You are a recently qualified Chartered Certified Accountant in charge of the internal audit department of ZX, a rapidly expanding company.

      

You are a recently qualified Chartered Certified Accountant in charge of the internal audit
department of ZX, a rapidly expanding company. Turnover has increased by about 20% p.a.
for the last five years, to the current level of Kshs50 million. Net profits are also high, with an
acceptable return being provided for the four shareholders. The internal audit department was
established last year to assist the board of directors in their control of the company and to
prepare for a possible listing on the stock exchange. The Managing Director is keen to follow
the principles of good corporate governance with respect to internal audit. However, he is also
aware that the other board members do not have complete knowledge of corporate governance
or detailed knowledge of International Auditing Standards.

Required:
Write a memo to the board of ZX that:
Explains how the internal audit department can assist the board of directors in fulfilling
their obligations under the principles of good corporate governance.

  

Answers


Wilfred
From: Chief Internal Auditor
To: Board of ZX
Subject: Role of Audit Committee
Date: June 2005
Areas where the internal audit department can assist the directors with the implementation of
good corporate governance in an organization include:

Board reports
Reviewing reports to the board and reports produced by the board to ensure that they do present
a balanced and understandable assessment of the company’s position and prospects. The
internal audit department will have good knowledge of the operations of the company as well as
access to accounting information. The department can effectively ‘audit’ board reports to ensure
they are accurate and understandable.

Internal controls
The board needs to maintain a sound system of internal control. The internal audit department
will be able to review existing controls and recommend improvements to ensure this objective is met.

Application of ISAs and IASs.
The board needs to have a policy for applying appropriate International Statements on Auditing
(ISA) and International Accounting Standards (IAS) to the organization. Internal audit will
certainly be aware of new auditing standards and will have the technical expertise (especially
where internal auditors are professionally qualified) to identify changes required by accounting
standards. Amendments to control systems for new auditing standards and financial accounting
systems for new accounting standards can therefore be recommended.

Communication with external auditors
Under corporate governance regulations, communications with external auditors will normally be
via the audit committee, although the board must maintain an appropriate relationship with the
external auditors. However, internal and external auditors can also work together to ensure that
the internal control system is sufficient; possibly by external audit delegating work to internal audit, and each auditor reviewing the work of the other auditor. The board will therefore receive reports from both sets of auditors which will be accurate because they have been properly checked.

Communication to the board
The internal auditor can also check that appropriate information is provided to the board from
the external auditor. ISA 260 provides a list of matters which should be communicated to the board and the internal auditor can work with the external auditor to ensure that this information is provided.
Wilfykil answered the question on April 12, 2019 at 08:33


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