The Importance And Purpose Of Internal Auditing Accounting Essay

The first chapter of the study will cover the chief points for the necessity of this thesis in relation to the Internal Auditing as it is bing presents in some companies. Besides, at this chapter, the purpose and aims of the study will be clearly demonstrated. In add-on, the above will be followed by a conjectural inquiry that at the terminal of the study is traveling to be answered with assorted justification and future recommendations. Finally, at the terminal of this chapter, the construction of the undertaking will be clearly revealed.


Harmonizing my old ideas, audit is a broad and really interesting topic which becomes more adventuresome when it is applied in existent life. Subsequently, within the complex and the development of economic system, the importance of Internal Auditing is quickly increasing. The internal control of the larger economic organisations, which normally brings together a considerable wealth, is going more and more indispensable and the persuasion for corruptness and maltreatment are enjoyable to a batch of people. As it can be seen farther down at this undertaking, companies that are utilizing the internal auditing for an effort to cover up their deepnesss, conceal some incorrect minutess, mask their fiscal errors, etc. turns out to be ruinous to the future economic system. What is more awful though, is that more and more instances of accounting fraud are coming into the public oculus peculiarly in the U.S. but besides in Europe. Such instances includes: Enron Scandal 2001, Xerox 2002, Lehman Brothers Holdings 2008, , etc.

Therefore, I have decided to transport out this research with the topic of Internal Auditing which is fundamentally the phase that will forestall the fraud to be. Optimistically, with this study each employer will be able to understand the importance of Internal Auditing and eventually forestall any farther unmasking to the future economic system.


The purpose of this research is to look into the importance and intent of Internal Auditing that is applied into the companies and besides the jeopardy that may happen from the deficiency of Internal Control will be clearly demonstrated.


The aims of the current study are:

‘ To be an grounds of the importance that Internal Auditing have into an administration.

S pecific: clear about what, where, when, and how the state of affairs will be changed ;

M easurable: able to quantify the marks and benefits ;

A chievable: able to achieve the aims

( cognizing the resources and capacities at the disposal of the community ) ;

R ealistic: able to obtain the degree of alteration reflected in the aim ; and

T ime edge: saying the clip period in which they will each be accomplished

Conjectural inquiry

Why do concerns hold to do appropriate usage of Internal Auditing and what are the issues that may hold to face in the fortunes that they do non utilize Internal Auditing?

With the replies to this conjectural inquiry, it is expected to briefly warrant the aims of the undertaking that where mentioned above. Furthermore, a precise reply to this inquiry will quite to the right building of the whole undertaking.

Structure of the undertaking

To all purposes and intents, this undertaking will be divided into five different chapters with the duty to reply the conjectural inquiry and gently reach the choice to the undertaking purpose that were stated supra. The division of the five chapters will be as follows:

At the first chapter, the background of the undertaking will be unfold in conformity with the purpose and aims of the undertaking. Besides, a research conjectural inquiry will be revealed and it will be followed by the construction of the undertaking. The 2nd chapter of the undertaking will exemplify the research overview of the undertaking and it will be followed from a figure which is fundamentally comprised with the research doctrine, the research methodological analysis and the methods of informations aggregation. Then, the methods used for the information analysis will be presented followed by the triangulation that was used. Chapter three represents the literature reappraisal that was carried out as respect the Internal Auditing and its alterations through the clip and besides this chapter includes some conceptual definitions that consider indispensable. Subsequently, at chapter four, the analysis of two instance surveies ( Enron Scandal, Lehman Brothers ) will take topographic point. Finally at chapter five, the decisions and some recommendations will be given with the intent to make the purpose of the undertaking and give an reply to the conjectural inquiry that was stated above.

Chapter decision

Chapter 2: Research Approach

Chapter debut

At this chapter, the research approaches that were used in this undertaking are traveling to be exhaustively pointed out. To get down with, the research overview of the undertaking will be braked down into the research method, research doctrine, research methodological analysis and the informations aggregation. At this point a tabular array will be created to clearly exemplify the way that is traveling to be used. Following, the information analysis methods will be demonstrated and the cross method of triangulation will be explained.

Research overview

As it can be seen from the figure 1 holla, the research that was done to finish this undertaking, is considered to be the finest to win its purpose and aims. Therefore, the research will follow the tax write-off believing to garner qualitative information with the aid of action research, grounded theory and instance surveies. At the terminal, the needed secondary informations will be collected through research of articles, diaries and books.

Figure 1: Research Approach of the undertaking.

