Practical Guide for Establishing YOUR Internal Auditing Activity Submitted by: Carl Burch, CMA, CIALecturer of Finance

and AccountingMoscow, RussiaCburch@global.t-bird.edu February 2009 Table of Contents ........................................................................................................................................ .......1Introduction .......................................................................................................... ...................5 Governance ................................................................................................................. ........................6Risk Management ................................................................................................................ ...............6Control ........................................................................................................ ........................................7 Internal Audit Start-up Framework .......................................................................................8STEP #1: Review the IIAs Professional Practices Framework .........................................9STEP #2: Understand stakeholders requirements ..........................................................11STEP # 3: Develop an Internal Audit Charter ....................................................................12 Review the Independence and Objectivity of the Internal Audit Function .......................................12 STEP #4: Develop an initial Risk Assessment for your company ..................................15STEP #5: Develop the Audit Plans .....................................................................................16 Strategic Audit Plans: .......................................................................................................................16 Annual Audit Plans: .......................................................................................................................... 17 STEP #6: Build the budget ..................................................................................................19STEP #7: Determine the staffing requirements .................................................................20 Building inhouse: .......................................................................................................................... ..20Fully Outsourcing: ................................................................................................................ ...........20Partial Outsourcing: .........................................................................................................................20Draft ing Job Descriptions: ............................................................................................................... 22 STEP #8: Establish a plan for the development of Staff ..................................................23STEP #9: Communicate the existence of the Internal Audit Function in the Company ........................................................................................................................................ ........24STEP #10: Establish a quality assurance program .........................................................25

Quality Program Assessment: ..........................................................................................................25 Appendix A ...........................................................................................................................27 16-steps to establishing an Internal Audit Shop ................................................................................27 Appendix B ...........................................................................................................................29 Summary Outline of The IIA Standards ............................................................................................29 Appendix C ...........................................................................................................................35 The IIAs Code of Ethics ...................................................................................................................35 Appendix D ...........................................................................................................................38 Audit Committee Charter Sample ..................................................................................................38 Appendix E ...........................................................................................................................41 Sample Internal Audit Charter .........................................................................................................41 Appendix F ...........................................................................................................................44 Schedule of Audit Coverage 2007-09 Sample ................................................................................44 Appendix G ...........................................................................................................................46 Job (Position) Descriptions for Internal Auditing Staff ....................................................................46 Appendix H ............................................................................................................................50 Internal Auditing Department Evaluation Form Sample ..............................................................503

4 Introduction The perception of internal auditing has certainly gone through some drastic changes over the pastdecade or so. To a great extent (unfortunately) this change in perception is owed to the accountingscandals that occurred at the beginning of this century. It seems true that change comes about only when unfortunate incidents occur.These accounting scandals brought attention to the importance of the internal auditing activity for all companies, both private and public. The term internal auditing meant, for most people, inspectors whowent around and checked off and checked on the accuracy of numbers. To most this seems, or seemedpretty boring. Thus, because it was probably not the most prestigious profession it didnt get a whole lotof attention. However, this negative connotation has changed to the point were internal auditing is nowone of the more sought after accounting professions.The Institute of Internal Auditing (IIA) defines the Internal

Audit Activity (IAA) as an independent, objective assurance and consulting activity designed to add value and improve an organizations operations. The IAA is intended to help the organization accomplishits objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management , control and governance processes . 1 Based on the above definition the scope of internal auditing includes:1 ) E n s u r i n g results are consistent with established objectives and goals, a n d o p e r a t i o n s o r programs are carried out as planned.2)Ensuring economical and efficient use of resources. 3 ) S a f e g u a r d i n g a s s e t s . 4)Ensuring compliance with organizational policies, contracts, laws, and regulations. 5 ) A p p r a i s i n g t h e r e l i a b i l i t y a n d i n t e g r i t y o f f i n a n c i a l i n f o r m a t i o n b y e v a l u a t i n g t h e m e a n s developed by management to identify, classify, measure, and report such information.Its obvious that the scope of internal auditing has evolved way beyond simply inspecting or as some would say - bean counting. The increased role of the internal auditor can be attributed to the increasedcomplexity and sophistication of businesses and government operations. Managers realize they arehaving more and more difficulty keeping track of whats going on in their operations, so they need someone whos able to help them make sense of whats going on. This someone most often turns out tobe the organizations internal auditor. Who in the organization is in a better position to know whats going on than the internal auditor?Based on the internal auditors expanded role you could then argue that the term internal auditing or internal auditor does not really properly describe the activity as defined by the IIA. Although, not all int h e a c c o u n t i n g p r o f e s s i o n a r e c o m p l e t e l y c o n t e n t w i t h t h e t e r m i n t e r n a l a u d i t i n g a s u i t a b l e replacement has still not been found. But, the purpose of this document is not to critique the term internal auditing but rather to walk you through the process of getting your internal auditing functionoff the ground. 1 Institute of Internal Auditors, The professional Practices Framework of Internal Auditing (Altamonte Springs, Florida:The Institute of Internal Auditors, 2004), xxvii. 5

There are many different reasons why your organization needs to establish an activity within your organization called Internal Auditing. Perhaps, the reason is for greater assurance for financial reportingpurposes, or perhaps, its to meet regulatory requirements, but whatever the reason, internal auditing isa function that can help your organization accomplish its business objectives. It is the accomplishmentof objectives that separate the successful, and less successful companies.At the beginning of this document, we mentioned that internal auditing helps organizations accomplisht h e i r o b j e c t i v e s t h r o u g h t h e i m p r o v e d effectiveness of their risk management , control and governance processes . These processes are grouped together because of their interrelatedness. Thismeans you cannot review and evaluate any one process without having it related to the others. At thispoint, we dont want to get into too much discussion about these processes; that can come later, but itis important that you be familiar with each term. Governance is the most general term so well start withi t f i r s t . You just need to remember that without proper governance, e v e r y t h i n g e l s e i s m o o t ( o r meaningless). Governance The IIA defines governance as the system by which organizations are directed and controlled. In addition, the IIA goes on to say governance includes the rules and procedures for making decisions oncorporate affairs to ensure success while maintaining the right balance with the stakeholders interest. The four cornerstones of corporate governance are the board, executive management, external auditors,and , of course our favorite, internal auditors. The internal audit function is included as a cornerstone because of its commitment to the improvement of governance. It does this by: 2 1)Promoting appropriate ethics and values within the organization.2)Ensuring effective organizational performance management and accountability.3)Effectively communicating risk and control information to appropriate areas of the organization. 4 ) E f f e c t i v e l y coordinating the activities of the communicating information a m o n g t h e b o a r d , external and internal auditors, and management. Risk Management Risk management is all about identifying, assessing, and managing risks that companies face. When wetalk about risk, we generally think of risk in the negative connotation, for example, the negative impactsomething is going to have on the organization. But the risk is not always negative, risk can also bepositive as well. For example, if a company produces a new product, theres the risk that the new product will fail. On the other hand, theres also the opportunity that the new product will succeed andbe profitable for the company. This opportunity is considered to be a risk.I n r e g a r d s t o r i s k m a n a g e m e n t , the IIA has identified five key objectives in the risk m a n a g e m e n t process. These five objectives are:

3 1)Risks that arise from business strategies and activities are identified and prioritized.2)Management and the board have determined the level of risk acceptable to the organization. 3 ) R i s k m i t i g a t i o n ( r e d u c t i o n ) activities are designed and implemented to reduce, or o t h e r w i s e manage, risk at levels that are acceptable. 2 Standard 2130. 3 Practice Advisory 2110-1. 6 4)Risk is periodically reassessed on an ongoing basis. 5 ) R e p o r t s a r e given periodically to the board and management on the r e s u l t s o f t h e r i s k assessment process. Control Control in its most basic sense is a force that leads to something happening or not happening. It is through control that management is able to achieve its wishes.The IIA says that control is Any action taken by management to enhance the likelihood that established objectives and g o a l s w o u l d b e a c h i e v e d . C o n t r o l s m a y b e preventive ( t o d e t e r u n d e s i r a b l e e v e n t s f r o m happening), detective (to detect and correct undesirable events which happen), and directive (to cause or encourage a desirable event to happen). The concept of a system of control is theintegrated collection of control components and activities that are used by an organization to achieve its objectives and goals. Below are the more common types of controls. Preventive : Segregation of duties, suitable authorization of transactions, c h e c k i n g t h e c r e d i t worthiness of customers before goods are shipped. Directive : Managers of a construction company instructing project managers to hire local workers in order to create a favorable image in the communities in which the company operates. Requiringinternal auditing staff to be certified, possibly as a CIA (Certified Internal Auditor), or CPA (CertifiedPublic Accountant), or some other certification. Detective : Bank reconciliations, checking for missing document numbers in p r e - n u m b e r e d documents, performing variance analysis.There are other definitions of control but you simple need to remember that controls are adequate anduseful if they help your organization achieve its objectives.Now that we have reviewed the basics of internal auditing, its time to start laying the foundation for creating your internal auditing function. For this is the ultimate the purpose of this Paper. So, Where do you begin? You begin

by understanding that the internal audit activity can be anything you want it to be, as long as you have the support of the board and senior management. The critical phrase here is: as longas you have the support of the board and senior management . Getting and maintaining their supportwill be the most critical and hardest issue facing you and your department. Its obvious that without their strong support your chance of success will be severely diminished. 7 Internal Audit Start-up Framework We believe building a successful internal auditing function is a 10-step process. IIA developed its own 16-step process, but we believe our 10-step process is enough to get you to the point were you are ableto plan and conduct an engagement.We first layout the steps and then discuss each one in detail. The 10 steps are: 1)Review the IIAs Professional Practices Framework.2)Understand stakeholders requirements.3)Develop an Internal Audit Charter.4)Develop a risk assessment for your organization.5)Develop the Internal Audit Plans.6)Build the Internal Audit budget 7 ) D e v e l o p a s t a f f i n g p l a n 8)Develop a plan for training, staff development and evaluations.9)Communicate the existence of the internal audit function within the company.10)Establish quality assurance program. Note: See Appendix A for a listing of the IIAs 16-step process for creating an internal audit function. Now, we begin 8

