IIA Magazine Feb 2017 issue

IIA Feb 2017 Issue

Internal Auditors need to provide maximum return on investment and audit the right things. They need to understand the company’s strategic mission, objectives and KPIs. More auditors need to base their work on the International Standards for the Professional Practice of Internal Auditing.

The 5 emerging threats are (i) global economic uncertainty; (ii) increased regulatory burden; (iii) significant industry changes; (iv) business model disruption; (v) cybersecurity threats. Global economic uncertainty seems to a bigger risk in 2017 as compared to previous years. In the compliance space, with the new US administration, enforcement areas could see some change. Trump could change the legislative, regulatory and executive actions under Obama’s reign.

Although most companies feel that they could detect a sophisticated cyberattack, many of them do not have an adequate communication strategy in the event of a significant attack. Also, some of the BCP might be lacking. The continuous monitoring of cyberattacks is also a challenge.

Data Mining. By leveraging data, internal auditors can address issues beyond the reach of traditional analysis techniques. It involves making use of data which had previously no formulated relationships, patterns. Artificial intelligence, machine learning, statistics and database systems all come into play. Some of the techniques auditors can use are predictive modeling (IF), data segmentation (data clustering), neural networks (artificial intelligence), link analysis (links between records), deviation detection (red flags). The use of email mining can identify red flags in fraud etc. Social network analysis is also possible. IA should continue to look for ways to innovate their audit testing.

Intelligent Assessments. Use cognitive technology to help identify high-risk areas. These are intelligent computer systems that can aid in the performance of risk assessments. For instance, this tool can extract and analyze text from audit reports and analyze trends and high-risk areas. Natural language processing (NLP) has the power to tap into every sentence of every report to churn out more information. The machine will convert text to a certain structure and add meaning to the text and teach the computer to understand audit concepts. Words like ‘fraud’, ‘finding’, ‘auditee’ can be flagged out.

Turning Up the Heat on Fraud. A fraud risk assessment can help auditors take the organization’s ethical temperature. There are many ways to do it, example, through surveys, focus groups, workshops etc. The focus is mainly on fraud risk. It works best in small brainstorming sessions with operational management. Using the ACFE’s Fraud Risk Assessment Tool can be useful as it provides a structured approach. Risk assessment is about identifying where fraud might occur and the potential perpetrators. IA can do surveys to measure the ethical climate and voting can be anonymous. The results of the survey can be discussed with management. If there are high risk areas with fraud risks, IA can pay more attention to them.

The Accidental Discovery. Small or remote locations can be more susceptible to embezzlement, especially when they are not audited regularly. Confront someone after the facts have been reviewed. Look at the big picture. Controls that aren’t operating effectively are as good as them not being there.

Auditing what matters. Add value by selecting audits that contribute to achievement of strategic objectives. Auditors now should start looking at this area. Look at where the company spends the most money, what their main programmes are etc. Find out who is responsible for the strategy and make them IA’s stakeholders. Traditional audit activities can move towards strategy too. IA should use the COSO ERM framework in its entirety. The aim is for IA to a strategic partner to management. Don’t fear failure and find out more from the auditee by talking to them. The trick is to engage with processor owners easy and evaluate control design. IA should do the following: (i) Identify and define the risks; (ii) rate the risks; (iii) address risks in detail. Getting management buy-in is also important. The CAE must convince the AC to highlight the need for a strategic approach. Most IA wants to be a trusted advisor.

Core Principles and the QAIP. The new IPPF in 2015 can be incorporated into the QAIP to show that the IA is aligned with the mandatory IPPF elements. Learn to develop a concept and approach that is easy to understand. Core principles are a mandatory element of the IPPF. IA need to have general conformance with the Code of Ethics and Standards. The 5 steps are (i) establish a maturity framework (ineffective, partially effective, effective, sustainable, world class); (ii) map core principles with the standards and code of ethics; (iii) Define characteristics of maturity in 3 aspects of standards and QAIP characteristics, infrastructure and process characteristics, core principles and specific characteristics; (iv) perform internal and external assessment consistent with requirements of QAIP; (v) Evaluate and report maturity levels for core principles.

Champion of Trust. By modelling high standards of ethical behaviour, IA can help shore up faith in the organizations they serve. How can IA be a trusted advisor that is well respected? One way is via ethical commitment. IA needs to model ethical conduct in everything they do. IA must have the courage to sound off before things get in trouble. Ethical commitment is the key to a well-functioning IA. Ethics should come naturally to all. We also need to build ethical resilience (integrity, courage, honesty, accountability, trustworthiness).

Infusing IT Auditing into Engagements via a three-phase approach. The tech sector is growing at a rapid rate. Internal auditors also need to develop IT-related capabilities. IA needs to think about the future of integrated auditing. For a start, IA can incorporate IT perspectives into current audit engagements. This can involve documenting down what are the IT automated controls. One can also read IT policies or those on change management. One should also identify resources and pinpoint where they are stored (example: servers). Map core IT resources and data to key business objectives. Respond to IT risks and identify audit objectives that can add value. An integrated audit can help in this. In the middle term, IA can build an IT audit team, understand the IT framework like COBIT, perform IT audits and also foster relationships with IT and management. In the long term, IA can leverage on data analytics and obtain professional certifications (like IIA and CISA).

Breaking Down The Standards. With the right strategy, practitioners can divide conformance into bite-size, easily digested portions. The standards consist of attribute standards (series 1000 to 1322) and performance standards (series 2000 to 2600). Some IA may neglect the attribute standards and focus on the performance standards instead. However, both are very important. IA should perform an assessment of how well they are conforming to the Standards. An external assessment must be conducted once every 5 years. The audit work program needs to be reviewed and approved by the CAE before engagement commencement. Ultimately, conforming and understanding the principles behind the Standards are important.