Research procedure

At this peculiar undertaking, the usage of deductive instead that inductive thought was considered more appropriate. With the deductive procedure we imply a specific theory and so we narrow it down to the agencies of the generic hypothesis that we have ( hypertext transfer protocol: // ) . Furthermore, with the elucidation that we will obtain through the undertaking we will deduce to the concluding decision which may hold with the chief theory or the theory may necessitate to be somewhat modified ( Saunders et al 2007 ) .

Research Doctrine

The research doctrine of the undertaking, as it can be seen in figure 1, is the subdivision were qualitative informations will be collected instead than quantitative informations. Qualitative informations are the informations that provide us with information sing merely our instance surveies. Furthermore, the available qualitative informations will carefully be examine with the cross theory of triangulation ( Saunders et al 2007 ) .

Research Methodology

As it can be seen from the figure 1 above, the research methodologies that will be used for the constitution of this undertaking are instance surveies, grounded theory and action research. With the instance surveies assistant, we will pull off to spread out our understanding on the topic and supply the readers with an accurate result. In add-on, grounded theory is really precise to the fact that will explicate the behavior of Internal Auditing into an administration. Finally, action research is the research that it is concentrating in the action and will happen in most subdivision of this undertaking. Hopefully at the terminal it will help to make a figure of recommendation sing this undertaking ‘s purpose ( Saunders et al 2007 ) .

Data Collection

As implied in the old subdivision, this undertaking will merely based on secondary informations aggregation. This information are largely collected from diaries, articles and books. Additionally, with the appropriate scrutiny and judgement of those informations we will organize the most proper decision for the conjectural inquiry which was stated at a old subdivision.


Throughout this research, the method of triangulation will be exhaustively applied to formalize that the informations that are traveling to be used will be accurate and dependable. Furthermore, triangulation method will be applied to bring forth that most appropriate decision and recommendations at the concluding phase of the undertaking.

Chapter decision

Chapter 3: Literature Reappraisal

Historical development of Auditing

Auditing as a map was originate really early in the ancient civilisations of China ( Lee, 1986 ) , Egypt and Greece ( Boyd, 1905 ) . Harmonizing to McMickle ( 1978, pp 11-12 ) the ancient checking activities found in Greece ( 350B.C. ) appear to be closest to the auditing of presents. Similar sort of look intoing activities were found in the antediluvian England where officers called ‘auditors ‘ were responsible for the scrutiny of the histories in order to forestall fraud ( Abdel-Qader, 2002 ) .

What is more, in the late medieval, the regeneration of Accountancy is marked in Italy and the metropolis of Pisa have their first official hearer. Besides, around the same clip at the English exchequer revenue enhancement lists are created for comparing. In 1581 the first functionary “ Association of Professional Accountants ” was created in Venice and it was named as “ Coliegio dei Raxonati ” ( ‘ ” ‘ ” ‘ ” ‘ ” , 1997 ) . The economic crises of the old ages 1825 and 1836 and the development of smaller and larger industries, contributed to the airing and systemization of the audits in the UK ( ‘ ” ” , 2000 ) .

Presents, the internal audit is a good expanded profession. Some old ages ago, an hearer who was traveling to work at a company in an internal audit section, would hold faced a hard state of affairs sing the scrutinizing maps of the house ( Pickett, 2003 ) . Watching the development of internal audit, it can be seen that before 1941, when the Institute of Internal Auditors was established ( hypertext transfer protocol: // ) , it was chiefly a map of office and most of the record maintaining was completed by manus and internal hearers were needed merely to verify the accounting informations and happen mistakes ( fraud ) . The old construct of the internal hearer was for the intents of security and their primary aim was to bring out fraud ( Pickett, 2003 ) .

In 1900s at the UK, scrutinizing became more established as a consequence of the industrial revolutions ( Abdel-Qader, 2002 ) . Brown ( 1962 ) reported that hearers were required to look into all the minutess and fiscal statements. As stated by Lawrence R.Dicksee ( 1892 cited in Leung, 2004, p.7 ) in a Practical Manual for Auditors, the aims of scrutinizing were: ( a ) the sensing of fraud ; ( B ) the sensing of proficient mistakes, and ( degree Celsius ) the sensing of mistakes of rules. The being of internal audit was still minimized ( Porter, et al. , 2005 ) .

Some decennaries subsequently the farther growing of the companies ‘forced ‘ them to divide the ownership from the scrutinizing maps. Furthermore, there was a demand to convert investors in the fiscal markets that the company ‘s fiscal statement was crystalline. Therefore, around 1940s the primary aim of an hearer has shifted from fraud sensing to the truth and equity of the companies. The voluminous minutess and fiscal operations developed the trying techniques ( Brown, 1962 ) .