STEP #1: Review the IIAs Professional Practices Framework The best place to begin our journey is by first reviewing the IIAs Professional Practices Framework. Bydefinition, any profession needs to hold its members to a high and consistent level of behavior, and thep r o f e s s i o n o f i n t e r n a l a u d i t i n g is no different. Based on this, the IIA promulgates the Professional Practice Framework that is used as a guide for internal auditors in the performance of their work.The three categories of guidance are:1)The International Standards for the Professional Practice of Internal Auditing ( Standards ),2 ) P r a c t i c e A d v i s o r i e s , a n d 3 ) C o d e o f E t h i c s . Note : A summary of the IIA Standards and Code of Ethics are shown in Appendices B and C .T o g e t h e r t h e s e d o c u m e n t s a r e c o n s i d e r e d t o b e e s s e n t i a l f o r t h e p r o f e s s i o n a l p r a c t i c e o f i n t e r n a l auditing.The Standards

are the criteria by which internal auditors should perform their duties in an organization.There is nothing specifically mentioned by regulators (i.e., PCAOB, NYSE, etc.) 4 in regards to following the IIA Standards , however, given the standing of the IIA as the leading global professional organizationfor internal auditors it simply makes sense that you would want to follow their guidelines. Lets look atthe example below.Lets say your company is planning an IPO (Initial Public Offering) to be offered on the NYSE.One of the requirements of the NYSE is that listed companies have an internal audit function. 5 The NYSE states: Listed companies must maintain an internal audit function to provide management and the auditcommittee with ongoing assessment of the companys risk management processes and system of i n t e r n a l c o n t r o l s . A company may choose to outsource this function to a third party s e r v i c e provider other than its independent auditor. B e c a u s e y o u r c o m p a n y is going public you also need to consider the requirements of theS a r b a n e s - O x l e y A c t o f 2 0 0 2 ( S O X ) . T h e e n a c t m e n t o f S O X w a s i n d i r e c t r e s p o n s e t o t h e accounting scandals at the beginning of the last century. Even though SOX has no requirement fort h e e x i s t e n c e o f a n internal audit function, its perceived that internal auditors can a s s i s t management in meeting their responsibilities of Sections 302 and 404. Section 302 : This section requires management to evaluate and report on the effectiveness of disclosure controls and procedures with respect to the quarterly and annual financial reports. Section 404 : This section requires management to document and evaluate the d e s i g n a n d operation, and report on the effectiveness of its internal control over financial reporting. 4 PCAOB (Public Company Accounting Oversight Board), NYSE (New York Stock Exchange). 5 Having an internal audit function does not necessarily mean having to have an actual department in the organization. Its possible that the function could be outsourced to a service provider. 9

Again, the regulations only mention about the need to have an internal audit function,nothing about following the Standards . But, remember the Standards provide guidanceto be in compliance with regulations. The Standards have the following four purposes:1 )Outline the basic principles that represent the practice of internal auditing, as it should be.2)Provide framework for performing and promoting a board range of value added internal auditing services.3)Establish the basis for the evaluation of internal auditing performance.4)Foster (support) improved organizational processes and operations. The IIA Practice Advisories represent the best practices of implementing the Standards . The PracticeAdvisories are not mandatory and do not represent all of the considerations that may be necessarywhen applying them, but they are simply the recommended stet of items that should be addressed or followed.Finally, there are the IIAs Code of Ethics . Whereas the Standards provide guidance for internal auditorsin the performance of their duties, The Code of Ethics provides an ethical guide for the conduct of internal auditors. 10

STEP #2: Understand stakeholders requirements For this stage we are trying to answer the question, How can the internal audit activity best serve theorganization? In order to answer this question, you need to do a lot of information gathering, and part of this processis to understand the stakeholders requirements. To better understand the stakeholders requirementsyou can do the following: Interview senior management and member of the audit committee . T h i s g i v e s y o u a chance to start building a rapport with the top. As we have already said, without their full and un-mitigating support, the chances of your success are severely diminished. You want to ensurethat they have a clear understanding of the internal audit function. You can then clarify their expectations. Review the audit committees Charter . You want to have clearer understanding of the auditcommittees responsibility regarding internal auditing (see below).Note: See Appendix D for a sample Audit Committee Charter. Review with management and the chief audit executive the charter, activities, staffing,and organizational structure of the internal audit function. Have final authority to review and approve the annual audit plan a n d a l l m a j o r changes to the plan. Ensure there are no unjustified restrictions or limitations, and review and concur in theappointment, replacement, or dismissal of the chief audit executive. At least once per year, review the performance of the CAE and concur with the annualcompensation and salary adjustment. Review the effectiveness of the internal audit function, including compliance with TheInstitute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing. On a regular basis, meet separately with the chief audit executive t o d i s c u s s a n y matters that the committee or internal audit believes should be discussed privately. Meet with the external auditor . The external auditors would be in a good position to advise youon some of the problems they have identified during their own reviews. Coordination between theinternal and external auditors is an important issue for the internal auditing function and this is a good method to start developing a good, working relationship. Meet with other stakeholders

, including operations managers . During these meetings you can get a better feel for their risks and concerns. 11

STEP # 3: Develop an Internal Audit Charter After gathering all of the necessary information during the second stage, you should now be in a positionto develop the Internal Audit Charter .During this stage you will be working with the board and senior management to articulate the mission for internal audit.It is the Charter that lets internal auditors do their work. It will probably be the CAE to write up the draftCharter, but for it to mean something it has to be approved by senior management and accepted by theaudit committee. After its approval and acceptance, it then needs to be communicated to people withinthe company.The Charter should define the following items in respect to the internal audit activity:1 ) T h e scope of the services (i.e., assurance and consulting) and work to be performed,2 ) T h e objectives of the function,3 ) T h e authority of the function to access records , personnel and physical properties in the organization,4 ) T h e accountability of the function, and5 ) T h e responsibility of the function.Note: See Appendix E for a sample Internal Audit Function Charter. This sample Charter was adaptedfrom the one posted on the IIA website (www.theiia.org).O f c o u r s e , n o C h a r t e r c a n possibly encompass all of the activities that could be possible, so w h e n tailoring your Charter, just make sure it fits your companys needs. Also, you need to recognize thateven though the Charter is a formal and approved document (approved by senior management and accepted by the audit committee), it is not a document that is unchanging. In the beginning you shouldreview the document at least annually (and more often as circumstances may require) to ensure that itis still relevant and addresses the needs and issues that the organization and the internal audit activityare facing. It may be good to include all of the activities you think you might want the internal auditfunction be involved in, in the coming two to three years. This does not mean you have to do these activities, only that you could if the need arose.O n e o f t h e i m p o r t a n t t h i n g s t o r e m e m b e r w h e n d e v e l o p i n g t h e C h a r t e r i s t o m a k e s u r e t h a t y o u r function maintains its independence and objectivity. We look at these terms below. Review the Independence and Objectivity of the Internal Audit Function Independence:

The function is a unique function within the organization. It is not part of the organizations regular management structure and as such does not play a management role within the organization. Ideally,you want the internal audit activity to functionally r e p o r t t o t h e A u d i t C o m m i t t e e o f t h e B o a r d o f Directors, and administratively to the CEO or some other designated management person. Why is this? As with external auditors, internal auditors need to be protect their independence from anyundue internal management pressure. This means that the internal auditor should be able to perform its 12

work freely and objectively without having to worry about individuals or groups within the organizationinfluencing or affecting what it is trying to do. Functionally reporting to the Audit Committee or some other governing authority means that they are responsible for: Approving the functions Charter. Approving the internal audit risk assessment and related audit plan, Receiving communications from the CAE on the results of the function or other private meetings with the CAE without management present. Approving decisions regarding the appointment or removal of the CAE, and Making appropriate inquiries of management and the CAE to determine whether there are scope orbudgetary limitations that impeded the ability of the function to execute its responsibilities.Now , when we are talking about independence, we know that you are not go to be as independent as say your companys external auditor because, one, it is management that is going to be involved in theapproval of your budget, and two, if you need to buy some office supplies, youre not going to go to theaudit committee to get approval for the expenditures. For issues like this you should go to someone inadministration, perhaps the chief financial officer.Administrative reporting typically would include: Setting the budget for the function, Having the HR department administer personnel evaluations and compensation,

Monitoring internal communications and information flows, and Administering the organizations internal policies and procedures.The idea of independence is not to be taken lightly. Its this idea of independence that differentiates internal auditing from the other departments within your organization.When looking at independence you might want to consider seeking some external assistance in makingsure the function is truly, as best it can, independent. External auditors might be in a good position to review the independence and objectivity of the internal audit activity. To some extent, external auditorsalso have some sake in the establishment of a well-run internal audit function. Its possible that the external auditors may rely on some of the work of the internal auditors; so therefore, they want to havesome comfort that the work of the internal auditors is not being manipulated. But their willingness to rely on some of the work will be diminished if they feel the internal audit function lacks independence, orobjectivity. Objectivity: What we mean by objectivity is that you, as an internal auditor, have to be able to remain objective when conducting your work. You should1) Impartial .2 ) H a v e a n unbiased attitude , and3) Avoid conflicts of interest . 13 Being objective means that the conclusions or opinions that you are drawing are based solely on facts athand , and are not influenced by feelings, emotions, relationships with others, monetary bribes or any other outside influence. Impairment of Objectivity: When we talk about objectivity you need to keep in mind others perception of whether the internal a u d i t o r i s b e i n g o b j e c t i v e o r n o t . For example, if the internal auditor accepts a gift or money of significant value from the client, objectivity would be perceived to be impaired even if the auditor, in fact, was objective.Also , objectivity is assumed to be impaired if an auditor performs an assurance review of any activity over which he or she has recently had responsibility. Individuals who are assigned to or transferred toy o u r d e p a r t m e n t s h o u l d n o t a u d i t a r e a s w h e r e t h e y w o r k e d u n t i l a r e a s o n a b l e p e r i o d o f t i m e h a s elapsed. Based on the IIA Standards , the amount of time is about one year. 14 STEP #4: Develop an initial Risk Assessment for your company Risk assessment is the systematic process of assessing and integrating professional judgment aboutprobable adverse conditions and/or events. The questions should always be asked: What could go wronghere? What assets do we need to protect? By answering these questions you can then understand themeans of controlling the risks.The COSO study, Internal Control-Integrated Framework