Auditing Organizational Governance. IA has an integral role to play in improving the organization’s strategic performance. This area is becoming increasingly important in recent years. Governance reviews can help prevent governance failures. Less than 1 in 6 IAs conduct reviews for their organization’s strategy. Sometimes, it might be difficult to conduct a separate governance review. Rather, it might be easier to incorporate it as part of routine audits. One can focus on both the governance structures as well as the organizational culture. Some of the soft controls can include management competence/style; mutual trust and openness; strong leadership; high performance and quality expectations; shared values and understanding; high ethical standards. However, for some of these measures, there are no hard data to analyse. Hence, it is important for IA to read the signs. IA can also provide a more advisory role, which is educating board about developments and trends in the industry and governance best practices. In terms of strategic reviews, IA has much to work on. There is a tendency to focus on weaknesses in financial reporting etc.

Good Governance is All About Quality. The 5 quality rules are (i) customer focus; (ii) management leadership; (iii) Teamwork; (iv) Measurement; (v) Total commitment to continuous improvement.

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IIA Magazine April 2017 issue

Business Resiliency is about the organization’s ability to quickly adapt to risk events such as these while maintaining continuous operations and safeguarding its employees, assets, and brand equity.

Malware, Ransomware and man-in-the-middle attacks are common security issues for organizations

Some organizations lack a clear risk management program and that is a problem. Lack of resources, complexity and inability to get started are some of the reasons cited.

  1. Communication errors/ misinformation over company performance through channels other than financial reports; 2. Environment, health and safety is an area which is high risk, but not many IA covers this.

Cyber risks are also a main area where IA needs to be concerned about.

Learn to work smart and not harder. Employers should 1) acknowledge the problem; 2) appreciate the employee; 3) identify the root cause; 4) define the roadblock; 5) Devise a solution (training, resource allocation, process improvements); 6) Circle back. Guiding an employee well will result in an increase in productivity and morale.

The Data Museum. IA can compile organizational data in structured exhibits. Auditors need to use data warehousing principles to clean the data and structure it once that it is ready for analysis. Before storing data, consider the following: relevance, reliability; reusability; rarity. For instance, SQL can be used to extract, transform and load the data. Learn to run SQL statements. As for audit tools, auditors can use data visualization and advanced reporting techniques. Use a relational database and start small. Ensure that there are audit trails and logs.

The Many Facets of Risk. Risk is always multi-faceted. Look at the product and market research life cycle. It is important to do the strategy and competitive analysis like via SWOT, Porters’ 5 forces etc. Financial Management like NPV calculations aid in project-making decisions. Operations Management is about maintaining the optimum amount of inventory, like the EOQ method. Forecasting sales and demand is also a risk. Human resource risks and quality management risks are also possible. IA can act to cross-pollinate risks via mathematical or management methods.

Life of Luxury (Embezzlement). When too much power, accounting and budgeting etc, resides with the head, too much risks exists and there is potential fraud risk. There were too many over budgeted accounts in this case. Also, a person spending excessively or leading a lavish lifestyle will arouse suspicion. There are many lessons that the IA can learn: include riskier businesses in the IA plan; question how beneficial is the whistle-blowing hotline; an audit on payroll can detect payment to ficitious persons/ other people; review the acceptable use policy for all corporate-issued credit cards.

Resilience Through Crisis. Organizations all need to overcome crises and emerge stronger. The BP oil-spill PR was handled badly. IA can audit the crisis management plan. A crisis team should be cross-functional and with each goal clearly defined. IA should also be part of the team to ensure that the team is addressing the appropriate issues. The team should identify potential crises and IA can chip in. Next, a comprehensive crisis plan should be developed. Effective communication is the key and there must be a plan to inform stakeholders quickly. It is also important to have a spokesperson to handle the media etc. General templates can be used for media statements. Experts can be used as well. Crisis simulations should be conducted, like table-top exercises etc. IA should be the observer in all simulations. After the crisis, the crisis management team should evaluate the effectiveness and the performance of the plan.

Hit the Ground Running. The trend is to convert interns in IA into the permanent establishment as they already understand some of the company’s operations. One option is to transfer existing staff to IA. Interns who perform well stand to be converted. Interns are also less costly and can be used during peal-periods. There needs to be a significant investment in developing a good internship programme. There needs to be a plan all along. When you plan, it is important to prepare a job description, program budget, hiring plan and schedule. Provide guidelines for the interns to do work and make the audit project interesting for them. Teach them soft skills in the audit. Give them real assignments. Stretch them and ensure that they can contribute and make their internship meaningful.

Climbing the Scale. Turn to maturity models. Maturity models can rank from 1 to 5. They can be expanded into many business areas nowadays. Maturity models can be more meaningful than a simple pass/fail. Using this can convey a more positive collaborative tone too. Acknowledge what the client is doing already to improve processes and controls. A maturity model also focuses more on processes than people and seems more non-threatening. The models you can use are CMMI, C2M2, COBIT, P3M3, RMM, TMMi etc. Develop a dynamic risk assessment approach. IA should provide both assurance and insight. One can use the ISO standardized frameworks to compare the organization’s maturity level against. At times, the highest level of maturity might not be required as a lot of resources will be required. Maturity models can be very judgemental indeed. To succeed, IA needs to choose the correct model and be flexible when applying it. Build the best model and find a project champion if possible.

From the Same Playbook. IA needs to align its work with the organization’s strategy. There are debates as to whether IA should provide assurance around risks affecting company strategy. It depends on the CAE. However, not all top executives will want to discuss strategy with the CAE. There can be a disconnect as IA usually does not audit the latest transformations and developments in the company. Some IA prefer to audit compliance, which they are more familiar with. Two big risks are not having effective strategy or not executing them properly. CAE should think like CEOs and think through different perspectives and figure out how to maximize shareholder value. IA can perform gross profit margin analysis etc. There needs to be a balance between strategic-level audits and compliance based audits. Have discussions with management and the audit committee on strategy. It is for IA to look into strategy risks and the risks of entering any particular strategy.