Subsequently on, in the seventiess with economic system ‘s and engineering ‘s growing, hearers played an of import function in heightening the solvency of fiscal information and fostering the operations of an effectual capital market ( Porter, et al. , 2005 ) . Due to the addition of fiscal histories, hearers placed more trust on the internal control of companies during the audit process. If the internal control was dependable, the hearers reduced the elaborate testing.

In the 1980s risk-based auditing had been introduced. Risk-based auditing is an audit attack where the hearer focuses on countries which are likely to incorporate mistakes. In order to implement risk-based auditing, hearers need to accomplish a thorough apprehension of their clients ( Porter, et al. , 2005 ) . As Porter ( 2005 ) opined, that was the period when computing machine systems were introduced in most companies in order to treat their informations. Additionally, hearers developed one more function since they were supplying consultative services to their clients.

Since 1990s a rapid alteration was observed in scrutinizing profession due to the fast growing of the universe economic systems. Nowadays, as Porter et Al ( 2005 ) stated, scrutinizing is expanded into new procedures that built on a concern hazard position of their clients. The concern hazard attack supports that a broad scope of the client ‘s concern hazards are relevant to the audit. If the hearer understands the different sort of hazards in concerns the designation of different affairs will be more important and relevant to the auditing.

A conceptual Definition of Internal Audit and Audit Risk

In an attempt to appreciate the construct of internal audit, it will be necessary to separate it between the construct of internal control system. Then and with the same mode, the construct of the internal and external hearer will be contrasted so that the 1 who works within a company ( Internal Auditor ) will be more cleared from the hearer ( External Auditor ) who works for it.

Internal Audit and Internal Control System

In conformity to Millichamp ( 2008 ) , the internal audit procedure in an organisation includes the duty to be after, form and direct the public presentation of actions, which are designed to supply equal security to run into the marks of: a ) accomplishing specific aims, B ) reappraisal of the economic system and efficient usage of resources, degree Celsius ) protecting the company ‘s assets, vitamin D ) dependability and unity of the given information, vitamin E ) comply with policies, plans, processs, Torahs and other ordinances. In add-on, internal audit is a portion of the theoretical account of corporate administration in the sense that contributes to the administration procedure of an organisation by measuring and bettering: a ) the procedure by which the purposes and the values of the organisation are established, B ) the manner of supervising the accomplishment of the companies aims, degree Celsiuss ) by guaranting the answerability of the house and vitamin D ) by protecting the companies values. ( Picket, 2003 ) .

The internal control system is an organized web of maps and processs. It is a system of controls that is established by the board of managers and it is designed to maintain the organisation runing expeditiously ( Cheung, 1997 ) . The internal control systems is an of import undertaking which is in front of the auditing, while at the same clip it comprises the effectual work of the internal hearer. Furthermore, a basic stipulation for their readying, is the being of documented processs in the organisation, for the ground that any control plan follows the workflow measure by measure. Besides, by the terminal of the usage cheques, the hearers are bettering the system by presenting new informations that may hold obtained and at the terminal, if compiled for the first clip, they filed the new informations ( ‘ ” ‘ ” ‘ ” ‘ , 2003 ) . Finally, it is creditable to state that the internal control system looks similar to the human nervous system since both of them transportations bids and responses to and from the disposal ( Cook et al, 1976 ) .

Internal hearers and their distinguish from the external hearers

The internal and external hearers have a figure of common characteristics, such as: a ) their concern for the effectivity of internal fiscal operations, B ) their demand to hold in manus processs that are equal without any of import ignorance, degree Celsius ) both of them need to collaborate with each other, d ) they both have to bring forth audit studies, etc. ( http: // ) . What is more, on the other manus, we will separate the internal from the external hearers and we will name their indispensable differences:

A. Different aims

The internal hearers are engaged to the concern in both economic and non-economic procedures and schemes, taking to assist the company accomplish its intent efficaciously and with a more disciplined attack. On the other manus, the external hearers who guarantee whether the economic state of affairs of a peculiar period is presented in a just, right and accurate mode ( Millichamp 2008 ) .

B. Organizational structure/ duty

The internal hearers are stand foring an internal portion of the organisation that they are working to and they are accounting to the direction of the house. In contrast the external hearers submit a study to the stockholders of the house on an one-year footing ( Millichamp 2008 ) .

C. Legal Status

The formation of internal hearers subdivision into organisation is non compulsory, except for companies that are merchandising into stock exchange, while the external audit is required by jurisprudence for most houses, particularly for those which are commercially register ( Millichamp 2008 ) .