, summaries risk assessment in the following way: 6 Every entity faces a variety of risks from external and internal sources that must be assessed.A pre-condition to risk assessment is the establishment of objectives, linked at different levels and internally consistent. Risk Assessment is the identification and analysis of relevant risks toachievement of objectives, forming a basis for determining how the risks should be managed. B e c a u s e e c o n o m i c , i n d u s t r y , r e g u l a t o r y a n d o p e r a t i n g c o n d i t i o n s w i l l c o n t i n u e t o c h a n g e , mechanisms are needed to identify and deal with the special risks associated with change. The assessment of risks starts by developing the audit universe , or list of all auditable entities. Thiswould be a compilation of the subsidiaries, business units, departments, groups, processes, or other established subdivisions of an organization that exist to manage one or more business risks.The assessment of risk involves determining the volume of transactions and the average dollar amountper transaction, the dollar value of assets that are exposed to loss, as well as the probability that a losswill occur.The company objectives must be established before risks can be assessed. Risk assessment forms thebasis for determining how risks (both internal and external) should be managed. External risks include changes in technology, changes in the market in which an entity operates,new legislation bringing new requirements, natural disasters, economic changes, a failure of a keysupplier, or being sued, defrauded, or robbed. Internal risks include employee embezzlement accompanied by falsification of records to concealthe theft; lack of compliance with government regulations; or other illegal acts by employees, suchas taking a bribe. Internal risks can also include disruption in computer systems, poor managementdecisions, errors, or accidents. Changes in management responsibilities can affect control activities;and an ineffective board or audit committee may leave openings for fraudulent actions on the part of anyone within the company. 6 Committee of Sponsoring Organization of the Treadway Commission, Internal Control-Integrated Framework,Executive Summary, page 3. 15 STEP #5: Develop the Audit Plans Based on the IIA Standards 7 The CAE should establish risk-based plans to determine the priorities of the internal audit activity, consistent with the organizations goals. The function of the audit plan is to put into writing the audit goals, schedules, staffing needs, andreporting . The plan should also demonstrate that audit resources are used efficiently and effectively.Based on this, we can see that audit plans are a good method of promoting internal auditing in the company.Even though, audit plans are designed to act as a guide or roadmap for your company when you do theaudits, you need to remember that the plans are not

written in stone and might be modified during anaudit if circumstances require it.T h e a u d i t p l a n s h o u l d b e p r e p a r e d at least annually , but it is highly recommended to develop strategic audit plans as well. The primary purpose of the strategic plans is to ensure sufficient internalaudit coverage. Strategic Audit Plans: Strategic means in the future, so this plan would show your audit coverage going out two, three or moreyears. Developing this long-term plan is something you should not take lightly.Sawyer 8 identifies 6 purposes of the strategic plan. These are:1)To provide a guide for your internal audit department, 2 ) T o p r o v i d e a b a s i s f o r y o u r b u d g e t r e q u e s t , 3)A way of involving management and the board in audit planning,4)Provides the standard by which you can measure the accomplishments of your department,5)A means to show management and the board that your department is under competent control, and6)A notice to the external auditor of proposed audit coverage. Sawyer 9 also outlined some of the basic elements that every strategic plan s h o u l d c o n t a i n . T h e s e elements are:1 )All the operations of the company should be analyzed for auditability and potential risks. 2 ) E a c h organizational component should be analyzed as to specific objectives, performancestandards, and controls. Proposed audit h o u r s s h o u l d b e a l l o c a t e d e a c h o f t h e i d e n t i f i a b l e elements constituting an audit project.3 )Relative risks should be assessed, taking into account the objectives of internal control set forth in the Standards : 10 7 Standard 2010. 8 Sawyers Internal Auditing, 5 th Edition, page 945. 9 Sawyers Internal Auditing, 5 th Edition, page 947. 10 Standard 2120.A1. 16 Reliability and integrity of information. Compliance with internal and external rules and regulations. Safeguarding assets. Economical and efficient use of resources.

 Achievement of established organizational objectives and goals.The big issue for the strategic plan is to make sure that all areas of the company are audited at leastperiodically . Without such a plan, it is possible that a certain area would never be audited because it does not meet the requirements for the annual audit.Now, we want to look at the annual audit planning process. Annual Audit Plans: The CAE has the responsibility to develop the annual audit plan based on the assessment of risk and theexposures that may affect the company. Based on risk and exposure the CAE can prioritize the activitiesto be audited. You just need to make certain that the plans are consistent with the Charter and with thegoals of the company. How do you determine which engagements to conduct? Its ultimately the responsibility of the CAE to determine which engagements are to be performed. Sometimes it may come down to the judgment of the CAE in making this decision.Other factors to consider when prioritizing are: The length of time since the last engagement was performed in the area; Request from senior management, the audit committee or other governing bodies; An engagements relation to the external audit; Changing circumstances in the business, operations, programs, systems or controls; Changes in the risk environment or control procedures in the department; The potential benefit that could be achieved from the engagement; and Changes in the skills of the available staff (it may be that a new employee has new skills, or traininghas given a staff member new skills) because new skills may enable conducting different types of engagements.N o t e : I n t h e development of audit plans, it is generally recommended to leave s o m e t i m e f o r management request (usually about 10%).We have already mentioned that the primary factor in prioritizing engagements is risk. When we discussr i s k a s s e s s m e n t , y o u n e e d t o r e m e m b e r t h a t t h e r e a r e t w o t y p e s o f a s s e s s m e n t s , q u a n t i t a t i v e (numerical) assessments as well as qualitative (characteristics) assessments. Quantitative assessmentswould include the dollar value of the assets at risk or the potential loss, while qualitative includes thingssuch as the risk in the area of fraudulent behavior or the importance of the section to the operations of the business as a whole. 17

One way to measure the extent of risk in different areas is to multiply the dollar amount that is at risk of loss by the percentage chance of the loss occurring. In this way, the CAE is able to address the fact thatwhile petty cash is at great risk because it is cash that is, in essence, available to everyone in the organization, there is not much cash at risk at any one time because there is never much cash in pettycash at any point in time. When combining these factors, petty cash is probably a lower priority when compared to an area

where there is a lower risk of loss, but the loss value would be much greater.The above discussion has focused on a monetary measurement. However, there are also risks that arenot related to the assets of the company or a specific monetary amount that also need to be assessed.For example, control procedures (or, more accurately, lack of control procedures) may also be an area of risk that would need investigation.Note : See Appendix F for a sample Schedule of Audit Coverage for a three-year period. T h e difference between this 3-year plan and the annual plan is that the annual plan would include the timing of the audits, and possibly the assigned personnel. 18

STEP #6: Build the budget You are going to build your internal audit budget based on the results of the risk assessment and auditplan . The internal audit budget must be sufficient to so you can deliver a risk-based plan developed during the fifth stage. The amount that you are going to budget to achieve your objectives will be drivenby the audit plan, organizational structure, and staffing strategy.In 2004, the IIA conducted a random survey of 730 companies to get an idea of what companies spendto support their internal auditing functions (see Exhibit 1 ). The survey identified a general range of 0.03% to 0.22% of revenues for an internal audit budget. The percentage goes up to 1.33% of revenuefor companies with revenue of less than 100 million USD.The following information below was provided by The IIA Global Auditing Information Network (GAIN ) Reports: Exhibit 1 Average Internal Audit Cost By Revenue Revenue Range Internal AuditStaff CountAverageRevenueAverage InternalAuditAverage InternalAudit as % of Revenue< $ 1 0 0 M 3 $ 3 6 , 9 0 0 , 2 5 4 $ 2 7 7 , 8 8 4 1 . 3 3 % $ 1 0 0 $ 5 0 0 M 4 $ 2 1 8 , 5 7 6 , 7 3 6 $ 4 7 4 , 4 2 9 0 . 2 2 % $ 5 0 0 M $ 1 B 7 $ 7 5 5 , 2 7 1 , 7 3 5 $ 9 4 5 , 4 3 2 0 . 1 3 % $ 1 B $ 5 B 1 2 $ 2 , 4 9 0 , 6 8 3 , 2 9 7 $ 1 , 7 6 9 , 8 9 0 0 . 0 7 % $ 5 B $ 1 5 B 2 3 $ 9 , 2 2 9 , 5 9 4 , 0 1 6 $ 3 , 7 2 0 , 1 5 6 0 . 0

4 % > $ 1 5 B 7 4 $ 4 1 , 3 4 7 , 9 6 5 , 7 4 3 $ 1 1 , 6 7 8 , 4 2 3 0 . 0 3 % Source: The IIA Global Auditing Information Network (GAIN).For more information visit website:www.theiia.org/gain You will have two classifications of costs in the internal audit budget: Capital expenditures and Administrative expenses .1) Capital Expenditures include costs for purchasing desktop computers, notebooks, printers, copy machine, cell phones, office furniture, etc.2) Administrative costs could include the following: The salary of the CAE. The salary of remaining auditors. Travel expenses. This could be a significant cost, particularly, if your company has multiple locations. IT support costs. Office equipment repair costs. Office supplies. General office maintenance costs. 19

STEP #7: Determine the staffing requirements The CAE needs to make sure his or her staff is professional. This means having the right people in theright positions. This follows along the idea that its better to be understaffed then to hire the wrong people who could very quickly ruin the creditability of your department. But, the CAE does need to beconcerned about not meeting the regulatory requirements, e.g., NYSE, SarbanesOxley, and others. What staffing options do you have? In our earlier example, the company is going to float an IPO on theNYSE. In this case, the company is mandated to have an internal audit function. Again, listed companiesmay choose to outsource this function to a third party service provider other than its independent auditor.Based on this requirement, you have three alternatives. You can: (1) build the IAA in-house, (2) fully outsource the IAA, or (3) partially outsource the IAA. Building in-house: This alternative tends to be the more traditional way of creating and building internal audit activities.Advantages to this approach can include the ability to groom employees for future needs within thecompany . The company also has the advantage of having staff available on a permanent basis whounderstand the culture, structure, and practices of the company. In addition, the full-time staff is in a position to further develop specialized skills through professional certification programs (i.e., CIA, CFSA,CISA, and others), which further professionalizes the department. Fully Outsourcing: Outsourcing is generally defined as contracting out the IAA to others who are not employees of thecompany . There are a variety of reasons why a company may consider fully outsourcing the internal auditing function, including: Saving time having to staff the function, Having the opportunity to have an operational function immediately, Having access to varied skills and resources, and Potentially providing greater independence and objectivity. This is because they would not be onstaff of the company.