Three Lines in Harmony. A Centralized testing model will enable the 3 lines of defence to rely on each others’ work. Front-line management is the first line of defense, risk/compliance functions are the second line of defense, internal audit is the third line of defense. It is important to co-ordinate so as to ensure all areas are covered and there are no duplications. Relying on others can also provide an increase in efficiency. Ensure that there are proper service agreements if there is a centralized testing unit. Automatic testing preferred and desired. There is a need to document the risk framework.

Signature Audits. Auditors should try to identify and respond to emerging risks. Most IA confirm concerns already identified by management. IA can do a mystery shopper role, or perform simulations to test controls. IA now need to be more innovative and curious. Signature Audits refer to thinking out of the box to design appropriate test procedures (example: penetration testing or social engineering). IA can identify best practices or try to circumvent processes rather than test them.

Internal-Audit

World-class Internal Audit by Norman Marks

We were a world-class audit team. There is always a need to change and seek improvement. Solve departments solve their problems. Learn to be innovative in your work. This book features highlights of my career. Hopefully, the reader will be able to gain insights. Learn from your mistakes and learn from those I made too.

In the Beginning. I joined PwC straight out of college. I learnt to treat audit partners with respect. Gutter Brothers were an audit firm. Back then, I was just labelled as an ‘other’, which was even a lower rank than the receptionist. I was doing an apprenticeship by then. Respect must be earned through your actions.

I learned a valuable lesson from this. No matter how high you see yourself, how magnificent you look in the mirror of your vanity, others may see you as a pompous nitwit or worse. – Norman Marks

Another situation, many years later, reminded me never to think too highly of yourself. – Norman Marks

I am obdurate. Later on, I worked under a number of audit seniors and supervisors. One of my appraisal was rated as below average and that I was ‘obdurate’. My manager thought that I was inflexible. He believed that I was stern. Asking questions was a must. I asked to ask managers why must I do certain stuff. Do not follow the procedures last year blindly as last year’s work might not be done properly. Never simply follow a checklist without understanding what it is about. Simply use standard audit programs as a tool and a checklist. It is important to understand and appreciate the business. This is a powerful checklist. Keep asking ‘why’.

I believe very strongly that only when people have a solid understanding of why something needs to be done will they do it well. – Norman Marks

Too much quality. Sometimes, people in positions of authority do not have the right experience and ability. Learn to use analytics, trends and rations as an audit technique. Use performance indicators to detect unusual patterns in inventory level. Analytics is useful to save time during the audit. Once, the audit partner said my work-papers were great but I took too much to perform the work. Time taken to perform the work was a cost to the client. My work was apparently ‘too good’ and it didn’t have to be that that good. For internal auditors, the focus on documentation is not as great as for external auditors. IA’s work is not reviewed by examiners or regulators. Our audit opinion is for internal use. Internal auditors are rarely sued. If there are dispute in findings, it is important to have working papers as evidence. Interpreting the audit findings is also an issue. Working papers are crucial if there is a fraud investigation. You can review by talking to the audit team. If external auditors are going to rely on internal auditors’ work, documentation is important. Creating working papers should not be very ‘costly’ and the time wasted could be used for another audit. Apply ‘stop and go auditing’. This means extending the audit if risk was higher than expected but shorten an audit if the risk was lower than anticipated. Sometimes, cutting short an audit is useful. The CAE must balance the value and cost of developing working papers.

There is no way that audit documentation should take such an enormous percentage of total audit engagement time. If my internal auditors spent more than 10% of their time on working papers, I would need to know why. – Norman Marks

The value of criticism. I was good at flow-charting and completing ICQs. I received a lot of comments from the CAG specialist and requested for a meeting with him. All the review notes made sense. Luckily, he was patient and explained what I had done wrong and what should have been done. Later, I re-did the working papers and in future, I did not receive that many review notes. I realized that my flowcharting systems was lacking. I needed to have a better grasp of the fundamental principles. Technical skills are important too. I respected the CAG specialist and learnt a lot from him. Criticism can educate and change you. Later, I was hired by the CAG team as they were impressed with my knowledge.

The value of writing and teaching. I loved history. I was a gifted programmer and knew how to use the computer auditing sessions. To my superiors, I was an expert in the subject manner. For new technology, it is best to implement in stages. IT systems must be built on a solid foundation. The foundations and fundamentals don’t change. For example, you must understand internal controls, risk management, IS, cash management etc. Later on, I was interested in microprocessors. Tell people why the tasks they are doing are important. Avoid technical language and use ordinary English. In order to teach, you have to learn the fundamentals. Therefore, there is huge benefits for learning to teach. Use examples and diagrams when teaching.

The value of Curiosity and Research. I was the IT auditor for a large insurance firm. Keep asking and make sure that audit tests are not run on old data or old systems. From then now, I had a keen interest in ITGC. Sometimes you need to look deeper and not be fooled by the name of a system or report. Someone could have changed the name of the report but the data was not relevant. My common sense impressed him.

The executive attention span. I drafted ICQs to those programmers who had power to change many elements of the IT environment. There was once when I had to explain my work to a senior partner but I realised that he was not paying attention. I realized that once I had hesitated, the senior partner stopped listening to me. Senior management wants you to explain your point succinctly and quickly. They don’t like to hear things that they don’t want to hear. He wanted to size me up. Senior management only wants to know whether there are any issues in the audit. You should conclude what the effectiveness of controls meant for the organization as a whole.

You are how others see you. I was about to receive my annual evaluation from David. However, apparently, I had offended a senior colleague of David. I appeared arrogant in front of that colleague. When I approached my other colleagues, I realized that that was what they were saying about me too. Charisma is important in audit. When climbing the corporate ladder, you need to learn to be a charismatic leader.

