weighted mean*
, O %ompletely true 5E@ to =-- true8
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? O 'enerally true 5/= to E/ true8
+ O Partly true 5+@ to /- true8
= O 9ot at all true 5 - to +/ true8
E*ta#$*h!ent o" Va$dt& and Re$a#$t&
Data gathering employed two sets of sur&ey questionnaire for the internal
audit staffs$ They were de&eloped 1y the researcher with the appro&al of the
ad&isory committee$ In order to test the &alidity of the questionnaire used for the
study! the researcher tested the questionnaire to fi&e respondents$ These
respondents as well as their answers were not part of the actual study process
and were only used for testing purposes$ After the questions ha&e 1een
answered! the researcher as2ed the respondents for any suggestions or any
necessary corrections to ensure further impro&ement and &alidity of the
instrument$
The researcher re&ised the sur&ey questionnaire 1ased on the suggestion of
the respondents$ The researcher then e:cluded irrele&ant questions and
changed &ague or difficult terminologies into simpler ones in order to ensure
comprehension$
Stat*tca$ Treat!ent
The researcher will use the following statistical treatment process data*
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Percenta%e) According to A1ergas 5+--@8! This to get the proportion of the
whole$
Formula* Percentage O fH9 : =--
0hen* f . frequency
9 . Population
0eighted #ean$ It refers to the set of data ta2en from the a&erage of the
population 5Broto! +--@8
Formula* 0#O fx
N
0here* 0# . 0eighted #ean
fx . sum of the products of the frequency with weights
9 . sample si4e
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REFERENCES
Adams! #$B$ 5+--,8! Agency theory and the internal audit * #anagerial Auditing
)ournal! ol$ 5>8! pp$>=+
Anderson! ( $ 5+--?8$ Quality Assurance for Internal Auditing! Institute of Internal
Auditors * Altamonte Spring! Florida! ?+E,+$
Arena! #$ and A44one! '$ 5+--8! Identifying 3rgani4ational Dri&ers of Internal
Audit ffecti&eness * International )ournal of Auditing! ol$ =?! ,?@-$
Balna&es #$ and %aputi P$ 5+--=8! Introduction to Quantitati&e Research
#ethods! an in&estigati&e approach* Sage Pu1lications! London!
Thousands 3a2s and 9ew Delhi$
Bou . Raad! '$ 5+---8! internal auditors and a &alue . added approach* the new
1usiness regimeN* #anagerial Auditing )ournal! =/5,8! pp$=>+=>@$
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P a g e | 30
%oram P$ Ferguson! %$ and #oroney R$ 5+-->8! Internal Audit! Alternati&e
Internal Audit Structures and the Le&el of #isappropriation of Assets
Fraud * Accounting and Finance! ,>! pp$/,?/
Dechow! P$ Sloan! and A$p$ Sweeney$ +--@$ %auses and consequences of
earnings manipulations* An analysis of firms su1;ect to enforcement
actions 1y the S%$ %ontemporary Accounting Research =?5=8 * =?@$
Dunn! P$ +--,$ The impact of insider on fraudulent financial reporting$ )ournal of
#anagement ?- 5?8 * ?E . ,=+
Fad4il! F$h$! 6aron! 6$ and )antan! #$ 5+--/8! Internal auditing practices and
internal control system* #anagerial Auditing )ournal! +-5>8! pp$ >,,@@$
6ellman 9$ 5+-==8! %hief Financial 3fficer Influence on Audit Planning*
International )ournal of Auditing! =/5,??8! pp$+,EE,
Institute of internal auditors 5+--=8! Standards for the Professional Practice of
Internal Auditing 5SPPIA8* Audit ToolsH9ewIIAStandards$htm!
"infu! )$ 5+--=8! Accounting and auditing in thiopia* a historical perspecti&e!
proceedings of the First 9ational %onference of thiopia Studies! Institute
of thiopian Studies! Addis A1a1a (ni&ersity! Addis A1a1a! =>++/
"hotari! R$%$ 5+--,8! Research methodology* methods and techniques! +ndd$
9ew Delhi* 9ew Age International 5P8 Ltd$! Pu1lisher$
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P a g e | 31
Leung! P$ and %ooper! B$)$ 5+--8! Internal audit . an AsiaPacific profile and
the le&el of compliance with Internal Audit Standards * #anagerial
Auditing )ournal! +,58! pp$>@=>@+$
Lemma Argaw! 5+---8! Proceedings inaugural ceremony of IIA . %! The State
of internal Auditin in thiopia! The 0ay Forward to Professionalism! pp+=
?E$
Lindow! P$$ and Race!)$D$ 5+--+8! Beyond traditional audit techniques* )ournal
of Accountancy! =,5=8! +??$
#ihret! D$'$ and Jismaw! A$0$ 5+--E8! Internal audit effecti&eness* and
thiopian pu1lic sector case study* #anagerial Auditing )ournal! ++5/8!
