Topic 2: Role of Internal Auditing in

Corporate Governance
Corporate Governance
Definition:
a group of people getting together as one united body with the
task and responsibility to direct, control and rule with authority
To ensure that:
Information are accurate, reliable and timely
Compliance to rules and regulations
Assets are safeguarded
Optimum use of resources
Goals are accomplished

Meaning of good corporate

governance

Is a system of structuring, operating and controlling a

company in order to achieve the following objectives:

Fulfilling long term strategic goals and building shareholders

value
Consider and care for the interest of employees
Take into consideration of the needs of the environment and
local community
Maintain an excellent relationship with customers and
suppliers
Maintain proper compliance with all legal and regulatory
requirements

Areas of activities

Formulating strategic directions for future of the enterprise in the

long run
Executing the actions through the involvement of key executive
decisions
Supervising and monitoring the management process
Accountability to those who are legitimately responsible and
demand for such accountability

Main elements in corporate governance

1.
2.
3.

Management
Audit committee
Internal audit

Roles of Internal Auditors in enhancing

Corporate Governance
(Dato Megat Najmuddin Khas Akauntan
Nasional, May 1999)
Internal Auditors should widen their roles and
enhance their array of expertise in dealing with
complex issues of company transactions and
changing control environment a good internal
control is a prerequisite for effective corporate
governance and management.

Internal Auditing as part of control

Internal auditing is designed to add value and improve an orgns

operations.
Its functions include:

Examining, evaluating and monitoring the adequacy and effectiveness of

the accounting and internal control system.

Its responsibilities towards control system:

Reviews all controls to ensure they are being operated effectively, efficiently
and economically
Make recommendations for improvement to the operation of controls and
ensures that management takes acceptable corrective action.
Bring major weaknesses in control procedures to the attention of senior
management and the Audit Committee
Deters and detects errors, abuse and fraud

Corporate Governance Framework

If mgt is about running business, governance is about seeing
that it runs properly Professor Bob Tricker
STAKEHOLDERS
EXTERNAL
AUDIT
INTERNAL
AUDIT

The Corporation in relations to:

a.

The Cos Act 1965

b.

The Memorandum & Article of Association

c.

The Securities Comm. Act 1993

d.

International Stds. Of Auditing

AUDIT COMMITTEE

EXTERNAL
AUDIT

INTERNAL
AUDIT

Internal Auditing as aid to

management

How internal auditor can serve the management?

Internal auditor can assist them by:

Monitoring activities top mgt cant itself monitor

Identifying and minimizing risks
Validating reports to senior mgt
Protecting senior mgt in technical areas beyond its ken
Providing information for decision making process
Reviewing the past, present and future
Helping line mgrs manager manage by pointing to violations of
procedures and of mgt principles

Internal Auditing and Audit

Committee
Audit Committee
Composed exclusively outside members of the Board, serve as
an intermediary between the auditor and management; oversight
responsibilities for the financial reporting and auditing process.
An effective Audit Committee should:

Maintain independence
Combine a balance of skills
Make necessary time commitment
Be tough minded
Develop a clear charter
Develop a list of specific duties and responsibilities
Plan the years agenda
Document the committees work

Internal Auditing and Audit

Committee - continuation
Responsibilities of Audit Committee:
Assists the Board of Directors in carrying out their
responsibilities as they relate to the orgns accounting
policies, internal control and financial reporting practices
Establish and maintain lines of communication between the
board and external auditors, internal auditors and financial
management
Specific areas of responsibilities:

Financial reporting
Corporate Governance
Corporate Control

Internal Auditing and Audit

Committee - continuation
1.

Financial reporting

Audit Committee should seek reasonable assurance that

financial disclosure made by management show the orgns
financial condition, result of operations and both plans and
long term commitments.
Audit Committee should:

Recommend the independent accountants

Oversee the external audit coverage
Review accounting policies and policy decision
Examine the Financial Statement (interim, annual and other
reports)

Internal Auditing and Audit

Committee - continuation
Corporate Governance

2.

Audit Committee should provide reasonable assurance that the corporation

comply with pertinent law and regulations, conduct affairs ethically and
maintain effective controls to deter employee conflicts of interest and fraud

Audit Committee should:

Review corporate policies

Review current/pending litigation
Review significant cases of employees conflict of interest, misconduct or
fraud
Require internal auditors report

Corporate Control

3.

Audit Committee should understand the orgns key financial and

operating risk areas and internal control system as well as put reliance
on duty carry out by Internal Auditing Department

Internal Auditing and Audit

Committee - continuation
Relationship with Internal Auditors:
Reporting relationships

The Chief Audit Executive (CAE) should attend audit committee

meetings and meet privately with audit committee at least once
annually.

Oversight relationships which includes:

Review and approve Internal Auditing charter

Concur the appointment and removal of the CAE
Review internal audit plans and budgets
Review audit results
Require audit projects
Require quality assurance reviews

Audit of Board of Directors

A review

of audit of the Board of Directors and

activities relative to strategies, structure and
style in the light of orgns needs
Critical areas such as:

Basis of corporate governance

Appropriateness of the board structure and size
The board membership
The Boards efficiency and effectiveness

Coordination between internal and

external auditors
Internal Auditor
Examines, evaluate and monitors the adequacy and
effectiveness of the Internal Control Structure.
In conducting test of controls; they are likely to influence the
nature, timing and extent of external auditors audit
procedures
External Auditor
Its responsibilities amongst other things are to study and
evaluate Internal Control Systems and to make
recommendations on the weaknesses of Internal Controls
noted during the course of audit

Coordination between internal and

external auditors - continuation
Thus; the External Auditor has a close working relationship
and direct interest in the work of Internal Auditor that
pertains to the entitys Internal Control structure.
Internal Auditors work cannot be used as a substitute for
the External Auditors work; but it could be an important
complement.
STANDARDS RELATED TO THE COORDINATION:

ISA 610: Considering the work of Internal Auditing

Requires the External Auditor to assess the work of the
Internal Auditor for the purpose of planning the audit and
developing an effective audit approach

Coordination between internal and

external auditors - continuation

In determining the effect of such work on the audit; the

External Auditor should:
Consider the organizational status
The scope of work
The technical training and proficiency
Due professional care of the work of Internal Auditing
BENEFITS derived from coordination: increases the economy,
efficiency and effectiveness of total audit activities