Showing that you are the best at what you do may win you a job, but will rarely win friends or influence people. If we are to be successful, we need to surround ourselves with people who are interested in our success as well as their own. Arrogance turns them away. – Normal Marks

The search for charisma. I learnt charisma from leaders during my short stint in the US office. A large part of it is smiling. You need to behave in a way where people find it appealing. Demonstrate that you place value in your staff and you can trust them. Everyone is valuable and interesting in their own way. I have been enlightened by conversations. You should talk to everyone if you want to find out more about the organization’s problems. Listen to people on the ground. Show respect to others and listen well.

I have learned that people love those who will listen to them. You can be charismatic by listening actively, showing respect and attention to another’s views. – Norman Marks

The Root Cause. You cannot report the symptom. You need to dig to the root cause of the problem. Keep saying ‘why’. This is the 5 ‘why’ method.

If the auditor reports a problem that is only a symptom, management is unlikely to take the actions necessary to fix the problem permanently. Only when the root cause is treated, rather than the symptom, is the deficiency addressed. – Norman Marks

Do we speak the same language? The English spoken in America and England have slight differences. For instance, to the British, ‘ta’ means ‘thank you’ to the British people. Make the effort to speak clearly so that others can understand you. Do not assume that everybody understands each other. Take responsibility for what you say.

WIIFM. Sometimes, if you want to climb the corporate ladder, connections matter. Is this behaviour consistent with your values and principles? It was against my principles to steal others’ credit. People usually only care about themselves. They think in this perspective ‘What’s In It For Me?’ You need to understand how people act. Over time, playing office politics will create enemies.

Where do I go from here? I decided the life of a partner was not for me. The opportunities and salary are more important than the title awarded to you. You must look forward to the next role before jumping in.

Only take a job when you see yourself excited and running towards it. Don’t take a job just to escape your current position. – Norman Marks

Wearing a White Hat. People make mistakes and controls are important.

Awkward Days. If you can’t trust people, you can’t expect them to be loyal. If you have a bad boss, you will see that people will start leaving.

When you can’t trust your own people, especially when there is no good reason for mistrust, they will neither trust you nor owe you loyalty. – Norman Marks

Some measure their value and effectiveness by the number and significance of their audit findings. I measure my value and effectiveness in terms of how management trusts and looks to me to help them be successful. – Norman Marks

A great but unlikely compliment. I wanted to move into line management before wanting to consider whether to be an IA head. The CAE should report administratively to senior management and administratively to the Audit Committee. Compensation for the CAE should be set by the Audit Committee. Internal auditors should be experts in internal controls and processes. Workload assignment is important.

When to suggest an answer. It is good for auditors to have some line experience. First, one needs to assess the design of the controls. Learn to create a control matrix. The control matrix can help you make an assessment and prevent excessive audit. Be wary of backlog requests. Do not be quick to suggest answers before understanding the problem. Do not suggest a solution if you know just the symptom.

Learning about Limits. Common sense, together with logic, can help one accomplish a lot in life. Sometimes, it is better not to set limits for yourself. If you enforce the HR policies too strictly, some people might not like it. This might make you more enemies.

Empathy. Walk in someone else’s shoes before you criticize them. Understand what others are going through and the challenges they face. Walk around and ask others how they are doing and show some concern. When they know you care for them, they tend to be more loyal towards you. Sometimes, you need the humanistic and caring approach of management.

Empathy, understanding what it was like to walk in the auditees’ shoes, would help me craft a report with recommendations that were practical, business-oriented, and achievable. Having empathy would help me influence and effect the change I desired and felt was necessary for the business. – Norman Marks

The Customer. It is important to follow-up with the customer and update them if the query is still in progress. The person who made initial customer contact should take ownership of the case.

The lesson was that hiring motivated and experienced people may cost a little more per person, but they need little supervision or management, are far more productive, and in general create products that are practical, relevant, and useful to the business. – Norman Marks

The Best Job I ever had. The best way to know a job is through a network. Tosco did well due to strategic management decisions. I was given room to grow as the head of Internal Audit. IA should be able to effect change and adapt to changing business conditions. The staff need to be talented and also be able to communicate well.

Hiring the Best. I started off as the CAE with no staff under me. Eventually, I hired 3 experienced people. In IA, both hard and soft skills are necessary. In addition, being intelligent and having a curious mindset is necessary. Auditors need to think for themselves. During the interview, ask what the candidate reads. Ask the candidate audit-related questions and dig out more information on him. Think about a situation where you have never encountered before. A way to approach auditing is to evaluate the risks and to better manage them. Sometimes, if the risk are at an acceptable level to management, then no further testing is required. Having experienced staff is important.

Too many auditors are trained not to think. They are told to follow an audit program or checklist that somebody else created. – Norman Marks

Humility and Respect. I was the director of IA at Tosco. Even if you are very senior, always act with humility and respect. Trust your employees to work diligently. I was proud of the management team, who placed people ahead of profits. Listen from people who can offer different perspectives. People like to feel empowered and respected. IA was seen as a path to business. Create a fun environment so that people will stay.

The risk-based IA plan. Learn to build up your audit universe. Always practise risk-based auditing. Sometimes, a full-scope audit can use up too much of your resources. Later, I understood the concept of ‘opportunity cost’. Your audit plan can have relative ranking of risk factors. I included risks within each business unit and compared them across the enterprise. Focus on the more significant risks to the organization. There are endless possibilities of audit. I was able to substantially cut down the audit time required. The more audits you do, the more risks you are able to assess. One average, one audit member could complete up to 12 audits per year. Learn to perform an ERM first, before developing your audit universe. In the past, nobody talked about ERM. The whole point is to discuss on the wide-range of activities for the organization.