,E->,$
#inistry of Finance of conomic De&elopment 5+--,8! Internal Audit Standards
and %ode of thics for Internal Auditors and Internal Audit Procedural
#anual* #inistry of Finance and conomic De&elopment$
9eumann! 0L$ 5+--@8! Social Research methods* Qualitati&e and Quantitati&e
Approaches! Si:th edition! Pearson! Boston$
3
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Reynolds! #$A$ 5+---8! Professionalism! thical %odes and Internal Auditor* A
#oral Argument< ! )ournal of Business thics! 5+,8! ==/=+,$
Sey! #$ 5+-=?8! Importance of internal auditors of a company! %ase* Lintas
'hana limited 7 "asapre2o %ompany limited$
Simple studies 5+-=,8! (RL* www$simplestudies$com
Tysiac! "$ 5+-=,8! Stop using audit failure terms in P%A3B report! (RL* http*HH
www$;ournalofaccountancy$comH9ewsH+-=,>++$htm$
ite4! 3$ 5+-=,8! 0hat are financial management o1;ecti&es! (RL* http*HH
small1usiness$chron$comHfinancialmanagemento1;ecti&es,E+/$html$
0eetman! P$ 5+-==8! Financial Accounting* An introduction! / th ed! Pearson
ducation limited$
PR3BL#* T6 FF%TI9SS 3F I9TR9AL A(DIT A9D I9TR9AL
%39TR3L
Q(STI399AIR F3R I9TR9AL A(DIT STAFFS
I$ PRS39AL DATA S6T
DIR%TI39S* Please pro&ide pertinent information to the items 1elow 1y
chec2ing the appropriate 1lan2 andHor 1y supplying the answer on the 1lan2s
9A# 53PTI39AL8* A'9%J*
P3SITI39*
=$ 0or2ing e:perience as head of agency
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= year and 1elow ===/ years
+/ years =@+- years
@=- years += years and a1o&e
+$ Field of study
Accounting conomics
#anagement 3ther 5specify8
II$ FF%TI9SS 3F I9TR9AL A(DIT A9D I9TR9AL %39TR3L
DIR%TI39S* Indicate the degree to which you thin2 the following
statementsHindicators are true or false$
, O %ompletely true 5E@ to =-- true8
? O 'enerally true 5/= to E/ true8
+ O Partly true 5+@ to /- true8
= O 9ot at all true 5 - to +/ true8
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I9DI%AT3RS , ? + =
I) EFFECTIVENESS OF INTERNAL AUDIT
A) Mana%e!ent Support
=$ I recei&e full cooperation! access to records and
information from my officeHsector
+$ I can get the necessary resources 5facilities8 that help
me to perform auditing acti&ities as needed$
?$ The officeHsector supports me 1y pro&iding training in
order to impro&e my s2ill and update with the field$
,$ The officeHsector supports me to introduce myself with
new technology! policy or procedures when it is
necessary$
/$ The officeHsector supports Internal Auditing staffs 1y
1udgeting funds for certification to ha&e rele&ant
education in auditing that allows them to audit all of the
organi4ationsHsector
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assessment! and consultants 7 ad&iser particularity into
controls associated to management performance and
internal operations$
C) Or%anatona$ ndependence=$ I perform the auditing acti&ities without any
interference from any1ody and without any influence
from the officeHsector$
+$ I freely decide the scope! time and e:tent of auditing
procedures 1ased on auditing standards and the
officesHsectors policy$
?$ I o1;ecti&ely e:amine auditing issues only meeting on
relia1le audit e&idence and no management interest is
in&ol&ed for ad;ustment 1eyond auditing standards 7
&alues$
,$ I feel free to include any audit finding in my audit wor2
and report directly to responsi1le 1ody$
/$I can freely access necessary documents! information
and data a1out the organi4ationHsector for my audit
wor2$
D)The ade2uate co!petent nterna$ audt *ta""
=$ #y officeHsector has sufficient s2illed internal auditors$
#ost of them ha&e certification in auditing$
+$ It is possi1le to audit and re&iew each acti&ity on time!
and co&er the planned scope of auditing acti&ities$
?$ The audit procedures and e&idence collections are
completed on time! since enough and s2illed internal
auditors are a&aila1le or employed$
,$ The internal audit staff num1er 7 their s2ill matches
the scope of officesHsector
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/$ The wor2 of internal audit is performed with modern
technology that uses computeri4ed data tools and
specific IA software
E) The appro(ed nterna$ audt charter=$ Internal audit charter is maintained 5a&aila1le8 in my
office Hsector$
+$ The purpose and authority of internal audit is clearly
defined in charter$
?$ The purpose and authority of internal audit charter is
in line with Standards for the Professional Practice
formulated 1y the Institute of Internal Auditors,$ The IA charter specifies the internal audit acti&ity
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1een communicated so as to pro&ide effecti&e direction
to employees on ris2 assessment and control issues$
+$ #anagement appropriately e&aluates ris2 when
planning for new product or acti&ity$?$ There are sufficient staff mem1ers who are
competent and 2nowledgea1le to manage company
acti&ities and these ha&e 1een pro&ided with adequate
resources$
,$ Technology issues are considered and appropriately
addressed$
Significant internal and e:ternal operational! financial!
compliance and other ris2s are identified and assessed
on an ongoing 1asis$
C) CONTROL ACTIVIT/
=$ Policies and procedures e:ist to ensure critical
decisions are made with appropriate appro&al$
+$ Processes e:ist for independent &erification of
transaction 5to ensure integrity8?$ There is a system in place to ensure that duties are
rotated periodically$
,$ Processes are in place to ensure that policy o&errides
are minimal and e:ceptions are reported to
management
/$ People in the %ompany ha&e the 2nowledge! s2ill and
tools to support them in their duties in order to
effecti&ely manage ris2 and achie&e company
o1;ecti&es$
D) INFORMATION AND COMMUNICATION S/STEMS
=$ There are effecti&e reporting procedures in
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communicating a 1alanced and understanda1le account
of the company
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to ree&aluate ris2s and ad;ust controls in response to
changes in its o1;ecti&es! 1usiness! and e:ternal
en&ironment$