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Unit 6: Internal and External Audit

Notes
Some 40 per cent of stakeholders thought some or substantial improvement was needed
in the expertise or professionalism of internal audit.
HM Treasury’s Internal Audit Transformation Programme is a partial solution to the
issues identified by the NAO, but the project does not consider, in sufficient detail, what
should be expected of an effective internal audit service. Nor does the Treasury have an
accurate view on the costs of internal audit in government.

Source: http://www.nao.org.uk/publications/1213/internal_audit.aspx

6.2 Objectives of Internal Auditing

The significance of internal audit is growing day by day. Historically, internal audit was mostly
confine to ensure that the accounting and allied records have been properly maintained, the
assets management system is in place in order to safeguard the assets and also to see whether
standing policies and procedures are duly complied with. But with the passage of time, the
objectives of internal audit have been significantly changed. Now cost benefit analysis, resources
utilization and their proper deployment, effectiveness of management decisions etc. are also
being reviewed by the internal auditor.
Briefly, the objects of internal audit may be described as follows:
1. Evaluation of business control system: Internal audit is concerned with ensuring effective
and efficient system of accounting control, standard cost control, budgetary control and
other functional control.

2. Compliance with standard policies and procedures: Reporting to management about the
compliance of standard policies and procedures is an important objective of internal
audit.

Example: Suppose company’s standing policy is that any purchase order worth more
than 4,00,000 cannot be awarded without asking quotation from at least three parties. If
internal auditor found that this has not been strictly followed then he must report those cases to
the management.

3. Safeguarding and adequate utilization of business assets: Internal audit has to ensure that
all assets of the company are properly recorded. It has to verify assets utilization report
and determine whether fixed targets have been achieved or not.

Example: Suppose internal auditor found that valuable scrap are not being properly
recorded in the books, he should include this observation in his audit report.
4. Reliability of Management Information System (MIS): Internal Audit ascertains the
reliability of financial and operating reports prepared throughout the organization. The
management relies on the reports of internal auditors as they provide an assurance as to
validity of records and transactions of the enterprise.

5. Suggesting improvements: The ultimate objective of internal audit is to assist management
in the effective discharge of their responsibilities by furnishing them with proper
suggestions for improvements.
To achieve full objectives of internal audit, the internal audit should have sufficient authority to
access all necessary records of the organization.

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