My first frauds. Over the years, I have performed many investigations. Sometimes, companies want to protect the fraudster because he is still a valuable member of the organization. Do not commit ‘white lies’ as they may have serious repercussions moving forward. Limit the people in the ‘know’. Do not jeopardise people’s career if they are under investigation. Sometimes, they might actually be innocent. Anyone is capable of committing fraud, even your close friend. It is important to keep investigations confidential, so as not to affect others’ reputations. Never assume guilt unless you have sufficient evidence.

Not all auditors hate risk. Management can decide how much risk to take, but auditors can challenge this. IA should not try to eliminate every risk that they see. Do your audit customers smile? It is not about eliminating risk, but about taking the right risk. There needs to be security over the batch jobs. It is essential to take a business perspective when it comes to auditing.

Internal auditors should understand that business is not about avoiding or limiting risk, it is about taking the right risk. I have learned that all internal auditors should consider themselves business people who have a job as internal auditors. Their work should be intended to contribute to organization success, not just point out deficiencies or “findings”. – Norman Marks

Loretta and Wow! Audit Projects. As IA, you can make the person’s job more interesting by making better use of their manuals and documents. Learn to reinvent your work. Make every project a ‘Wow!’ project. IA needs to talk to people to understand the risks that the organization faces, and what are the risks and opportunities. Spend time to talk to people on the ground. Timeliness is important. Long meetings are unproductive in nature and should be avoided. Auditors must talk in the language of business executives.

Why do I need to write an audit report? One needs to demonstrate empathy. You need to care about the success of the team. The report is a vehicle of communication. It benefits the management and the audit committee. Clear communications are easily understood. The report must be clear and concise. Management and the AC wants to know the following: 1) Is there anything they need to worry about?; 2) Are there any issues of such significance that somebody in senior management should be monitoring how and when they are addressed?. Manage on ‘exception’. After reading the first few paragraphs, you should be able to obtain the correct information. An opinion can be expressed on a written scale, 1) Satisfactory; 2) Needs Improvement; 3) Unsatisfactory. Management just want ‘high-level’ information. The goal is to effect improvement and not to keep reporting issues. Risks must be managed effectively. If management corrects the issue before the report is issued, I can drop the finding. Is it necessary to organize a closing meeting? I am looking out for information to make IA communications more accurate. If you know one audit report might affect other areas of the business, it is possible to share the findings with that area of the business.

Auditing Forward. IA must be independent and objective. Evaluate and improve the control and governance processes. Auditing forward means being involved in forward looking activities and ensure that controls are in place. Controls should be implemented before ‘production’ phase. This is more of a consulting project. IA’s success has to be inter-wined with success of project implementation. Going live without testing is potentially high-risk. Identify areas where the project is most likely to experience pitfalls. IA can value add if it can improve the company’s future. Telling about problems in the past can help, but only to a limited extent. Be agile and learn to change the IA plan swiftly. Know that business environments can change. Obtain monthly operating reports and key metrics so that analytics can be performed. Business leaders like IA who can value-add.

Effecting Change. Some IA functions measure their success by the number of recommendations made and % of findings accepted by management. The number of audit findings should diminish over time. IA must target the root cause and actions needed to fix the problem. By right, all recommendations should be accepted by management. Measure quality through the change that is made. The number of significant findings should be decreasing over time. IA should enable organizations to take corrective actions. ‘Does internal audit help you identify the need for change and improvement in the business, and then to get those changes made?’

Leadership. People need to have confidence in you. You cannot fake who you are. Always be the best that you can be. Show respect and listen to others. Give credit to your team members. Ask questions that make people think hard. I have received good feedback from those around me. Try to mentor others and to help their careers whenever possible. People need to think for themselves. People from the Big 4 are trained not to think. This sort of thinking needs to be reversed. There is a difference between a boss and a leader. Leadership is about providing direction, implementing plans and motivating people. Leadership styles can be modified and tailored according to the situation. Trust and loyalty are really crucial. Be loyal and build strong teams. Understand what motivates your staff and where they want to go in their careers. Always be there for your employees. A leader is supposed to motivate employees so that they can perform to the best of their ability.

Working with difficult people. Sometimes, you will meet people who dislike you on a personal level. If you want to be successful, you need to learn how to work with difficult people. There is nothing much you can do but apologize sometimes. Sometimes, you may enter a workplace with a high degree of politics. At times, you might not be able to change a difficult situation. In that case, the best thing to do is to leave on a good note. You can take courses on how to deal with difficult people. Learn to listen to angry people talk. Eventually they will simmer down. Being heard is almost like being loved. Being alone can allow the person to calm down. Always try to be professional and polite. There is little to gain if you keep criticizing the other person. Difficult people are difficult for a reason. That is because they may have something to hide.

Working for a Difficult Region. It is ridiculous if you need management permission to perform the audit. IA should be given full access and co-operation. If bonuses are tied to number and severity of audit problems, people will clean up data and be extra vigilant when dealing with auditors. Sometimes, people do not see value in IA. Do not have the aim of disciplining others.

Organizational Culture. CAEs should be concerned with the organizational culture. Is there a culture of integrity? Is the culture appropriate for realizing and delivering value? The CAE must stand tall. Sometimes, when the CAE reports bad news, the CE might want the CAE to be fired. There might be a culture of manipulation of books and earnings management. There must be a strong tone from the top. Do not have the culture of ‘cooking the books’. If there is, it could be a good idea to leave.

The expansion of internal auditing. Pay attention to contracts audit. Sometimes, there can be loopholes that may be exploited. Investigations should only be performed by well-trained personnel. Determination of whether fraud is committed is a legal responsibility. Do not believe that guilt is present until all evidence is in. Audit must be performed to check compliance with licensing terms.