What could be a disadvantage of outsourcing? One disadvantage could be that since the contractedauditors are not part of the company they might not have the loyalty to the company has inhouse auditors. Also, in-house auditors would be more familiar with the business environment of the company,and thus, be in a better position to help the company. Finally, internal auditing is supposed to be a valueadded function, but if executive management and the board are not a 100% on board, then outsourcingcould limit the benefits of the IAA. Partial Outsourcing: Even with fully developed in-house internal auditing staff, its unlikely you will have the capability to provide complete audit coverage. In these cases, you should consider partially outsourcing to an outsideorganization that can provide specialized skills so you can meet your objectives.For example, if your company offers a pension plan then it is not unusual for an actuary to be hired tolook at the reasonableness of future pension liabilities. Or, if your company produces environmental 20 waste , it might be good to hire an outside firm to look at compliance with environmental laws. You should never think that your department has to be specialist in every area of the organization. It is justnot realistic to think so.When deciding whether to hire in-house, outsource or possibly do both, you need to ask yourself:1 )What are the priorities for the internal auditing function? If you build in-house, can to hire the staff that can handle the work? Can they do the work professionally, and get it done on time?2 ) I f y o u o u t s o u r c e , c a n y o u improve the effectiveness of your department? What are the longterm implications? Will outsourcing save the company funds? How about long-term needs?3 )Can you source staff internally on a part-time basis to help meet the departments objectives?For example, if you had scheduled an environmental audit for the current period, perhaps the c o m p a n y h a s a n experienced environmental engineer who could help with the a u d i t . A n important issue with this is to make sure the employee maintains his or her objectivity.The CAE simply needs to realize that outsourcing is a viable option. The company has particular needsa n d c o m p l i a n c e d e a d l i n e s a n d t h e s e factors will dictate whether building, outsourcing, or using a combination of both is right for your company. Each option has its benefits and risks so an analysis should be conducted to determine which option is the right option.Some of the things to consider in your analysis are: 11 Independence of the service provider. Allegiance of in-house versus external service provider. Professional standards followed by the service provider. Qualifications of the service provider. Staffing training, turnover, rotation of staff, management. Flexibility in staffing resources to meet engagement need or special request.

Availability of resources. Retention of institutional knowledge for future assignments. Access to best practices or insight to alternative approaches. Culture of the company receptiveness to service providers. Coverage of remote locations (if relevant). Coordination with in-house internal audit services. Coordination with external auditors. Use of internal auditing as a training ground for internal promotions. Retention, access to and ownership of working papers. Acquisition and availability of specialty skills. Cost considerations. Good standing membership in an appropriate professional organization. 11 IIA Position Paper on Resourcing Alternatives for the Internal Audit Function, 6/20/05. 21 Drafting Job Descriptions: By drafting descriptions, it will be much easier for you to determine whether your department is properlystaffed . Having good job descriptions is also an important basis for the recruitment and promotion of staff.In Appendix G we have drafted sample job descriptions for the various internal auditing positions. Weincluded job descriptions for the positions: Chief Audit Executive Internal Auditing Manager Internal Auditing Senior Supervisor Internal Auditor SupervisorIts unlikely you would have the resources available to initially fill these positions, but again you alwaysneed to be thinking beyond current needs. 22 STEP #8: Establish a plan for the development of Staff Once youve hired the staff, staff development will be an important part of the longterm success of yourdepartment. Staff development consists of training , counseling

and performance evaluations .Training needs to be provided with the goal of providing the staff with the necessary skills to perform t h e i r j o b s i n t h e s h o r t t e r m , a n d a l s o to develop and broaden their skills for their longt e r m development . Individuals often see training as a benefit and a welldeveloped training program is an excellent recruiting tool for the company.Individuals personal desires should be considered, but are not the only consideration. This means that iti s p o s s i b l e t h a t p e o p l e w i l l b e t r a i n e d , o r a s s i g n e d t o , a r e a s a n d e n g a g e m e n t s t h a t t h e y a r e n o t personally interested in.H o w e v e r , n o t o n l y s h o u l d t r a i n i n g b e n e f i t t h e i n d i v i d u a l , i t s h o u l d a l s o h e l p t h e f u n c t i o n m e e t i t s organizational goals. As such, some staff may be trained in areas where the function does not currentlyhave skills, but which are required in the company. Counseling , or mentoring , is a growing element of staff development. The CAE has a responsibility forcounseling and assisting staff members in their growth in the organization. This is not to say that the CAE is supposed to have weekly counseling sessions with each member, but the CAE has a responsibilityto step in as needed. In a large internal audit department, there may be a formal counseling/mentoringprogram and, in this case, the CAE most likely is responsible for the oversight and management of theprocess. Additionally, the CAE may be the counselor for some of the higher-level staff members in thedepartment. Performance appraisals should be performed at least annually, and more often if needed. T h e performance evaluations need to focus on the skills that are necessary for the individual to perform theirwork and for IAA as a whole to perform its duties. These staff evaluations should be seen as a means of g i v i n g i n t e r n a l a u d i t employees the opportunity to identify their weaknesses and give t h e m a n opportunity to improve their performance. The evaluation should not be based on personal likes or dislikes or other non-job related factors. This is particularly true when the evaluation is an engagementevaluation of their work on a specific job, and not an annual evaluation.There should be sufficient time to allow everyone to prepare for conducting the annual evaluation. Thisusually involves the auditor and the manager both filling out the evaluation form and preparing for themeeting. The meeting should be scheduled when both parties are not pressed for time so that anythingthat arises during the evaluation can be discussed and addressed without one person trying to hurry through the evaluation because of other commitments.The performance evaluation form can be a standard form (and will be a standard form in large companies)because this provides focus to the evaluation on the areas that are most important. However, for thisprocess to work as well as possible, the evaluation needs to be carefully thought through by the evaluatorand should not include standard comments that are applicable to everyone. Examples and specific references to events should be provided and included whenever possible.Note: See Appendix H for a sample internal auditing evaluation form. 23

STEP #9: Communicate the existence of the I n t e r n a l A u d i t Function in the Company This next step seems obvious, but it is a very critical part of establishing the internal audit function in the organization. You have to have some level of confidence that when you actually start your work youwill have the complete cooperation of the employees and departments in the organization. Without theircomplete cooperation, you just wont be able to do your work.W h e n management communicates the existence of the internal auditing a c t i v i t y t h e y s h o u l d b e promoting the function as a management orientated resource, not a futile exercise. If they do this , internal auditors have a better chance of getting what they need.Sawyer listed some ways for management to market the internal audit function. 12 Brochures . An easily read non-technical booklet can go a long way toward removing the mysteryand hence the fear from internal auditing. Bulletins/newsletters . Bulletins can highlight urgent, current findings. Newsletters can b e anecdotal and hence easily understood without getting into internal audit jargon. Organization publications . These often include human interest stories on employees. And a well-written story might be accepted and useful in showing the human side of internal auditing. Organization programs . Many organizations sponsor civic or charitable activities. Helping to leadone of these will present internal auditors in a favorable light. Open house/open door . Hosting an open house lets internal auditors meet operating personnel under relaxed circumstances. Client vs. auditee . In both written and oral statements it is preferable to refer to the people beingaudited as clients or customers. Advisory board . To develop an interchange of information about organization reorganization , changes, and developments, develop an advisory board of operating managers, chaired by the chief audit executive. Subjects discussed could relate to risk exposures and potential problems. The boardis advisory only but can augment the approach to what and when to audit. Pre-audit meeting . This is good way to start building a relationship with the client. During the m e e t i n g y o u c a n e x p l a i n i n t e r n a l a u d i t i n g a n d i t s t r u e f u n c t i o n o n e t h a t i s m o r e t h a n t h e mysterious resident critic. Risk rating . This has generally been regarded as a one-dimension, internal audit function. But bypromoting liaisons between internal auditors and selected operating people, it can be developed intoa problem solving partnership.

 Post audit questionnaire . Properly used, the questionnaire can be a valuable quality assurance tool. Client opinions can help fine-tune the audit process. Client training . This can include courses for client personnel and a period of actually working in the internal audit function for top-level new hires who are destined for management positions. Thiscan offer hands-on training in assessing internal controls and valuable experience when the traineestake on the jobs they were hired for. Quality programs . Internal auditors can be in the forefront of the quality quest sweeping the country. Audit reports receive wide distribution in the organization and should be quality-oriented tofoster the attitude of doing it right the first time. 12 Sawyers Internal Auditing, 5 th Edition, pages 861-862. 24 STEP #10: Establish a quality assurance program Our final stage is the establishment of a quality assurance program. It is through this program that wewill be able to measure the success of the internal audit activity.At this point, you might be asking yourself, So, whos going to be auditing the internal auditors? The answer, in short is, they will be auditing themselves . So, how can internal auditors, audit themselves? Y o u d o t h i s b y b e i n g o b j e c t i v e a n d b y b e i n g professional. The role of auditing the internal auditing function falls on the shoulders of the CAE.According to the Standards : 13 The CAE should develop and maintain a quality assurance and improvement program (QAIP) that covers all aspects of the internal audit activity and continuously monitors its effectiveness. Thisp r o g r a m i n c l u d e s p e r i o d i c i n t e r n a l a n d e x t e r n a l q u a l i t y a s s e s s m e n t s a n d o n g o i n g i n t e r n a l monitoring . Each part of the program should be designed to help the internal auditing activity addvalue and improve the organizations operations and to provide assurance that the internal audit activity is in conformity with the Standards and the Code of Ethics . Thus, it is the QAIP that justifies the internal audit activity, but it will be the CAE doing the justifying. Therefore, the internal audit function is really auditing itself. But, as we will see later this is only partiallytrue. Quality Program Assessment:

The CAE will be responsible for the implementation of a quality program, the monitoring of that qualityprogram and the assessment of the quality of the program. The quality program should include both internal and external assessments.The function of these internal and external assessments is for the company stakeholders 14 to feelcomfortable with the services the IA function is providing to t h e o r g a n i z a t i o n . T h e y r e a s k i n g t h e question Is the internal auditing function contributing to the overall success of the organization? Quality program assessments should include evaluation, if appropriate, of: 15 Compliance with the Standards and Code of Ethics, including timely corrective actions to remedy any significant instances of noncompliance, Adequacy of the IAAs charter, goals, objectives, policies, and procedures, Contribution to the organizations governance, risk management and control processes. Compliance with applicable laws, regulations, and other governmental or industry standards, Effectiveness of continuous improvement activities and adoption of best practices, and Whether the auditing activity adds value and improves the organizations operations.The results of these assessments will then be provided to the abovementioned stakeholders.A p r o b l e m t h a t c a n o f t e n a r i s e w h e n d o i n g q u a l i t y p r o g r a m a s s e s s m e n t s i s t h a t q u a l i t y c a n m e a n different things to different people. This is particularly true of service operations such as the internalaudit function. For example, the internal audit department may be conforming to the Standards , but 13 Standard 1300. 14 By stakeholders, we mean top management, audit committee, and external auditors. 15 Practice Advisory 1310-1. 25 that doesnt mean its operating in an effective or efficient manner. To resolve this potential problem , organizations develop quality circles

