Internal Audit and Governance, and How It Differs from External Audit

What this chapter covers

Internal audit and governance and the differences between external audit and internal audit: topics in the order to study them

1. 1Corporate Governance Principles and CodesStart here because it sets out why boards, committees and internal audit exist at all.
2. 2Audit Committee and Non-Executive DirectorsThe committee is the main governance link to internal and external audit, so learn it before the function itself.
3. 3Internal Audit Function and Its Role in GovernanceOnce you know the oversight bodies, you can see what internal audit does for them.
4. 4Need for Internal Audit and Factors Affecting ItThis builds on the role by asking when a company should have a function, a common scenario question.
5. 5Types of Internal Audit AssignmentsAssignment types show the work in practice and give you examples to use in written answers.
6. 6Differences Between External and Internal AuditCompare the two only after you know internal audit well, so the contrasts make sense.
7. 7Internal Audit Independence and ReportingFinish with independence and reporting lines, which tie together governance, the committee and the comparison.

How to prepare Internal audit and governance and the differences between external audit and internal audit

1. Read each topic once and write a one-line purpose for it, for example why a company needs an audit committee.
2. Build a comparison table by hand for external and internal audit with rows for purpose, appointment, reporting, scope, independence and evidence. Rewrite it from memory until it is automatic.
3. Learn the audit committee's main duties and the role of non-executive directors in plain words, then link each to a control or reporting benefit.
4. Practise OT case questions (Section A) on this chapter and note why each wrong option is wrong, since marks are all or nothing.
5. Answer two or three written requirements under time pressure. Use a heading per point, make the point, then tie it to the scenario facts.
6. Finish by applying the chapter to a short scenario: a company with no internal audit, or one where internal audit reports to the finance director. Say what the issue is and what you would recommend.

Common mistakes in Internal audit and governance and the differences between external audit and internal audit

• Saying internal audit and external audit have the same purpose.

  Fix: State purpose first: external audit gives an opinion on the financial statements; internal audit helps management improve governance, risk and control.

• Listing generic points without using the scenario.

  Fix: After each point, add a clause using a fact from the scenario, such as company size, structure or recent problems.

• Confusing the roles of the audit committee and the board.

  Fix: Describe the committee as an oversight body of independent non-executive directors that supports the board.

• Assuming a company must have internal audit.

  Fix: Treat it as a decision depending on size, complexity, risk and any regulation or listing rules that apply.

• Treating independence as all or nothing.

  Fix: Explain that independence is a matter of degree, and is strengthened by reporting to the audit committee and by not auditing areas the person is responsible for.

• Missing the point in Section A questions by choosing a partly correct option.

  Fix: Read the requirement twice, remove options that are wrong in any detail, and then choose the most precise answer.

Last-day revision: Internal audit and governance and the differences between external audit and internal audit

• ✓Corporate governance is the system by which a company is directed and controlled.
• ✓The audit committee is usually made up of independent non-executive directors.
• ✓The audit committee oversees financial reporting, internal control, internal audit and the external auditor relationship.
• ✓Non-executive directors bring independent judgement and scrutiny of executives.
• ✓Internal audit evaluates and improves risk management, control and governance processes.
• ✓External audit gives an opinion on the financial statements to the shareholders; internal audit reports to management or the audit committee.
• ✓External auditors are independent of the company and appointed by shareholders; internal auditors are usually employees or an outsourced provider.
• ✓Internal audit scope is set by the company and can cover any area; external audit scope is set by law and standards.
• ✓Factors affecting need for internal audit include company size, complexity, risk, and regulatory demands.
• ✓Assignments include operational, financial, compliance, value for money and IT reviews.
• ✓Internal audit independence is best supported by reporting to the audit committee.
• ✓Internal audit does not give an audit opinion on the financial statements. Its role is to evaluate and improve risk management, control and governance, and it reports to management or the audit committee, although it may review financial controls and information.

Internal audit and governance and the differences between external audit and internal audit in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• CS ProfessionalInternal Audit: Introduction and Overview
• ACCA Strategic ProfessionalInternal control and management reporting
• CMA IntermediateAudit Risk, Internal Control, Internal Check and Internal Audit
• CMA FinalInternal Control and Internal Audit