World Class Internal Auditing. This means being an IA function that few are aware of and not many people adopt. Do not simply follow best practice. Always audit forward. Embed your IA team in all major initiatives. An effective leader should support the team and provide adequate resources. There are disadvantages with inexperienced auditors. Focus on important risks and do not waste time on immaterial activities. Do not try to make someone else look bad. There are 14 attributes to a world-class IA. 1) Be praised by AC and top management. 2) A cool place to work (Build a bonding spirit). 3) The department people want to transfer to, but hate to leave. 4) Where people think (observe similar situations in other companies; be creative and resourceful; standardized audit programs may not be applicable for all; learn to challenge norms). 5) Where people are set free to choose an audit approach that stimulates and develops, as well as getting to the heart of the problem – tackling the root issues head on. Auditors must get to the root cause of the problems, which tend to be people. Sometimes, people make mistakes because they are overworked. 6) The source of projects that are noticed, that will be told to the team’s grandchildren (major business improvements). 7) The internal consultants of choice and a source of talent. 8) At the exit interview, the manager says ‘thank you’ sincerely (Listen to your customers. If they value you, you are in a much better position). 9) Fully leverage the organization’s risk management process (automation, base audit plan on risk-adjusted risk universe (ERM etc)). 10) Fully leverage advanced continuous monitoring and auditing capabilities – as part of a risk-based audit program (perform analytics, employ technology for advantage, crowdsource etc. 11) Where the CAE sends a message to the CEO asking to chat, and the CEO comes to the CAE’s office (Learn to listen well). 12) Expanding into new and cool stuff, even if not traditional audit areas, such as process improvement, six sigma, audit of risk management and governance (use the LEAN concept to reduce waste, inefficiencies etc). 13) Where internal auditing is seen by management as a competitive advantage (see the value add in IA). 14) Where the CAE is never satisfied (learn from other CAEs, think outside the box).

After all, our job is not to score points telling people how many mistakes they made. Our job is to help people understand whether things are OK, and, when they are not, work with them to effect the necessary changes. – Norman Marks

Celebrating mistakes. Do not live in fear of making mistakes. However, one should learn from their mistakes or it might become an issue in future. However, there are some weaknesses that one must accept. Make adjustments to your behaviour. Sometimes, what appears to be negligence may not be so. Stop before reacting. Learn from your mistakes in order to help you succeed.

Looking back and forward. Not many IA departments assess and provide assurance on effectiveness of risk management. Very few consider governance issues. It is simply not just a ‘check the box’ function. Too many ACs don’t understand the potential of IA. IA practices must continue to improve. Business environments are getting more complex.

Audit checklist on a desk, with tick against audit satisfactory

The Essential Guide to Internal Auditing by KH Spencer Pickett

Introduction. Auditors are expected to deliver. They have to present ‘big picture’ risks. They also need to identify risks with the departments. The audit report must add value to the organization. Visit the IIA website and keep up to date with the latest information. It is now a full-blown profession. An IA function can provide good governance. We now need to take into account internal audit standards, and the work of academics etc. This book makes reference to a lot of IIA standards. Please read the IIA standards. Chapter 2 – Corporate Governance; Chapter 3 – Managing Risk; Chapter 4 – Internal Controls; Chapter 5 – The Internal Audit role; Chapter 6 – Professionalism; Chapter 7 – The Audit Approach; Chapter 8 – Setting an Audit Strategy; Chapter 9 – Audit Fieldwork; Chapter 10 – Meeting the Challenge. This guide can improve an auditor’s professionalism. The internal audit function has evolved over the years. It has moved from accounting data in the past to ‘risk management, control and governance processes’. In the past, internal auditors’ job was to try to pick up fraud more quickly than the external auditors. In the past, the focus was more on low-level, detailed checking. Most ACs are required to have non-executive directors as well. Now, audits involves recognizing risks and then seeing how the controls can address the risk. Should the CAE report to the main board and not just the AC? ERM is also increasing in importance. These are exciting times as IA is also taking on a greater consulting role. However, the assurance aspect is still necessary.

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. – IIA definition

Corporate Governance Perspectives. An organization should strive for performance, but at the same time adhere to guidelines and regulations. The tone from the top and investor’s expectations do matter as well. Corporate scandals can undermine the trust in the society etc. That is why there are corporate governance codes that are put to practise. Understand the agency model of how the shareholders vote in the directors, the directors oversee the managers and the mangers run the operations. The directors set targets for management and the directors report results to shareholders at the end of the year. Shareholders have a right to dividends. Directors have to protect the business and account for their activities. In reality, directors may not be aware of their role. There are many stakeholders involved in a company. There is a lot more attention on shareholders and how they are treated nowadays. Giving shareholders more information may not work as they might not understand such information. Why do we need business ethics if everyone is honest? Research has shown that people are not fully aware of what an ethical culture entails. External auditors make sure that the accounts can be relied upon. For public sector, the focus on VFM is greater and the owners are the taxpayers. Ethical standards should be made clear to all. There are problems, for example: a CEO which is too powerful; board members which are not independent; incompetent boards; employees who abuse the system; no accountability framework; poor tone from the top etc. Shareholders do not like short-term growth. However, managers want instant results. There can be confusion over levels of authority, and the legislative framework etc. Corporate governance aims to combat inappropriate behaviour. The 5 key principles of governance are 1) Rights of shareholders must be protected; 2) There should be equitable treatment of shareholders; 3) Timely and adequate disclosure; 4) Disclosure and transparency; 5) Responsibility of the board. Countries should adopt international accounting standards. Independent directors should meet at least once a year. Independent directors should ask tough questions to the CEO. Management should optimize shareholder return. Transparency is important. ASX has developed an important set of corporate governance principles. The OECD has global principles of good corporate governance. There should be effective interaction between board, management, external auditor and the internal auditor. IA must report directly to the AC. The AC should select the external auditor and evaluate both external and internal auditor performance. Fraud Risk Assessment must be performed. The internal auditor is more concerned with internal control to determine whether organizational objectives can be met. Sometimes, the EA and IA audit methodologies can appear to be quite similar. IA’s role is to promote suitable organizational controls. The IA should make use of IIA standards in their work. Both EA and IA should communicate with one another. IA is interested in system weaknesses that lead to potential loopholes or fraud. Most of the time, IA staff are employees of the company. EA is usually a legal requirement. IA is mainly in charge of fraud investigations. IA can focus more on operational audits. IA may also cover operational efficiency and VFM initiatives. The IA function is also active the entire year. IA and EA should exchange their audit plans. The ideal situation is where IA and EA sit together and fully integrate their plans. Most ACs meet at least quarterly. The AC is very important in the role of corporate governance. The AC is mandatory for most international stock exchanges. The AC has many governance related responsibilities to fulfil. Where is the link to risk management and internal control? All foreseeable risks must be anticipated. A well governed organization should have good internal controls in place. The annual report should spell out clearly the responsibilities of every committee etc. The codes of corporate governance does change over time. KPIs should be integrated with KRIs.