D. Scope and Approach

The employer has ever the right to judge the cognition and accomplishments that their internal hearer demand to hold. Usually, those internal hearers are coming from within the company, therefore they are already cognizant to some extent with the maps of the house. what is more after old ages of employment in merely one company they get a solid and extended cognition and experience. Alternatively, the external hearers must come from the organic structure of statutory hearers and they merely make an audit of the fiscal histories, assets/liabilities of the company one time or twice a twelvemonth, ensuing in non so extended cognition of the houses maps in relation to the internal hearer.

Possibly make a paragraph here to associate Internal Auditing with Audit Risk

Audited account Risk ( add appendix at the terminal )

As it was mentioned above, audit hazard was introduced around the 1980s when hearers could non travel through all minutess. Therefore, a hazard based attack is used by hearers in order to extinguish the opportunity of giving a false audit sentiment. All audits must follow the hazard based attack in conformity with ISAs ( International Standard on Auditing ) , in order to guarantee that audit work is right and the most efficient trials are used based on the audit hazard appraisal. As stated in ISA315, hearers should observe possible hazards that might take in mistakes in minutess and balances or a misstatement in the fiscal statements. ( http: // )

Audit hazard is cardinal for all hearers and harmonizing to the IAASB ( Glossary of Footings, Handbook, 2009 ) is defined as: ‘The hazard that the hearer expresses an inappropriate audit sentiment when the fiscal statements are materially misstated. Audit hazard is a map of material misstatement and sensing hazard. ‘ The above definition comes in understanding with the definition given from the ASB ( Auditing Standard Board ) Meeting in August 2007.

Components of Audit Risk

Audit hazard is fundamentally constituted by three constituents: Inherent hazard, Control hazard and Detection hazard. Built-in hazard as Wyett J. stated ( 1999 ) is when history balances or minutess could be materially misstated because of factors originating at the entity or history balance or category of dealing degree. An afterwards information argue that Inherent hazard is when the hearer ‘s appraisal of ‘the susceptibleness of a relevant averment to a misstatement that could be material, either separately or when aggregated with other misstatements, presuming there were no related controls ‘ ( Akresh D. , 2008 ) .

Harmonizing once more to Wyett J. ( 1999 ) , Control hazard means that a material misstatement could happen in an history balance or category of minutess which would non be prevented or detected in a timely manner by the entity ‘s accounting and internal control systems. Subsequently, an information argument that the hearer ‘s appraisal of ‘the hazard that a misstatement that could happen in a relevant averment and that could be material, either separately or when aggregated with other misstatements, will non be prevented or detected ( and corrected ) on a timely footing by the entity ‘s internal control ‘ ( Akresh D. , 2008 ) .

Finally, sensing hazard is defined as ‘ the hazard that all the substantial trials of inside informations and substantial analytical processs refering an averment would neglect to observe aggregative stuff misstatements that have occurred and were non detected ( and corrected ) by the entity ‘s internal controls ‘ ( Akresh D. , 2008 ) .

Chapter 4: Collapsed Auditing procedures

Conclusion & A ; Recommendations

Chapter Introduction

This chapter summarizes the decisions of the undertaking that derived from the research reappraisal and the instance surveies analysis. Besides, at this chapter we will hold some points of betterment and suggestions on bettering internal auditing. Furthermore, the importance of internal auditing will be clearly described.

Conclusions & A ; Recommendations

As it can be seen from the above undertaking, it is more preferred for the efficiency and effectivity of internal auditing to choose a control system that is traveling to take into consideration the hazard of all sections in the concern and it will be adjusted harmonizing to their fluctuations. Furthermore, another of import measure for the betterment to the services of internal audit into organisations is to coerce the internal hearers to follow with the international criterions of internal auditing. Additionally, the uninterrupted reclamation of professional criterions for the internal hearers is necessary so that it will fit with their accomplishments and cognition in the present growing. What is more, the complementary relationship and go oning coaction among all constructions of audit activities may besides lend to more internal quality auditing.

In add-on, it is for the best involvement if the internal hearers were to work without clip force per unit area at all, for the ground that on occasion this force per unit area may be a confining factor for obtaining sufficient and appropriate grounds. Furthermore, to keep and beef up the independency of internal hearers, the confusion and the struggle with other maps within the organisation should be avoided every bit much as possible. In add-on, the relationship between internal hearers and other employees in the concern must be redesigned due to the fact that the internal hearers are required merely to look into and non supply adviser to them.

Presents, the internal and external audit should be cooperated and both of them use each other cognition, making that the company could go more efficient and effectual. That is one manner so the external hearers can trust on their work and increase the functionality to a better overall control system