.A quality circle is a group of employees (anywhere from five to 15 employees) who are intimately familiar with an operation and are brought together to improve quality and productivity. They do this bystudying the operation, or problem, making recommendations, and depending on the operation, they may have the authority to implement recommendations.Q u a l i t y circles frequently use benchmarking as a means to improve quality and productivity. Benchmarking is the process of a company using the standards set by other companies as a target or model for its own operations. (This is also called best practices .) It is the process of continuously tryingto emulate (imitate) the best companies in the world. By striving to meet the standards of the bestcompanies , an organization may be able to create a competitive advantage by achieving a higher standard than its competitors. Benchmarking can use both financial (profit margin) and non-financial (%of defects).The company that is used as the benchmark does not necessarily need to be in the same industry as thecompany that is trying to improve. 26 Appendix A 16-steps to establishing an Internal Audit Shop Source:http://www.theiia.org Step 1 : Establish the authority of the internal audit activity and review the new definition of i n t e r n a l a u d i t i n g a n d t h e International Standards for the Professional Practice of Internal Auditing ( Standards ) to become familiar with what is required. Step 2 : Interview senior management and board of directors/audit committee chairman tobuild rapport to ensure those at the top have a clear picture of the internal audit function, and to clarifyexpectations of all. Use this opportunity to quickly learn and address what management and the boardview as the greatest risks to the organization, while keeping in mind issues, problems, and opportunitiesthat have already been identified. Develop a system for cataloging such information, including date andname of person interviewed for quick reference. Step 3 : Obtain and review the audit committee charter . O f c o u r s e , n o s a m p l e c h a r t e r encompasses all activities that might be appropriate to a particular audit committee, nor will all activitiesidentified in a sample charter be relevant to every committee. Accordingly, this charter must be tailoredto each committees needs and governing rules. Step 4 : Understand benchmarking needs , i.e., industry, specialty groups, organizations with sames t a f f s a m e , e t c . A s k senior management who they consider to be leaders and laggards

i n y o u r organizations market niche. Check out IIAs GAIN services. Review past GAIN surveys. Step 5 : Obtain and review your organizations written policies and procedures , especially thepolicy pertaining to managements responsibility to control the organization. Step 6 : Discuss with external auditors open and closed internal control issues , which they mayhave identified during their reviews. Step 7 : Start to develop the audit universe, or the list of all auditable entities. Step 8 : Map the map processes/operations within your organization . M e e t w i t h o p e r a t i o n s manager, including those in information technology, in order to understand their risks and concerns. Step 9 : Develop a risk assessment for your organization . T h i s s h o u l d b e a m a c r o - l e v e l assessment, which includes both external and internal risk factors. Step 10 : Develop a charter for Internal Audit . Ensure that both senior management and the auditcommittee review and approve the charter. 27 Step 11 : Build the budget , including personnel and travel. Step 12 : Based on your risk assessment, develop an audit plan . The amount of the plan that canbe accomplished in the allotted time period (usually a year) will depend on the risks identified and theinternal audit resources and staff. You should always leave time in your audit plan for management request (usually 10 percent). Step 13 : Hire your staff and develop a plan for staff training . Ensure your staff covers the rangeof expertise needed based on your risk assessment. You may also consider outsourcing portion of youraudit plan to outside service providers or using professionals internal to the organization. Step 14 : Endure that senior management notifies other departments of your existence

andcalls for complete cooperation. Step 15 : Work with management to establish best-practice reporting relationships , to ensureinternal audit is promoted throughout the organization, and to develop a methodology for following up on audit recommendations and measuring performance. Step 16 : Establish quality assurance program . 28 Appendix B Summary Outline of The IIA Standards The professional Standards consist of Attribute Standards , Performance Standards and Implementation Standards . Attribute Standards are concerned with the characteristics of the organization and the parties who will be performing the audit activities. Performance Standards describe the internal audit activities and criteria against which t h e performance of these services can be evaluated. Implementation Standards apply to the specific types of engagements such as assurance (A) orconsulting (C). For example, Standard 1000 consist of implementation standards 1000.A1, and 1000.C1. ATTRIBUTE STANDARDS 1000 - Purpose, Authority, and Responsibility The purpose, authority, and responsibility of the internal audit activity should be formally defined in an i n t e r n a l a u d i t c h a r t e r , c o n s i s t e n t w i t h the Definition of Internal Auditing, the Code of Ethics, and the Standards. The chief audit executive must periodically review the internal audit charter and present itto senior management and the board for approval 1010 Recognition of the Definition of Internal A u d i t i n g , t h e C o d e o f E t h i c s , a n d t h e Standards in the Internal Audit Charter The mandatory nature of the Definition of Internal Auditing, the Code of Ethics, and the Standards must be recognized in the internal audit charter. The chief audit executive shoulddiscuss the Definition of Internal Auditing, the Code of Ethics, and the Standards with seniormanagement and the board.

1100 Independence and Objectivity The internal audit activity should be independent, and internal auditors should be objective in performingtheir work. 1110 - Organizational Independence The chief audit executive must report to a level within the organization that allows the internal auditactivity to fulfill its responsibilities. 1111 Direct interaction with the Board The chief audit executive must communicate and interact directly with the board. 1120 - Individual Objectivity Internal auditors must have an impartial, unbiased attitude and avoid conflicts of interest. 1130 - Impairments to Independence or Objectivity If independence or objectivity is impaired in fact or appearance, the details of the impairment should be disclosed to appropriate parties. The nature of the disclosure will depend upon the impairment. 29

Note: When used in these Standards, the term "board" is defined as a board of directors, audit committee of such boards, head of an agency or legislative body to whom internal auditors report, board of governors ortrustees of a nonprofit organization, or any other designated governing bodies of an organization. 1200 Proficiency and Due Professional Care Engagements must be performed with proficiency and due professional care. 1210 - Proficiency Internal auditors must possess the knowledge, skills, and other competencies needed to perform their individual responsibilities. The internal audit activity collectively must possess or obtain the knowledge, skills, and other competencies needed to perform its responsibilities. 1220 - Due Professional Care

Internal auditors must apply the care and skill expected of a r e a s o n a b l y p r u d e n t a n d c o m p e t e n t internal auditor. Due professional care does not imply infallibility. 1230 - Continuing Professional Development Internal auditors must enhance their knowledge, skills, and other competencies through continuing professional development. 1300 - Quality Assurance and Improvement Program The chief audit executive must develop and maintain a quality assurance and improvement program that covers all aspects of the internal audit activity. 1310 Requirements of the Quality Assurance and Improvement Program The quality assurance and improvement program must i n c l u d e b o t h i n t e r n a l a n d e x t e r n a l assessments. 1311 - Internal Assessments Internal assessments must include: Ongoing reviews of the performance of the internal audit activity; and Periodic reviews performed through self- assessment or by o t h e r p e r s o n s w i t h i n t h e organization, with knowledge of internal auditing practices . 1312 - External Assessments External assessments must be conducted at least once every five years by a qualified, independentreviewer or review team from outside the organization. The chief audit executive must discuss withthe board: The need for more frequent external assessments; and The qualifications and independence of the external reviewer or review team, including any potential conflict of interest. 1320 - Reporting on the Quality Assurance and Improvement Program The chief audit executive must communicate the results of the q u a l i t y a s s u r a n c e a n d i m p r o v e m e n t program to senior management and the board. 30

1321 - Use of "Conforms with the International Standards for the Professional Practiceof Internal Auditing " The chief audit executive may state that the internal audit activity conforms with the International S t a n d a r d s f o r t h e P r o f e s s i o n a l P r a c t i c e o f Internal Auditing o n l y i f t h e r e s u l t s o f t h e q u a l i t y assurance and improvement program support this statement. 1322 - Disclosure of Noncompliance When nonconformance with the Definition of Internal Auditing, the Code of Ethics, or Standards impacts the overall scope or operation of the internal audit activity, the chief audit executive must disclose the nonconformance and the impact to senior management and the board. PERFORMANCE STANDARDS 2000 - Managing the Internal Audit Activity The chief audit executive must effectively manage the internal audit activity to ensure it adds value to theorganization. 2010 - Planning The chief audit executive must establish risk-based plans to determine the priorities of the internal audit activity, consistent with the organization's goals. 2020 - Communication and Approval The chief audit executive must communicate the internal audit activity's plans and resourcerequirements, including significant interim changes, to senior management and to the board forreview and approval. The chief audit executive must also communicate t h e i m p a c t o f r e s o u r c e limitations. 2030 - Resource Management The chief audit executive must ensure that internal audit resources are appropriate, sufficient, and effectively deployed to achieve the approved plan. 2040 - Policies and Procedures The chief audit executive must establish policies and procedures to guide the internal audit activity. 2050 - Coordination The chief audit executive should share information and coordinate activities with other internal andexternal providers of relevant assurance and consulting services to ensure proper coverage and minimize duplication of efforts. 2060 - Reporting to the Board and Senior Management The chief audit executive must report periodically to the board and senior management on the internalaudit activity's purpose, authority, responsibility, and performance relative to its plan. Reporting mustalso include significant risk exposures and control issues, including fraud risks, governance issues ,and other matters needed or requested by senior management and the board. 31

2100 - Nature of Work The internal audit activity must evaluate and contribute to the i m p r o v e m e n t o f g o v e r n a n c e , r i s k management, and control processes using a systematic and disciplined approach. 2110 - Governance The internal audit activity must assess and make appropriate recommendations for improving the governance process in its accomplishment of the following objectives: Promoting appropriate ethics and values within the organization; Ensuring effective organizational performance management and accountability; Communicating risk and control information to appropriate areas of the organization; and Coordinating the activities of and communicating information among the board, external and internal auditors, and management. 2120 - Risk Management The internal audit activity must evaluate the effectiveness and contribute to the improvement of risk management processes. 2130 - Control The internal audit activity must assist the organization in maintaining effective controls by evaluating their effectiveness and efficiency and by promoting continuous improvement. 2200 - Engagement Planning Internal auditors must develop and document a plan for each engagement, including the engagements objectives, scope, timing and resource allocations. 2201 - Planning Considerations In planning the engagement, internal auditors must consider: The objectives of the activity being reviewed and the means by which the activity controls its performance; The significant risks to the activity, its objectives, resources, and operations and the means by which the potential impact of risk is kept to an acceptable level; The adequacy and effectiveness of the activity's risk management a n d c o n t r o l s y s t e m s compared to a relevant control framework or model; and The opportunities for making significant improvements to the activity's risk management and control processes. 2210 - Engagement Objectives Objectives must be established for each engagement. 2220 - Engagement Scope The established scope must be sufficient to satisfy the objectives of the engagement. 32

