internal audit

internal audit
A branch of auditing developed in the twentieth century as a means of monitoring an organization’s *risks, *internal controls, procedures, and *management accounting. As *corporations and *public sector organizations became increasingly complex in the twentieth century, and "as direct, personal contacts of managers with the respective operational areas for which they were responsible became more restricted, a greater need developed for the kind of managerial service provided by internal auditors" (Brink, 1977, 9). The remit of internal auditing extends beyond the audit of financial statements traditionally associated with external auditing. In 1945, *Robert B Milne, one of the founding fathers of the IIA, wrote that although internal auditing’s "roots are in accountancy, its key purpose lies in the area of management control" (quoted in Flescher, 1991, ix). Among other things, internal auditing encompasses (i) *fraud detection, (ii) the safeguarding of assets, (iii) legal and regulatory compliance, (iv) reviews of management accounting, (v) *internal control assessment, and (vi) *risk assessment. It covers both *compliance and *consulting reviews. The *Institute of Internal Auditors is the main internal auditing institution, and it defines the discipline as follows: an "*independent, objective *assurance and *consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes" (www.theiia.org). The evolution of internal auditing has been described in the following terms: "Internal auditing as practised in the *developed countries has passed through two dominant paradigms and is poised on the edge of a third. The first internal auditing paradigm focused on *observing and counting... later a new concept of the system of internal control... changed the internal audit paradigm from a focus on reperformance to a focus on *controls... a third paradigm for internal auditing is emerging, based on auditing the business process through a focus on *risk" (McNamee and Selim, 1998, 6, emphasis in original). Traditionally, internal auditors were described as the eyes and ears of an organization’s management: They have recently been called the eyes and ears of the *audit committee (Hermanson and Rittenberg, 2001, 54). Compare *external audit. Further reading: Bailey et al. (2003); Brink (1977); Flescher (1991); IIA(1999); Pickett (2003); Ramamoorti (2003); Ridley and Chambers (1998); Sawyer and Vinten (1996); Ziegenfuss (1994)

Auditor's dictionary. 2014.

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