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Great Tips on Establishing an Internal Audit Department

May 22, 2011AccountingNo comments

Great Tips on Establishing an Internal Audit Department

Internal audit has increasingly gained ground recently and companies have found it very usefulin keeping check of systems and procedures, predicting risks and providing recommendations

where there are weaknesses. An entity may opt to fully outsource, co-source internal auditservices or establish an in house internal audit department.

Due to the nature of internal auditing and the company information that the auditors will acquire,

most companies prefer having an in house team with occasional outsourcing of experts inspecific areas.

Developing an internal audit department is an exercise that should be carefully carried out toensure efficiency and acceptability of the department by other stakeholders. Often managers and

sometimes the entire workforce of an entity may develop a general dislike for the audit teamwhere in such circumstances an in house team may not be effective.

However if keeping critical company information under lock and key as well as full

implementation of recommendations is an entitys priority, an internal audit department could bea very powerful agent of change in an organization.

The manner in which the department is set up and the process in which the team carries its tasksis most important. The following are key steps that can be taken to ensure a successful set up of

an internal audit department:

1. Obtain and discuss expectations with senior management, the board and audit committee,including required listing standards for listed companies. Non-listed organizations should

consider voluntary compliance.

2. Develop an audit charter and have it discussed and approved by the audit committee.

3. Design an appropriate budget and staffing model (e.g., in-house, co-sourced or outsourced). In

addition review what companies within your industry are doing while taking into accountcompany preferences.

4. Formulate reporting lines and responsibilities of the internal audit function.

5. Identify the auditable areas within the organization.

6. Conduct an initial risk assessment with company management and audit committeeinvolvement. You may consider COSO enterprise risk management (ERM) framework.

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7. Consider the need to comply with various statutory requirements within your environment forinstance compliance with Sarbanes-Oxley Act for companies in the USA.

8. Develop an internal audit plan responsive to the risk assessment.

9. Design staffing requirements and whether the department will be staffed internally, co-sourcedor outsourced.

10. Plan and execute audit work called for in the audit plan, including a system to monitor and

follow up on audit recommendations.

11. Update the risk assessment for changing circumstances during the year.

12. Continuously enhance and modify the internal audit function to meet changing needs ofmanagement and the audit committee.

Once the department has been set up the head should ensure that the objectives of the departmentare reviewed from time to time depending on the organizational changing needs and risk profile.

The author is an internal auditor in the manufacturing sector with a background of CPA and

Economics.