In order to minimize recordkeeping errors, the misappropriation of assets, and fraud within business and non-business organizations, external and internal auditing were implemented. As quoted by historian Richard Brown, “The origin of accounting goes back to times scarcely less remote than that of accounting. Whenever the advance of civilization brought about the necessity of one man being entrusted to some extent with the property of another, the advisability of some kind of check upon the fidelity of the former would become apparent.”
How Internal Auditing Started
The system of keeping records dates back to 4,000 BC. Enterprises, organizations, and the governments in the Near East documented their receipts, disbursements, and collected taxes for accounting purposes. Even ancient empires that ruled Europe and Asia utilized a systematic way of checking and counterchecking. According to a document published by the Institute of Internal Auditors Research Foundation, the governments back then were worried that their inept officials would make errors in keeping their books, and that corrupt officials would commit fraud when they saw an opportunity to do so. Even the Bible discussed the importance of employing internal controls. Fast forward to the 20th century, there was a growing need for ways to evaluate not only the efficiency of the employees, but also their honesty. The formal internal audit was seen as the solution.
What is Internal Auditing?
The Institute of Internal Auditors defined the term as “an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.” It will aid any organization to fulfill its aims and goals by employing an approach that will assess and enhance the effectiveness control, governance, and risk management processes.
In internal auditing, the Standards for the Professional Practice of Internal Auditing (Standards) must be followed.
Purpose of the Standards
According to the Institute of Internal Auditors, the Standards will:
- Outline the basic principles that illustrate how internal auditing should be practiced
- Supply a framework on promoting and performing internal audit activities
- Institute the basis in measuring the performance in internal auditing
- Promote improved processes and operations within the organization
The Standards are comprised of Attribute Standards, Performance Standards, and Implementation Standards.
- The Attribute Standards identify the characteristics of those who carry out internal audit activities.
- The Performance Standards illustrate the nature of internal audit activities and supply excellent criteria on which of the performed services can be evaluated.
- The Implementation Standards employ the Attribute and Performance Standards to certain types of engagements such as fraud investigation or compliance audit.
In general, the Attribute and Performance Standards relate to internal audit services.
Regulating Internal Audit as a Profession
Internal auditing is not governed by the Securities and Exchange Commission, the Public Company Accounting Oversight Board (PCAOB), or any federal agencies, but by the Institute of Internal Auditors (IIA). IIA is a self-regulating professional body whose task is to evaluate and develop practice standards that are released in draft and are subjected to a period of public commenting.
Internal auditing is regulated by professional standards. IIA promotes the Professional Practices Framework, which contains the Standards and Code of Ethics, Practice Advisories, and Position Papers and Practice Guides.
Who Can Perform an Internal Audit?
Aside from certified internal auditors, existing employees of any company can conduct an internal audit. In fact, some US companies have a “guest auditor” project wherein employees are designated to function as internal auditors for a period of time. However, not all employees can be or are expected to be effective internal auditors.
Expenses in Conducting an Internal Audit
According to IIA, the budget, focus, and extent of an internal audit depend on the needs of the company. Moreover, the audit committee-approved internal audit charter will affect the yearly budget for an internal audit investment.
Is Internal Auditing the Same as External Auditing?
Internal auditing is different from external auditing. The aim of external auditing is to convey an opinion of the company’s presentation of their financial statements in compliance with the Generally Accepted Accounting Principles (GAAP). The external audit is achieved by following the Generally Accepted Accounting Standards (GAAS).
There is quite a distinction between an internal audit and an external audit where the external audit presents the issued accounting reports to outside parties and investors, while the internal audit reviews internal business practices, accounting, and process controls.