2230 - Engagement Resource Allocation Internal auditors must determine appropriate and sufficient resources to achieve engagement o b j e c t i v e s b a s e d o n a n evaluation of the nature and complexity of each e n g a g e m e n t , t i m e constraints, and available resources. 2240 - Engagement Work Program Internal auditors must develop and document work programs t h a t a c h i e v e t h e e n g a g e m e n t objectives. 2300 - Performing the Engagement Internal auditors must identify, analyze, evaluate, and record s u f f i c i e n t i n f o r m a t i o n t o a c h i e v e t h e engagement's objectives. 2310 - Identifying Information Internal auditors must identify sufficient, reliable, relevant, and useful information to achieve the engagement's objectives. 2320 - Analysis and Evaluation Internal auditors must base conclusions and engagement results o n a p p r o p r i a t e a n a l y s e s a n d evaluations. 2330 Documenting Information Internal auditors must document relevant information to support the conclusions and engagement results. 2340 - Engagement Supervision Engagements must be properly supervised to ensure objectives are achieved, quality is assured, and staff is developed. 2400 - Communicating Results Internal auditors must communicate the engagement results. 2410 - Criteria for Communicating Communications must include the engagement's objectives a n d s c o p e a s w e l l a s a p p l i c a b l e conclusions, recommendations, and action plans. 2420 - Quality of Communications Communications must be accurate, objective, clear, concise, constructive, complete, and timely. 2421 - Errors and Omissions If a final communication contains a significant error or omission, the chief audit executive must communicate corrected information to all individuals who received the original communication. 2430 Use of Conducted in Conformance with the International Standards for the Professional Practice of internal Auditing Internal auditors may report that their engagements are conducted in conformance with the International Standards for the Professional Practice of Internal Auditing, o n l y i f t h e r e s u l t s o f t h e quality assurance and improvement program support the statement. 33

2431 Engagement Disclosure of Nonconformance When nonconformance with the Definition of Internal Auditing, the Code of Ethics or the Standards impacts a specific engagement, communication of the results must disclose the Principle or rule of conduct of the Code of Ethics or S t a n d a r d ( s ) w i t h w h i c h f u l l conformance was not achieved: Reason(s) for nonconformance; and Impact of nonconformance on the engagement and the communicated engagement results. 2440 Disseminating Results The chief audit executive must communicate results to the appropriate parties. 2500 Monitoring Progress The chief audit executive must establish and maintain a system to monitor the disposition of results communicated to management. 2600 Resolution of Senior Management's Acceptance of Risks When the chief audit executive believes that senior management has accepted a level of residual risk thati s u n a c c e p t a b l e t o t h e o r g a n i z a t i o n , t h e c h i e f a u d i t e x e c u t i v e m u s t d i s c u s s t h e m a t t e r w i t h s e n i o r management . If the decision regarding residual risk is not resolved, the chief audit executive and senior management should report the matter to the board for resolution. 34

Appendix C The IIAs Code of Ethics The purpose of The Institute's Code of Ethics is to promote an e t h i c a l c u l t u r e i n t h e p r o f e s s i o n o f internal auditing.A code of ethics is necessary and appropriate for the profession of internal auditing, founded as it is ont h e t r u s t p l a c e d i n i t s o b j e c t i v e a s s u r a n c e a b o u t r i s k m a n a g e m e n t , c o n t r o l , a n d g o v e r n a n c e . T h e Institute's Code of Ethics extends beyond the definition of internal auditing to include two essential components:1 )Principles that are relevant to the profession and practice of internal auditing;2)Rules of Conduct that describe behavior norms expected of internal auditors. These rules are an aid to interpreting the Principles into practical applications and are intended to guide the ethicalconduct of internal auditors.The Code of Ethics together with The Institute's Professional Practices Framework and other relevant Institute pronouncements provide guidance to internal auditors serving others. "Internal auditors" refersto Institute members, recipients of or candidates for IIA professional certifications, and those who provide internal auditing services within the definition of internal auditing. Applicability and Enforcement

This Code of Ethics applies to both individuals and entities that provide internal auditing services.For Institute members and recipients of or candidates for IIA professional certifications, breaches of theCode of Ethics will be evaluated and administered according to The Institute's Bylaws and AdministrativeGuidelines. The fact that a particular conduct is not mentioned in the Rules of Conduct does not preventit from being unacceptable or discreditable, and therefore, the member, certification holder, or candidatecan be liable for disciplinary action. Principles: Internal auditors are expected to apply and uphold the following principles: Integrity The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment. Objectivity Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating, andcommunicating information about the activity or process being examined. Internal auditors make abalanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments. 35 Confidentiality Internal auditors respect the value and ownership of information t h e y r e c e i v e a n d d o n o t d i s c l o s e information without appropriate authority unless there is a legal or professional obligation to do so. Competency Internal auditors apply the knowledge, skills, and experience needed in the performance of internal auditing services. Rules of Conduct: 1. Integrity Internal auditors:1.1 . Shall perform their work with honesty, diligence, and responsibility. [In other words, the auditor does the right thing.] 1.2. Shall observe the law and make disclosures expected by the law and the profession.1.3. Shall not knowingly be a party to any illegal activity, or engage in acts that are discreditableto the profession of internal auditing or to the organization.1.4. Shall respect and contribute to the legitimate and ethical objectives of the organization. 2. Objectivity Internal auditors:2.1.Shall not participate in any activity or relationship that may impair or be presumed to impairtheir unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interests of the organization.2 . 2 . S h a l l n o t a c c e p t a n y t h i n g t h a t m a y i m p a i r o r b e p r e s u m e d t o i m p a i r t h e i r p r o f e s s i o n a l judgment. [For example, a material gift (use of beach house) is considered t o i m p a i r objectivity.] 2.3. Shall disclose all material facts known to them that, if not d i s c l o s e d , m a y d i s t o r t t h e reporting of activities under review. [ F o r e x a m p l e , t h e r e m a y b e s o m e i t e m s t h a t w e r e capitalized instead of expensed. This fact needs to be disclosed to management and the Audit Committee.] 3. Confidentiality Internal auditors:3 . 1 . S h a l l b e p r u d e n t i n t h e u s e a n d p r o t e c t i o n o f i n f o r m a t i o n a c q u i r e d i n t h e c o u r s e o f t h e i r duties.3 . 2 . S h a l l n o t u s e information for any personal gain or in any manner that would be

c o n t r a r y t o the law or detrimental to the legitimate and ethical objectives of the organization. 36 4. Competency Internal auditors:4.1.Shall engage only in those services for which they have the necessary knowledge, skills, and experience.4 . 2 . S h a l l p e r f o r m internal auditing services in accordance with the International Standards for the Professional Practice of Internal Auditing .4.3.Shall continually improve their proficiency and the effectiveness and quality of their services. 37 Appendix D Audit Committee Charter - Sample PURPOSE: To assist the board of directors in fulfilling its oversight r e s p o n s i b i l i t i e s f o r t h e f i n a n c i a l r e p o r t i n g process , the system of internal control, the audit process, and the company's process for monitoring compliance with laws and regulations and the code of conduct. AUTHORITY: The audit committee has authority to conduct or authorize investigations into any matters within its scope of responsibility. It is empowered to: Appoint, compensate, and oversee the work of any registered public accounting firm employed bythe organization. Resolve any disagreements between management and the auditor regarding financial reporting. Pre-approve all auditing and non-audit services. Retain independent counsel, accountants, or others to advise the committee or assist in the conductof an investigation. Seek any information it requires from employees-all of whom are directed to cooperate with the committee's requests-or external parties. Meet with company officers, external auditors, or outside counsel, as necessary. COMPOSITION: The audit committee will consist of at least three and no more t h a n s i x m e m b e r s o f t h e b o a r d o f directors. The board or its nominating committee will appoint committee members and the committee chair.Each committee member will be both independent and financially literate. At least one member shall bedesignated as the "financial expert," as defined by applicable legislation and regulation. MEETINGS: The committee will meet at least four times a year, with authority to convene additional meetings, ascircumstances require. All committee members are expected to attend each meeting, in person or viatele - or video-conference. The committee will invite members of management, auditors or others toattend meetings and provide pertinent information, as necessary. It will hold private meetings with auditors (see below) and

executive sessions. Meeting agendas will be prepared and provided in advanceto members, along with appropriate briefing materials. Minutes will be prepared. RESPONSIBILITIES: The committee will carry out the following responsibilities: 38 Financial Statements Review significant accounting and reporting issues, including complex or unusual transactions andhighly judgmental areas, and recent professional and regulatory pronouncements, and understandtheir impact on the financial statements. Review with management and the external auditors the results of t h e a u d i t , i n c l u d i n g a n y difficulties encountered. Review the annual financial statements, and consider whether they are complete, consistent with information known to committee members, and reflect appropriate accounting principles. Review other sections of the annual report and related regulatory filings before release and considerthe accuracy and completeness of the information. Review with management and the external auditors all matters required to be communicated to thecommittee under generally accepted auditing Standards. Understand how management develops interim financial information, and the nature and extent of internal and external auditor involvement. Review interim financial reports with management and the external auditors before filing withregulators , and consider whether they are complete and consistent with the information known to committee members. Internal Control Consider the effectiveness of the company's internal control s y s t e m , i n c l u d i n g i n f o r m a t i o n technology security and control. Understand the scope of internal and external auditors' review of internal control over financial r e p o r t i n g , a n d o b t a i n r e p o r t s o n s i g n i f i c a n t f i n d i n g s a n d r e c o m m e n d a t i o n s , t o g e t h e r w i t h management's responses. Internal Audit Review with management and the chief audit executive the c h a r t e r , a c t i v i t i e s , s t a f f i n g , a n d organizational structure of the internal audit function. Have final authority to review and approve the annual audit plan and all major changes to the plan. Ensure there are no unjustified restrictions or limitations, a n d r e v i e w a n d c o n c u r i n t h e appointment, replacement, or dismissal of the chief audit executive.

At least once per year, review the performance of the CAE and concur with the annual compensationand salary adjustment. Review the effectiveness of the internal audit function, including compliance with The Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing. On a regular basis, meet separately with the chief audit executive to discuss any matters that thecommittee or internal audit believes should be discussed privately. External Audit 39

Review the external auditors' proposed audit scope and approach, including coordination of audit effort with internal audit. Review the performance of the external auditors, and exercise final approval on the appointment ordischarge of the auditors. Review and confirm the independence of the external auditors by obtaining statements from the auditors on relationships between the auditors and the company, including non-audit services, anddiscussing the relationships with the auditors. On a regular basis, meet separately with the external auditors to discuss any matters that the committee or auditors believe should be discussed privately. Compliance Review the effectiveness of the system for monitoring compliance with laws and regulations and theresults of management's investigation and follow-up (including disciplinary action) of any instancesof noncompliance. Review the findings of any examinations by regulatory agencies, and any auditor observations. Review the process for communicating the code of conduct to c o m p a n y p e r s o n n e l , a n d f o r monitoring compliance therewith. Obtain regular updates from management and company legal c o u n s e l r e g a r d i n g c o m p l i a n c e matters. Reporting Responsibilities Regularly report to the board of directors about committee a c t i v i t i e s , i s s u e s , a n d r e l a t e d recommendations. Provide an open avenue of communication between internal audit, the external auditors, and the board of directors. Report annually to the shareholders, describing the committee's composition, responsibilities andhow they were discharged, and any other information required by rule, including approval of non- audit services.

