THE INTERNAL AUDITOR: DEFINITION, DUTIES AND RESPONSIBILITIES, RELATIONSHIPS, ETHICS, AND INDEPENDENCE

BY

ABUBAKAR, Salisu
B. Sc., M. Sc. Acctg. & Fin. (A.B.U.), MBA (B.U.K.), ACA, AMNIM LECTURER, DEPARTMENT OF ACCOUNTING, AHMADU BELLO UNIVERSIT , !ARIA.

A PAPER PRESENTED AT THE TRAINING WORKSHOP ORGANIZED BY ZARIA BUSINESS SCHOOL FOR THE STAFF OF THE INTERNAL AUDIT UNIT OF AHMADU BELLO UNIVERSITY, ZARIA

APRIL, !!" INTRODUCTION Internal auditing is a management-oriented discipline that has evolved rapidly since World War II. Once a function primarily concerned auditing no ith financial and accounting matters! internal addresses the entire range of operating activities ide variety of assurance and

and performs a correspondingly

consulting services. "y definition! according to Institute of Internal #uditors $II#%! internal auditing is an independent! o&'ective assurance and consulting activity designed to add value and improve an organisation(s operations. It helps an organisation accomplish its o&'ectives &y &ringing a systematic! disciplined approach to evaluate and improve the effectiveness of ris) management! control! and governance processes. Internal auditing is e*ecuted &y an internal auditor. +e is regarded as part and parcel of the organisation since his,her appointment is usually effected and influenced &y the organisation-s management. +is,her activities are defined &y the recruiting organisation! though there are &asic issues that are e*pected to &e addressed &y him,her during the course of his,her tenure in office. This paper! therefore! attempted to unveil the issues surrounding the internal auditor-s functions ithin an organisation. #s such
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the paper d ells on the definition! duties! responsi&ilities! relationships! ethics! and independence of an internal auditor. In doing this! &oth the international and local re/uirements! auditor are considered. D01INITION O1 INT0RN#2 #UDITOR 3any definitions have &een for arded for internal auditor. The follo ing are some of them4 The Institute of Internal #uditors $II#% defines an internal auditor as an individual auditing department ithin an organisation(s internal ho is assigned the responsi&ility of ho revie s the here different! regarding the functions and operations of an internal

performing internal auditing functions. Internal auditor is an accountant controller(s $some&ody treasurer(s $some&ody accounting procedures! records! and reports in &oth the hose 'o& is to oversee financial ho manages the finances of a matters in a &usiness or government department% and government! organisation! or corporation! usually the chief financial officer% areas of responsi&ility. Internal auditor is an auditor company,organisation directors. ho is an employee of the ho hose records are audited and

provides information to the management and &oard of

1rom the a&ove definitions! internal auditor has the follo ing features4 +e,she is an employee of the organisation. +is,her appointed is effected &y the organisation-s management. +e,she is an information provider. +is,her responsi&ility is to perform internal audit functions. +o ever! internal auditors are not e*pected to have )no ledge e/uivalent to a person procedures alone! even hose primary responsi&ility is to detect hen carried out ith due professional and investigate fraud,a&use $i.e. e*ternal auditor%. #lso! auditing care! do not guarantee fraud,a&use ill &e detected. DUTI06 #ND R067ON6I"I2ITI06 O1 #N INT0RN#2 #UDITOR Whereas the duties and responsi&ilities of an e*ternal auditor are stipulated in the Companies and #llied 3atters #ct! No. 8 of 899:! the duties and responsi&ilities of the internal auditor depends on the si;e and technology of the organi;ation. A# Mai$ Du%i&s '( a$ I$%&)$al Au*i%'): The internal auditor shall4