Managing Risk. There are different types of risk management, including ERM and CSA. The audit should move towards the future, by perceiving risk. There is a move away from compliance. Risk can be controlled. Management needs to take a certain risk appetite. Risk is measured in terms of consequence and likelihood. Risk only has meaning when related to an objective. A mission statement is useful. Risk has both an upside and downside. Excessive controls should also be cut as it affects productivity. Risk management is a dynamic process. Flexibility is important. However, some risks will be unanticipated. The risk owner must be identified. There must be open communication with management on risk-related matters. All risk must be identified. There needs to be strategies to tackle high risk impact areas. The entire process must be reviewed periodically. With a good ERM structure, shareholder value should be enhanced. Risk owners should be the ones implementing controls. After controls, the residual risk can be measured. 1) Terminate – stop the activity; 2) controls – are we doing enough to reduce risk to an acceptable level?; 3) Transfer – this could be through taking an insurance policy; 4) Contingency – BCP in case high risk events occur (high impact, low likelihood); 5) Take more risk; 6) Communicate; 7) Tolerate (esp for low risk areas); 8) Commission research; 9) Tell someone; 10) Check compliance . A company should keep risk registers. The approach for residual risk is to 1) more risk; 2) accept risk; 3) implement more controls. Take note that controls are costly. The tone of the top must be set. However, risk management is sometimes conducted based on gut feel. The risk analysis must be compared with a set criteria (different areas). The organization should prepare a risk appetite statement and define the control environment etc. There needs to be both qualitative and quantitative statements (limits, thresholds, key risk indicators). Risk workshops are good. However, risk workshops could be seen as cumbersome and a waste of time. There must be a board member sponsoring the process. There should be a risk management committee. The board and the audit committee should work together on a risk assessment around corporate strategy. The CE can act as the board sponsor. It is important to get the people on the ground’s buy-in. It is important for the risk policy to be established (It should contain governance, policy scope, policy applicability, risk management process, risk appetite, reporting, roles & accountability, variations and dispensations). COSO defines ERM as ‘A process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within the risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.’. Look out for cross-functional risks. CSAs could be used to get information. In addition, interviews could be made. The use of CRA workshops are one option as well. Use a properly prioritized risk register to focus on the bigger risk issues. Risk can be classified into ‘strategic, programme, project, financial and operational.’ IA needs to work with the RM team to have streamlined ERM. ERM has a big role to play in strategic planning. There have been some new developments in the ERM space. For banks, it is very important to have a CRO. Even smaller organizations are paying more attention to risk management. Risk management is a good way to improve corporate performance.

Internal Controls. IC is very important to an internal auditor. A good understanding of internal control is important. IC is important and has to put in place. Poor controls can lead to losses. There is no substitute for IC. The control environment is important. Management must determine whether there is a need for controls. Once this has been identified, suitable controls needs to be identified. Next, they need to be implemented. Controls must be applied effectively. They need to be maintained and updated too. Do understand that there are different types of controls. It is all about the people. Beware of burdensome controls. Controls must be reviewed adequately. Controls should be a way of managing risk in the organization. IC must be implemented in the working procedures. The COSO framework is a good guide. The control framework helps drives the control environment. ICs must be communicated and monitored. Purpose à Commitment à Capability à Learning & Monitoring. People must learn to challenge old assumptions. CoBiT is for IT. There is also the Basel Committee on Banking Supervision. IC is closely linked to RM. Control mechanisms should be clearly defined. There are 4 types of controls: 1) directive; 2) preventive; 3) detective; 4) corrective. Some of the types of controls are: 1) authorization; 2) physical access restrictions; 3) supervision; 4) compliance checks; 5) procedural manuals; 6) recruitment and staff development policies; 7) SOD; 8) Sequential numbering of documents and controlled stationery; 9) Reconciliations; 10) Project and procurement management; 11) Financial system controls; 12) IT security; 13) Performance management. Warning signs: 1) Ability of senior management to override accepted control; 2) Lack of staff and vacant posts; 3) Poor control culture; 4) Staff collusion; 5) Reliance on a single KPI; 6) Reliance on memory; 7) Retrospective transaction recording; 8) Uncontrolled delegation of tasks. Understand the importance of soft controls. Control mechanisms must be designed appropriately. Use integrated controls. The fallacy of perfection. Control measures are costly. Management override of control is an issue which needs to be addressed. Ownership of control is very important. New developments are important to follow. SOX was being implemented.