 Review any other reports the company issues that relate to committee responsibilities. Other Responsibilities Perform other activities related to this charter as requested by the board of directors. Institute and oversee special investigations as needed. Review and assess the adequacy of the committee charter annually, requesting board approval forproposed changes, and ensure appropriate disclosure as may be required by law or regulation. Confirm annually that all responsibilities outlined in this charter have been carried out. Evaluate the committee's and individual members' performance on a regular basis. 40 Appendix E Sample Internal Audit Charter Mission and Scope of Work: The mission of the internal audit department is to provide i n d e p e n d e n t , o b j e c t i v e a s s u r a n c e a n d consulting services designed to add value and improve the companys operations. It helps the companyb y b r i n g i n g a systematic, disciplined approach to evaluate and improve the e f f e c t i v e n e s s o f r i s k management, control, and governance processes. Role: The Internal Auditing Function is established by the Board of Directors, and its responsibilities are defined by the Audit Committee of the Board of Directors as part of their oversight function. Professional Standards: The internal auditing staff shall govern themselves by adherence to The Institute of Internal Auditors Code of Ethics. The Institutes International Standards for the Professional Practice of Internal A u d i t i n g ( Standards ) shall constitute the operating procedures for the department. These twodocuments constitute an addendum to their charter. The I n s t i t u t e o f I n t e r n a l A u d i t o r s P r a c t i c e Advisories will be adhered to as applicable. In addition, Internal Auditing will adhere to the companyspolicies and procedures and Internal Auditings Standard Operating Procedures Manual. The StandardOperating Procedures Manual shall include attribute, performance, and implementation standards to guide the Department. Authority: The chief audit executive and staff of ATMs internal audit department are authorized to: Have unrestricted access to all functions, records, property, and personnel. Have full and free access to the audit committee.

Allocate resources, set frequencies, select subjects, determine scopes of work, and apply the techniques required to accomplish audit objectives. Obtain the necessary assistance of personnel in units of the organization where they perform audits, aswell as other specialized services from within or outside the organization. The chief audit executive and staff of the internal audit department are not authorized to: Perform any operational duties for the organization or its affiliates. Initiate or approve accounting transactions external to the internal auditing department. Direct the activities of any organization employee not e m p l o y e d b y t h e i n t e r n a l a u d i t i n g department , except to the extent such employees have been appropriately assigned to auditing teams or to otherwise assist the internal auditors. 41 Organizational Status: The CAE shall report administratively to the Chief Executive Officer (CEO) and functionally to the AuditCommittee of the Board of Directors. Independence: All internal audit activities shall remain free of influence by any element in the organization, including matters of audit selection, scope procedures, frequency, timing, or report content to permit maintenanceof an independent and objective mental attitude necessary in rendering reports.Internal auditors shall have no direct operational responsibility or authority over any of the activities they review. Accordingly, they shall not develop nor install systems or procedures, prepare records, orengage in any other activity which would normally be audited. Mission and Scope of Work: The scope of work of the internal audit department is to determine whether the organizations networkof risk management, control, and governance processes, as designed and represented by management,is adequate and functioning in a manner to ensure: Risks are appropriately identified and managed. Interaction with the various governance groups occurs as needed. Significant financial, managerial, and operating information is accurate, reliable, and timely. Employees actions are in compliance with policies, standards, procedures, and applicable laws andregulations. Resources are acquired economically, used efficiently, and adequately protected. Programs, plans, and objectives are achieved. Quality and continuous improvement are fostered in the organizations control process.

Significant legislative or regulatory issues impacting the organization are recognized and addressedappropriately.Opportunities for improving management control, profitability, and the organizations image may be identified during audits. They will be communicated to the appropriate level of management. Audit Planning: Annually, the CAE shall submit to senior management and the Audit Committee a summary of the auditwork schedule, staffing plan, and budget for the following fiscal year. The audit work schedule is to bedeveloped based on a prioritization of the audit universe using a risk-based methodology. Any significantdeviation from the formally approved work schedule shall be communicated to senior management andthe Audit Committee through periodic activity reports. Reporting: A written report will be prepared and issued by the CAE or designee following the conclusion of eachaudit and will be distributed as appropriate. A copy of each audit report and a summarization will be forwarded to the CAE and the Chairman of the Audit Committee. 42 The CAE or designee may include in the audit report the auditees response and corrective action takenor to be taken in regard to the specific findings and recommendations. Managements response shouldi n c l u d e a t i m e t a b l e f o r anticipated completion of action to be taken and an explanation f o r a n y recommendations not addressed.In cases where a response is not included within the audit report, management of the audited area s h o u l d respond, in writing, within thirty days of publication to Internal A u d i t i n g a n d t h o s e o n t h e distribution list.Internal Auditing shall be responsible for appropriate follow-up on audit findings and recommendations.All significant findings will remain in an open issues file until cleared by the CAE or the Audit Committee. Periodic Assessment: The CAE should periodically assess whether the purpose, authority, and responsibility, as defined in thischarter, continue to be adequate to enable the internal auditing activity to accomplish its objectives. Theresult of this periodic assessment should be communicated to senior management and the Board of Directors.Chief Audit Executive ______________________Chief Executive Officer ______________________Audit Committee Chairman______________________Date _______________________ 43 Appendix F Schedule of Audit Coverage 2007-09 - Sample Audit DaysP r i o r i t y P l a n n e d E n g a g e m e n t s D e s c r i p t i o n Y e a r 1 Y e a r 2 Y e a r 3 1.Annual Review of Core SystemsCompliance and substantive testing to confirm the continuing o p e r a t i o n o f key controls operating over the core systems.This review will be carried out annually and will incorporate the use of datainterrogation as well as manual checks.The reviews will provide management with assurance that the key controlswithin the core financial systems continue to operate effectively.Additional days3 0 2 5 2 5 2. Full Review of Core Systems During the 3-year life cycle of the plan, each of the Core Financial Systemswill be subject to full internal audit review in addition to the

testing focusedannual review.The reviews will provide management with an indepth assurance of theefficiency and effectiveness of the Core Financial Systems. Financial Asset ManagementFull review of the controls t h a t e n s u r e t h a t a s s e t s a r e e f f e c t i v e l y a n d securely held, used and disposed of, with sufficient, complete and accurateinformation available for incorporation into the financial accounts.500 Revenue Sales and tradereceivablesFull review of controls to ensure that revenue sales are accurately reported,and trade receivables are promptly and securely collected. In regards to trade receivables in to also look at the accuracy of the companys bad debtaccounts.500 Cash and Bank Full review of the controls to ensure that cash and bank accounts areproperly secured.500 Purchases and payables Full review of the controls to ensure that the company achieves value for itsmoney from its procurement of goods and services and that the procurementprocess is effective.050 Financial Treasury Management Full review of controls to ensure that the companys investments andfinancing achieve value and are secure.005 44

Financial loans Full review of the controls to ensure that payments to credits, primarily tobanks are timely and accurately reported.005 Other financial accounting issuesFull review of controls to ensure t h e i n s u r a n c e , t a x a n d o t h e r f i n a n c i a l i s s u e s are properly managed.0503 . B u i l d i n g a n d G r o u n d s MaintenanceFull review of the controls that ensure that buildings and estates areefficiently and effectively maintained.0 1 5 0 4 . C a p i t a l W o r k s F u l l r e v i e w o f c o n t r o l s t h a t e n s u r e t h a t c a p i t a l p r o j e c t s b e s t m e e t c o m p a n y needs, are planned and executed to the budget, and represent the bestvalue for the money.0 0 2 5 5 . H u m a n R e s o u r c e s F u l l r e vi e w o f c o n t r o l s t o e n s u r e th a t t h e c o m p a n y h a s s u f f i c i e n t s t a f f w i t h required skills and experience to meet its objectives.2 5 0 0 6. Health and Safety Full review of the control that ensure that the health and safety of staff isprotected as far as is possible and that relevant legislation is complied with.1 5 0 0 7 . I S I n s t a l l a t i o n F u l l r e v i e w o f t h e c o n t r o l s t h a t e n s u r e t h e c o m p u t e r s y s t e m s , h a r d w a r e a n d installation activity operate in a controlled, secure and m a n a g e d environment.0 1 5 0 8.IS Networks Full review of the controls that ensure that the companys network i s effective, robust and secure.0 0 1 5 9.IS Operating controls Full review of the controls that ensure the companys PC operating s y s t e m s are effective, robust and secure.1 5 0 0 10.Risk Management An annual review will be made of the risk management process to e n s u r e that it continues to operate effectively. The review will focus on ensuring thatrisks continue to be identified, assessed and managed throughout the company.The review will be supplemented by a full review of Corporate Governance,which will consider the on-going effectiveness of the process in more detailand in comparison to best practices.T h e r e v i e w w i l l p r o v i d e m a n a g e m e n t w i t h a s s u r a n c e t h a t t h e r i s k management process continues to be robust and to allow internal audit to place reliance on the risk management process in providing direction for itswork.5 5 1 5 45

Appendix G Job (Position) Descriptions for Internal Auditing Staff Help to facilitate the recruiting by stating explicit job requirements. Provide a means to justify salaries. Means to express the managements expectations. Method for the internal audit activity to engage in personnel planning.The following job (position) descriptions are presented in Sawyers Internal Auditing 5 th edition, pages839, 846-848. CHIEF AUDIT EXECUTIVE Authority: The chief audit executive is authorized to direct a broad, comprehensive program of internal auditing within the organization. Internal auditing examines and evaluates the adequacy and effectiveness of thes y s t e m s o f m a n a g e m e n t control provided by the organization to direct its activities toward t h e accomplishment of its objectives in accordance with organization polices and plans. In accomplishingthese activities, the chief audit

executive and members of the audit staff are authorized to have full , free, and unrestricted access to all organization functions, records, property, and personnel. Responsibility: The chief audit executive is responsible for: Establishing policies for the auditing activity and directing its technical and administrative functions. Developing and executing a comprehensive audit programs for the evaluation of management controls provided over all organization activities. Examining the effectiveness of all levels of management in their s t e w a r d s h i p o f o r g a n i z a t i o n resources and their compliance with established policies and procedures. Recommending improvement of managements controls designed to safeguard organizationresources, promote organization growth, a n d e n s u r e c o m p l i a n c e w i t h g o v e r n m e n t l a w s a n d regulations. Reviewing procedures and records for Their adequacy to accomplish intended objectives, and appraising policies and plans relating to theactivity or function under audit review. Authorizing the publication of reports on audits, including recommendations for improvement. Appraising the adequacy of operating managements actions to c o r r e c t r e p o r t e d d e f i c i e n t conditions; accepting adequate corrective action; continuing reviews with appropriate managementp e r s o n n e l o n a c t i o n t h e chief audit executive considers inadequate until there has b e e n a satisfactory resolution of the matter. Conducting special audits as requested by management, including the reviews of representationsmade by persons outside the organization. Acting in a consulting capacity relative to the above areas of responsibility. 46 INTERNAL AUDITING - MANAGER Purpose: To administer the internal audit activity of an assigned location or operation. To develop a comprehensive, practical program of engagement coverage for the assigned locationor operation. To obtain accomplishment of the program in accordance with acceptable engagement standards andstipulated schedules. To maintain effective working relations with executive and operating management. Authority and Responsibility: Within the general guidelines provided by the chief audit executive:

Prepares a comprehensive, long-range program of engagement coverage for the location to whichassigned. Identifies those activities subject to engagement coverage, e v a l u a t e s t h e i r s i g n i f i c a n c e , a n d assesses the degree of risk inherent in the activity in terms of cost, schedule, and quality. Establishes the related departmental structure. Obtains and maintains an audit staff capable of accomplishing the internal audit function. Assigns engagement areas, staff, and budget to supervisors. Develops a system of cost and schedule control over engagement projects. Establishes standards of performance and, by review, determines that performance meets the standards. Provides executive management within the assigned location with r e p o r t s o n e n g a g e m e n t coverage and engagement results, and interprets those results so as to improve the engagement program and the engagement coverage. Establishes and monitors accomplishment of objectives directed toward increasing the internal audit activity's ability to serve management. INTERNAL AUDITING - SUPERVISOR Purpose: To develop a comprehensive, practical program of engagement coverage for assigned areas. To supervise the activities of staff assigned to the review of various organizational and functional activities. To ensure conformance with acceptable standards, plans, budgets, and schedules. To maintain effective working relations with operating management. To provide for and conduct research and develop manuals and training guides. Authority and Responsibility: Under the general guidance of a manager: Supervises the work of staff engaged in the reviews of organizational and functional activities. 47 Provides a comprehensive, practical schedule of annual engagement coverage within general areasassigned by the manager. Determines areas of risk and appraises their significance in relation to operational factors of cost ,schedule , and quality. Classifies engagement

projects as to degree of risk and significance and as to frequency of coverage. Provides for flexibility in engagement schedules so as to be responsive to management's special needs. Schedules projects and staff assignments so as to comply with management's needs, within the scope of the internal audit activity's overall schedule. Coordinates the program with the organization's public accountant. Reviews and approves the purpose, scope, and approach of each engagement project for assignedareas. Directs engagement projects to see that professional standards are maintained in the planning andexecution and in the accumulation of information. Counsels and guides staff to see that the approved engagement o b j e c t i v e s a r e m e t a n d t h a t adequate, practical coverage is achieved. Reviews and edits engagement communications and, in organizations with the auditor-in- charge for the assigned project, discusses the communications with appropriate management. Presents oral briefing to branch-level management. Provides for and performs research on engagement techniques. Provides formal plans for the recruiting, selecting, training, evaluating, and supervising of staff personnel. Develops manuals and other training aids. Accumulates data, maintains records, and prepares reports on the administration of engagement projects and other assigned activities. Identifies factors causing deficient conditions and recommends courses of action to improve the conditions, including special surveys and audits. Provides for a flow of communication from operating management to the manager and to the chief audit executive. Assists in evaluating overall results of the engagements. INTERNAL AUDITOR - SENIOR Purpose: To conduct reviews of assigned organizational and functional activities. To evaluate the adequacy and effectiveness of the management controls over those activities. To determine whether organizational units are performing their planning, accounting, custodial, riskm a n a g e m e n t , o r c o n t r o l a c t i v i t i e s i n compliance with management instructions,

a p p l i c a b l e statements of policy and procedures, and in a manner consistent with both organizational objectivesand high standards of administrative practice. To plan and execute engagements in accordance with accepted standards. To report engagement observations and to make recommendations for correcting unsatisfactory conditions, improving operations, and reducing cost. 48 To perform special reviews at the request of management To direct the activities of assistants. Authority and Responsibility: Under the general guidance of a supervisor: Surveys functions and activities in assigned areas to determine the nature of operations and the adequacy of the system of control to achieve established objectives. Determines the direction and thrust of the proposed engagement effort. Plans the theory and scope of the engagement, and prepares an engagement work program. Determines the engagement procedures to be used, including statistical sampling and the use of information technology. Identifies the key control points of the system. Evaluates a system's effectiveness through the application of a knowledge of business systems , i n c l u d i n g f i n a n c i a l , m a n u f a c t u r i n g , e n g i n e e r i n g , p r o c u r e m e n t , a n d o t h e r o p e r a t i o n s , a n d a n understanding of engagement techniques. Recommends necessary staff required to complete the engagement. Performs the engagement in a professional manner and in a c c o r d a n c e w i t h t h e a p p r o v e d engagement work program. Obtains, analyzes, and appraises information as a basis for an i n f o r m e d , o b j e c t i v e c o n c l u s i o n (opinion) on the adequacy and effectiveness of the system and the efficiency of performance of theactivities being reviewed. Directs, counsels, and instructs staff assistants assigned to the engagement, and reviews their workfor sufficiency of scope and for accuracy. Makes oral or written presentations to management during a n d a t t h e c o n c l u s i o n o f t h e engagement , discussing observations and recommending corrective action to improve operations and reduce cost. Prepares formal written communications, expressing opinions on the adequacy and effectiveness of the system and the efficiency with which activities are carried out.

Appraises the adequacy of the corrective action taken to improve deficient conditions. 49

Appendix H Internal Auditing Department Evaluation Form Sample E m p l o y e e N a m e D a t e : Emp loyee Position TitleEvaluatorEvaluation Period Evaluation Factors (circle the appropriate quality for each evaluation factor)Use comments to describe employees strengths, weaknesses, and accomplishments that meet and exceed expectations. Evaluation factors should be based on the employees job description. XE = Exceeds Expectations ME = Meets Expectations NI = Needs Improvement NA = Not Applicable 1 Q u a l i t y o f w o r k X E M E N I N A Examples: produces neat and accurate work performs work thoroughly expresses self well verbally and in writing. Comments: Traits personally observed upon which evaluation is based. Use separate page if more spaceis needed.Action: Indicate actions necessary for employee to improve in his or her quality of work. 2 Q u a n t i t y o f w o r k X E M E N I N A Examples: completes assigned work completes work in accordance with budget able to manage a variety of tasks,or assignments demonstrates initiative. Comments: Traits personally observed upon which evaluation is based. Use separate page if more spaceis needed. Action: Indicate actions necessary for employee to improve in his or her quality of work. 50

Internal Auditing Department Evaluation Form (cont.) Evaluation Factors (circle the appropriate quality for each evaluation factor)Use comments to describe employees strengths, weaknesses, and accomplishments that meet and exceed expectations. Evaluation factors should be based on the employees job description. XE = Exceeds Expectations ME = Meets Expectations NI = Needs Improvement NA = Not Applicable 3 W o r k H a b i t s X E M E N I N A Examples: attends work on a regular basis complies with instructions demonstrates knowledge of departmental policies and procedures has an interest in developing skill level.

Comments: Traits personally observed upon which evaluation is based. Use separate page if more space isneeded.Action: Indicate actions necessary for employee to improve in his or her quality of work. 4 P e r s o n a l R e l a t i o n s X E M E N I N A Examples: gets along with other employees gets along with the engagement client demonstrates effective teamwork demonstrates willingness to help others is able to think independently, solve issues. Comments: Traits personally observed upon which evaluation is based. Use separate page if more space isneeded.Action: Indicate actions necessary for employee to improve in his or her quality of work. 51

Internal Auditing Department Evaluation Form (cont.) Evaluation Factors (circle the appropriate quality for each evaluation factor)Use comments to describe employees strengths, weaknesses, and accomplishments that meet and exceed expectations. Evaluation factors should be based on the employees job description. 5 I n i t i a t i v e X E M E N I N A Examples: understands and accepts new situations performs well with minimal supervision makes sound decisions inabsence of direct supervision keeps supervisor informed of status of assigned work Comments: Traits personally observed upon which evaluation is based. Use separate page if more space isneeded.Action: Indicate actions necessary for employee to improve in his or her quality of work. 6 S u p e r v i s o r y S k i l l s ( i f a p p l i c a b l e ) X E M E N I N A Examples: plans engagements effectively assigns engagements to others effectively demonstrates effective leadership provides instruction and training effectively when required treats supervised personnel fairly

Comments: Traits personally observed upon which evaluation is based. Use separate page if more space isneeded.Action: Indicate actions necessary for employee to improve in his or her quality of work. 52

Internal Auditing Department Evaluation Form (cont.) Evaluators Additional Comments You can use this space if you have any other comments or more detailed explanation of any aspect of the evaluation.Evaluators Signature Date:Employees Signature Date: Note: Signing this document form does not necessarily mean that the employee agrees with the evaluation. Employees have the right to responds to this evaluation form within 15 working days if desired. 53

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(21 Ratings) Copyright: Attribution Non-commercial I am including the latest revision of establishing an internal audit activity. Let me know your comments. Product Manuals Product Manuals (fewer) Follow CBurch6991 Sections show allcollapse prev | next Introduction Governance Risk Management

Control Internal Audit Start-up Framework STEP #1: Review the IIAs Professional Practices Framework STEP #2: Understand stakeholders requirements STEP # 3: Develop an Internal Audit Charter Review the Independence and Objectivity of the Internal Audit Function STEP #4: Develop an initial Risk Assessment for your company STEP #5: Develop the Audit Plans Strategic Audit Plans: Annual Audit Plans: STEP #6: Build the budget STEP #7: Determine the staffing requirements Building in-house: Fully Outsourcing: Partial Outsourcing: Drafting Job Descriptions: STEP #8: Establish a plan for the development of Staff STEP #9: Communicate the existence of the Internal Audit Function in the Company STEP #10: Establish a quality assurance program Quality Program Assessment: Appendix A 16-steps to establishing an Internal Audit Shop Appendix B Summary Outline of The IIA Standards Appendix C The IIAs Code of Ethics Appendix D Audit Committee Charter - Sample Appendix E Sample Internal Audit Charter Appendix F Schedule of Audit Coverage 2007-09 - Sample Appendix G Job (Position) Descriptions for Internal Auditing Staff Appendix H Internal Auditing Department Evaluation Form Sample

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