Chapter 5: Internal Audit Process

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Chapter 5 Internal Audit Process

• ACCT620 Internal Auditing
• Otto Chang
• Professor of Accounting

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Internal Auditing Process

• Selection of auditee (select riskiest area)
• Audit planning
• Preliminary survey of operations
• Internal control description and analysis
• Expanded tests of control system
• Develop findings and recommendations
• Reporting
• Follow-up
• Evaluation

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Step 1 Selection Of The Auditee(Chapter 6)

• Audit Plan Based On Risk Assessment (Systematic)
• Ad Hoc Audits
• Auditee Requests

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Step 2 Audit Preparation (Chapter 7)

• Tentative Overall Purpose and Scope Of Audit
• Review of Previous Audit Files
• Selection of Audit Team
• Preliminary Communication with Auditee
• Preparation of Preliminary Audit Program
• Planning the Audit Report
• Obtaining Approval of The Audit Approach

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Step 3 Preliminary Survey (Chapter 8)

• Opening Conference
• Tour
• Document Study
• Written Description
• Analytical Review, If Appropriate

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Step 4 Initial Study of Internal Control
(Chapter 8)

• Controls Description
• Walk-Through of Transactions or Decision Process
• Limited Testing
• Evaluation of Internal Controls
• Risk Assessment

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Step 5 Expanded Testing (Chapter 9)

• Detailed Review of Operations and Controls
• Tests of Auditors Compliance with Control
  Systems
• Evaluate Design of Control System
• Evaluate the Effectiveness of Control System

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Step 6 Findings And Recommendations (Chapter 9)

• Findings
• Conditions actually observed
• Criteria used to evaluate the conditions
• Effects (Risk) of the observed problems
• Cause of the problems
• Recommendations
• No Changes
• Improve Current Controls
• Adding Insurance to Ensure against Risks
• Required Rate of Return to Reflect Risks

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Step 7 Reporting (Chapter 10)

• Written
• Audit Objectives
• Audit Scope
• General Procedures
• Findings
• Recommendations
• Personal (Oral) Presentation

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Step 8 9 Follow-Up and Evaluation (Chapter 11)

• Follow-Up
• Auditee Response
• Managements Follow-Up
• Auditors Review
• Evaluation
• Evaluation of Audit Approach, Techniques, Etc.
• Auditor Performance Reviews

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An Outline of Audit Working Paper

• 1. Table of contents
• 2. Planning checklist
• 3. Authorization form
• 4. Preliminary memo to the auditee
• 5. A cross-referenced audit report, imterrim
  memoranda, and follow-up report
• 6. Auditees written response to audit findings
  and recommendations

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Audit Working Paper-continued

• 7. Review notes on the working papers
• 8. Audit program
• 9. Summary finding sheets (Chapter 9)
• 10. Preliminary survey
• A. Minutes of opening conference
• B. Summary of observations made during the
  on-site tour
• C. Notes from study of background materials
• D. Written descriptions of the auditees
  operation
• E. Analytical review worksheet

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Audit Working Paper--continued

• 11. Review of Internal Control
• A. Completed internal control questionnaires
• B. Flowcharts and descriptions of internal
  control
• C. Work sheets on limited tests
• D. Internal control matrix
• 12. Worksheet from expanded tests
• 13. Miscellaneous papers
• 14. Follow-up working papers

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Format of Working Paper

• Title
• Preparer and reviewers date and initials
• Complete cross-indexing
• Use of tick marks
• Explanation of legends
• Auditors conclusion and recommendation