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8. 0*ecute a .. 7rovide an

ide range of audits and revie s in a diverse independent! o&'ective assurance and

and highly computerised organisation= consulting service to management! ith the principal aims

of evaluating and improving the effectiveness of ris) management! control and governance processes= 5. 3a)e recommendations on increasing operational efficiency! having regard to value for money auditing= <. #gree the annual audit plan ith the Chairman prior to approval &y the #udit Committee= >. Report /uarterly and as re/uested to the #udit Committee and to the Chairman or any person ith e/ual position= ?. On a day to day functional &asis! the Internal #uditor reports to the Chairman or any person ith e/ual position= @. #ny other appropriate duties as may &e defined from time to time &y the Chairman. B# G&$&)al R&s+'$si,ili%i&s '( a$ I$%&)$al Au*i%'): The internal auditor is generally responsi&le for4
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3anaging the Internal #udit function. Developing and maintaining a charter for the Internal #udit function hich reflects the Office(s responsi&ilities! authority! and reporting relationships.

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Developing and o&taining proper approval for goals! audit or) schedules! staffing plans! and financial &udgets for the Department. 7erform individual audits according to the 6tandards for the 7rofessional 7ractice of Internal #uditing issued &y the Institute of Internal #uditors $II#% and other local professional accounting &odies li)e IC#N. 3aintain personal proficiency and that of staff auditors &y o&taining an ade/uate amount of continuing education. 6upervise staff auditors &y assigning them to 'o&s match their a&ilities! revie ing their their performance. hich

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or)! and appraising

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7articipate in or conduct evaluation and cost studies as directed &y the appropriate officer$s% of the organisation. Conduct scheduled and special audits and ma)e

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recommendations for improvement.

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Continue to assess professional development and ta)e advantage of opportunities to improve s)ills. Beep current on trends in accounting and auditing.

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INT0RN#2 #UDITOR-6 R02#TION6+I7 WIT+ T+0 0CT0RN#2 #UDITOR Neither internal nor e*ternal auditors unnecessarily! ant to duplicate or)

aste time needlessly! or spend money

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fruitlessly. Coordinated efforts are not only encouraged &y II# and IC#N standards= they can also enhance the efficiency and effectiveness of &oth professional groups. Organi;ations utili;e internal and e*ternal auditors to achieve several important o&'ectives= &ut some areas. Internal auditors should ta)e a proactive role in e*ploring ho the or) of internal and e*ternal auditors can &e coordinated and productively utili;ed. # full understanding of respective professional responsi&ilities and concerns can help &uild a mutually &eneficial relationship. 0*ternal auditors are concerned ith an organi;ation(s financial hile the roles of internal and e*ternal auditors are distinct! their responsi&ilities overlap in

statements and the accounting information system and controls that affect the statements. The e*ternal auditor(s professional responsi&ilities in Nigeria emanate primarily from the provisions of C#3#! 899:. The IC#N re/uires the e*ternal auditor to evaluate the professionalism and independence of the internal auditor and the internal audit department in order to determine the degree of audit tests and relia&ility. 0*ternal auditors must follo 6tatement on #uditing 6tandards

No. ?> $6#6 ?>%! DThe #uditor(s Consideration of the Internal #uditing 1unction in an #udit of 1inancial 6tatements.D 6#6 ?>
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re/uires e*ternal auditors to ac/uire an understanding of a client(s internal audit function! hen one e*ists! in planning for the e*ternal audit. In fulfilling this o&ligation! e*ternal auditors typically in/uire a&out the organi;ational status of the internal audit function! the application of professional standards &y internal auditors planned internal audit activities! and internal auditor-s access to records. Thus! the internal auditor is generally as)ed to respond to numerous in/uiries a&out these areas. 0*ternal auditors ill &e primarily interested in the internal