If government organizations are to be effective, we must establish and maintain a system of internal control to protect government resources against fraud, waste, mismanagement or misappropriation. Employees often underestimate the importance of internal controls, or think internal controls amount to merely separating duties. However, internal controls encompass a comprehensive system that is critical to helping an organization achieve its goals and mission. – State of New York, Office of the State Comptroller

The IA role. Learn to define IA. An audit charter is needed. Internal auditing must be objective in nature. IA must attempt to add value to the organization. IA should also improve an organization’s operations. It must be systematic and disciplined. There is a need to continually improve the system. Risk management and control must be executed. The IA function should achieve 1) reliability and integrity of financial and operational information; 2) effectiveness and efficiency of operations; 3) safeguarding of assets; 4) compliance with laws, regulations and contracts. Much expertise is required from internal auditors. Sometimes, IA can provide an advisory role in relation to compliance and let the compliance do the rest of the job. MIS audits are also very important and have to be conducted. VFM is also related to audit work. The use of specialists may also be necessary. An audit charter needs to be written. The audit charter should cover areas recommended by the IIA Attribute Standard 1000. There are many possible types of audits that can be conducted by IA. IA must also appear to be independent when performing their work. IA must be impartial and provide unbiased views. The manager of the department cannot dictate what the auditor should do. Audit Ethics is important. IIA should refer to the ethics code. A code of ethics is necessary. Sometimes, the word ‘audit’ has a negative connotation. The auditor should have a good understanding of what the client is doing. Information must be extracted in an efficient manner. Dealing with people is important in the job. Planning for audits in the AC forum is important. IA should not just simply do work that management expects of them. Useful information should be listed on the IA website. What are some of the competencies required of internal auditors? Certifications help to showcase competency. Example: CIA. What makes good internal auditors? Auditors should be aware of 1) internal audit procedures/guidelines; 2) accounting principles; 3) indicators of fraud; 4) key IT risks; 5) management principles and materiality; 6) Appreciate and fundamentals of business subjects; 7) Soft and hard skills. Professional Development is important for the auditor. A certain number of CPE numbers is needed to retain membership to IIA. Workshops are useful for identifying training gaps. Appoint a training co-ordinator. This person should be able to carry out basic in-house training. The IA team should read journals etc. Work closely with SMM to ensure that risks are identified. Identify skill gaps etc.

The perception that operational management is very busy doing important work while the auditor is simply checking some of the basic accounting data that relates to the area can create a great imbalance. This sets the auditor at a disadvantage from day one of the audit. – KH Spencer Pickett

Professionalism. Internal auditors need to go through a detailed training programme. They must be knowledgeable. IA are professionals. IA is now a professional discipline and this is considered a huge achievement. IIA has issued its professional practice framework. You may read the attribute standards. An auditor needs to exhibit due professional care. All audits must be performed according to certain standards. Disclosure by IA must be made for consulting services etc. Quality assurance is important. IA needs to ensure that it complies with code of conduct and other relevant standards. Appropriate evidence of supervision is documented and retained. ‘The team leader, audit manager, and CAE each have a duty to ensure that they are available to direct staff as that audit is being conducted.’. Supervisors must review each workpaper and sign off. Questions or review notes must be addressed. Internal reviews or on-going monitoring is important. External reviews must be conducted once every 5 years. A pleasant audit image must be created. A feedback questionnaire needs to be conducted. A formal complaint procedure should be voiced out.

The internal auditor’s objectivity is not adversely affected when the audit recommends standards of control for systems or review procedures before they are implemented. The auditor’s objectivity is considered to be impaired if the auditor designs, installs, drafts procedures for, or operates such systems. – KH Spencer Pickett

The Audit Approach. IA can be performed in many different ways. Use a risk based systems approach. It can be more useful to examine the proper functioning of systems. Internal auditing provides a powerful level of review. There are several stages on RBSA. The use of CRSA is also possible. IA must be equipped with the right skills to perform the role. Fraud which have yet to be discovered is very alarming indeed. For fraud to take place, there must be the 4 elements: 1) motive; 2) attraction; 3) opportunity; 4) concealment. It is important to set the tone from the top etc. It is important to plan the investigation. Fraud risk assessment must be built in to the risk assessment workshops. VFM audits also may have to be performed. Management should be able to identify cost saving areas. VFM is concerned with the following: 1) economy; 2) efficiency; 3) effectiveness. IA can now also provide consulting services. Learn to manage change. Management is more concerned with the future than the past. IT governance is important as well.

Setting an Audit Strategy. The CAE must ensure that the audit activity adds value to the organization. Objectives must be present. The main role of audit is to give assurance work. The AC must understand clearly what IA is doing. The scope of services must be defined clearly. Audit objective must be geared to the organization’s objectives as well. The CSA approach has its perks. Sometimes, PESTL and SWOT analysis must be done. Audit plans should be driven based on ERM assessment. An audit universe must be defined. Management must be involved in the risk assessment process at least annually. Weaknesses in staff morale etc must be addressed so that the IA team can perform well. The resources used must be able to execute the audit plan. Auditors must be motivated to do their work. Low to medium risk audits can be performed on a rotation basis. An appraisal scheme must be suitably designed. There must be formal appraisal criteria. An auditor should have a career plan. There are many ways to assess an auditor’s performance. An audit manual needs to be written.

Audit Fieldwork. An auditor needs to perform the fieldwork. For each audit, the following must be defined: 1) engagement’s objectives; 2) scope; 3) timing; 4) resource allocations. Try and read through previous audit files. Every audit needs to have an outstanding matters list. Carry out your background research. Get the basic facts with management. Understand the nature of the audit. Highlight the type of audit skills required. If the audit is too difficult or the resources are not sufficient, the audit should be aborted. The senior staff should lead the preliminary meetings. Next, develop audit procedures. Define the tasks that need to be performed, even for the lead auditors. Define the extent of testing. The audit scope must be sufficient to achieve the objectives. For large audits, break them down into deliverables. A trend is for a move away from teamwork with a single auditor being given an audit to streamline resources.

Internal Audit