audit activities that are DrelevantD to their audit. Relevant activity provides evidence a&out the design and effectiveness of internal controls over the processes that affect the content of the financial statements under revie . It also contri&utes direct evidence a&out potential misstatements in the financial statements. 0*ternal auditors typically focus on the su&set of internal activity that relates directly or indirectly to the financial statements &eing audited. In addition to the re/uirement that e*ternal auditors o&tain an understanding of the internal audit function during the audit planning stage! 6#6 ?> allo s e*ternal auditors to use relevant evidence from the implementation of scheduled internal audit or) programs and to see) Ddirect assistanceD from internal auditors.
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0*ternal auditors can rely on evidence generated from internal audit or) hen they are satisfied ith the competence and o&'ectivity of the internal auditors. While assessing competence! e*ternal auditors are encouraged to e*amine factors such as the education and e*perience of the internal auditors= the prevalence of professional certifications! such as the #C#! #CC# or CN#! among staff= and the /uality of internal audit programs! or)paper documentation! and supervision. If the e*ternal auditors consider the internal auditors sufficiently competent and o&'ective! they are permitted to use the internal auditors in a num&er of e*ternal auditors ill &e or) of ays. The more o&'ective and or) product to

competent the internal auditors are! the more li)ely it is that illing to use their fulfil the o&'ectives of the e*ternal audit. 0*ternal auditors are permitted some modifications procedures! control planned procedures ith regard

to the nature! timing! and e*tent of their ris) assessment or)! and su&stantive testing. In the control hen they are relying on the control area! e*ternal auditors can reduce and even eliminate their evaluation and testing procedures of internal auditors. INT0RN#2 #UDITOR-6 COD0 O1 0T+IC6 The purpose of the internal auditor-s Code of 0thics is to promote an ethical culture in the profession of internal auditing.
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# code of ethics is necessary and appropriate for the profession of internal auditing! founded as it is on the trust placed in its o&'ective assurance a&out ris) management! control! and governance. Thus! the general Code of 0thics as provided &y the Institute of Internal #uditors $II#% includes t o essential components4 8. 7rinciples that are relevant to the profession and practice of internal auditing. .. Rules of Conduct that descri&e &ehaviour norms e*pected of internal auditors. These rules are an aid to interpreting the 7rinciples into practical applications and are intended to guide the ethical conduct of internal auditors. The Code of 0thics together 7ractices 1rame or) and ith The Institute(s 7rofessional other relevant Institutes

pronouncements provide guidance to internal auditors serving others. In Nigeria! the operations and functions of the internal auditor are guided &y the pronouncements of the professional accounting &odies esta&lished in Nigeria li)e the IC#N and #N#N especially here the internal auditor is a mem&er of one of them. #lthough not all the internal auditors are mem&ers of the professional accounting &odies! their functions are &oosted and chec)mated &y such &odies. 1or e*ample! IC#N has issued a code of conduct &oo) to its mem&ers that guide them in their
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dealings

ith their clients. These code of conduct are to &e

upheld &y the mem&ers any here they found themselves and in hatever capacity $i.e. internal or e*ternal auditors%. It is orthy to note that most of the principles and rules applied

in the environment of internal auditing are more or less the same hether upheld in Nigeria or else here. Therefore! the principles and rules are e*plained &elo 4 A#P)i$-i+l&s: Internal auditors are e*pected to apply and uphold the follo ing principles4

Integrity

The integrity of internal auditors esta&lishes trust and thus provides the &asis for reliance on their 'udgment.

O&'ectivity

Internal auditors e*hi&it the highest level of professional o&'ectivity in gathering! evaluating! and communicating information a&out the activity or process &eing e*amined. Internal auditors ma)e a &alanced assessment of all the relevant circumstances and are not unduly influenced &y their o n interests or &y others in forming 'udgments

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Confidentiality

Internal auditors respect the value and o nership of information they receive and do not disclose information ithout appropriate authority unless there is a legal or professional o&ligation to do so.

Competency

Internal auditors apply the )no ledge! s)ills! and e*perience needed in the performance of internal auditing services. B# Rul&s '( C'$*u-%: 8% Integrity - Internal auditors4 a% 6hall perform their responsi&ility. &% 6hall o&serve the la and ma)e disclosures e*pected &y or) ith honesty! diligence! and

the la and the profession. c% 6hall not )no ingly &e a party to any illegal activity! or engage in acts that are discredita&le to the profession of internal auditing or to the organisation. d% 6hall respect and contri&ute to the legitimate and ethical o&'ectives of the organisation. .% O&'ectivity - Internal auditors4

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a% 6hall not participate in any activity or relationship that may impair or &e presumed to impair their un&iased assessment. This participation includes those activities or relationships that may &e in conflict the organisation. &% 6hall not accept anything that may impair or &e presumed to impair their professional 'udgment. c% 6hall disclose all material facts )no n to them that! if not disclosed! may distort the reporting of activities under revie . 5% Confidentiality - Internal auditors4 a% 6hall &e prudent in the use and protection of information ac/uired in the course of their duties. &% 6hall not use information for any personal gain or in any manner that ould &e contrary to the la or detrimental to the legitimate and ethical o&'ectives of the organi;ation. <% Competency - Internal auditors4 a% 6hall engage only in those services for hich they have ith the interests of

the necessary )no ledge! s)ills! and e*perience.

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&% 6hall perform internal auditing services in accordance ith the International and local Standards for the Professional Practice of Internal Auditing. c% 6hall continually improve their proficiency and the effectiveness and /uality of their services. INT0RN#2 #UDITOR-6 IND070ND0NC0 Independence means the freedom from dependence on or control &y another person or organisation. In the concept of internal auditing! independence allo s internal auditors to carry out their or) freely and o&'ectively. This concept re/uires that internal auditors &e independent of the activities they audit. Independence is achieved through organisational status and o&'ectivity. Internal auditing represents a vital cog in the organi;ation(s corporate governance structure. Its scope generally e*ceeds that of outside auditing in ensuring that corporate policies are follo ed! corporate assets are protected! and operations are monitored. 1urthermore! the internal auditor(s familiarity ith operations and insider )no ledge can ena&le more informed! insightful audits than an outside auditor may &e a&le to provide. The additional &readth and depth of reporting that internal auditors offer! ho ever! can &e assured only if the function remains independent.

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The a&ility of the internal audit function to achieve desired o&'ectives depends largely on the independence of audit personnel. Eenerally! the position of the auditor ithin the organi;ational structure of the institution! the reporting authority for audit results! and the auditor-s responsi&ilities indicate the degree of auditor independence. The &oard should ensure that the audit department does not participate in activities that may compromise! or appear to compromise! its independence. These activities may include preparing reports or records! developing procedures! or performing other operational duties normally revie ed &y auditors. The auditor-s independence is also determined &y analy;ing the reporting process and verifying that management does not interfere ith the candor of the findings and recommendations. 1or an effective program! the &oard should give the auditor the authority to4 a% #ccess all records and staff necessary to conduct the audit! and &% Re/uire management to respond formally! and in a timely manner! to significant adverse audit findings &y ta)ing appropriate corrective action. Internal auditors should discuss their findings and

recommendations periodically &oard of directors.

ith the audit committee or

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Ideally! the internal auditor should report directly to the &oard of directors or its audit committee regarding &oth audit issues and administrative matters. #lternatively! an organisation may esta&lish a dual reporting relationship here the internal auditor reports to the audit committee or &oard for audit matters and to organisation e*ecutive management for administrative matters. The o&'ectivity and organisational stature of the internal audit function are &est served under such a dual arrangement if the internal auditor reports administratively to the Chief 0*ecutive Office $C0O%! and not to the Chief 1inancial Officer $C1O% or a similar officer ho has a direct responsi&ility for systems &eing audited. The &oard or its audit committee should determine the internal auditor-s performance evaluations and compensation.

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Institute of Chartered #ccountants of Nigeria $IC#N%! Code of Conduct for 3em&ers. Institute of Internal #uditing $II#% 7u&lications Bolman! 3. R. $.::.%! HInternal #uditors= 0thicsI! Int"+n(' A,%it$+ -$,+n('! Gune. 2ocatelli! 3. $.::.%! HEood Internal Controls and #uditor IndependenceI! T." CPA -$,+n('! Octo&er. Og&onnah! I. I. $8999%! HThe Nigerian Internal #uditor4 7ractical ChallengesI! ICAN N"/& -$,+n('! Jol. <! No. .! pp8?-8@.

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