The Roles Of Internal Auditor

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02 Nov 2017

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Introduction

Nowadays, the roles of internal auditor was mainly accounting oriented, concentrating on the precision and reliability of financial statements which reflect historical performance of the organization. After the Asian financial crisis and the global audit scandals such as Enron case in 2001, the role of internal auditors has been improved tremendously. Previously, internal auditors will check and monitor the company’s procedures and the level of compliances with the rules. Recently, internal auditors need to enhance by not only need to review on the organization’s past performance but also the resent performance as well and find the ways to improve it, so it will helping to achieve the organization’s objectives and add value to company.

Based on Wikipedia, internal auditors are employed by an organization to perform various audit procedures which related to the company’s internal controls over financial reporting. Internal auditor not only charting out the business risks, but also the fraud risk prevalent in our region. Internal auditors are required to report directly to the board of directors or a sub-committee of the board of directors, so it can reduce the risk that internal auditors will be pressured to produce favorable assessments.

In 1999, The Institute of Internal Audit (IIA) United States redefined that 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 objective by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Internal auditor also can be act as a risk manager to enhancing the internal control by give assurance on the risk management systems objectively to the management of the organization.

Based on the International Research Journal of Finance and Economics with the titled of "Women in Internal Auditing Profession in Malaysia", the researchers found that the recent problem faces by the female internal auditors are family responsibilities and excessive travelling. The result from the survey showed that family responsibilities as the most significant problem which is 74.4% (50.7% for agree; 24% for strongly agreed). Then follows by excessive travelling 70.7% (42.7% for agree; 28% for strongly agreed). Thus, the family responsibilities and excessive travelling are the most significant factors that may cause the under-representation women in internal auditing profession.

The roles of audit committee has increasingly important consideration which are they need to ensure the integrity by overseeing financial reporting process, review process and procedures to ensure the effectiveness of the internal control system, improving the relevance and reliability of an organization’s financial reporting. American Institute of Certifies Public Accountants (AICPA) defined audit committee as "An audit committee should be organized as a standing committee of the board composed mainly of non-officer directors". In the other hand, in Section 2(a)(3) of the Sarbanes-Oxley Act of 2002 reaffirmed that the audit committee is a committee to established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial reporting processes of the issuer and audits of the financial statements of the issuer; and if no such committee exists with respect to an issuer, the entire board of directors of the issuer.

Audit committee should implement, monitor and continue a good corporate governance practices which can bring benefits to company and its stakeholders. Good corporate governance indicates that audit committees seek to safeguard the interest of various stakeholders of the organization by preventing fraudulent reporting. Besides that, audit committee should be dynamic in rotate on a regular basis, therefore can be mix of experienced and new members in any stage. Last but not least, the chair of the committee should be a non-executive director who is not also the chairmen of the board which showed the independently of the audit committee by ensure ethical conduct and encompasses the timely and accurate disclosure of financial information. However, in order to make the audit committee effective and efficient is not easy. Therefore, audit committee need to hold three important qualities which are independence, communication and accountability in order to fulfill its duties.

The next section of this report discusses about the positives and negatives aspect of how audit committees can enhance the role of internal audit in meeting board of directors’ needs. In the following section will be the conclusions for the whole assignment. The end of this report will provide the improvement recommendation to the personals with the evidence that we had obtained and analyzed.

Main Report

Positive aspects of how audit committees can enhance the role of internal audit in meeting board of directors’ needs.

This section explains the audit committees bring the positive aspects that enhance the role of internal audit to meet the requirement of board of directors. Based on the annual report 2011 for Silver Bird Group Berhad, the audit committees are comprises of the chairman, Mr. Richard George Azlan Bin Abas, an Independent Non-Executive Director. The two members are Mr. Lim Hock Chye, an Independent Non-Executive Director and Dato’ Lee Kok Chuan, a Non-Independent Non-Executive Director.

According to Malaysian Code on Corporate Governance, the Board of Directors of every listed company shall establish an Audit Committee, which shall comprise not less than three members (including the chairman) and the majority of the members shall be from among the non-executive directors of the listed company and also the chairman of the Audit Committee shall preferably be a non-executive director. The advantages of non-executive directors on the committee will allow the Audit Committee to obtain honest feedback on the performance of financial management easily. This is because the presence of executive directors may inhibit discussion of sensitive issues. Likewise, the non-executive directors may be able to see larger picture better for effective decision making as they are less likely to be informed in details.

The roles of the audit committee are ensuring the internal audit activity is sufficiently resourced with competent. Besides that, audit committee need to review the adequacy of the scope, functions, competency and resources of the internal audit function. They also need to review and approve the internal audit plans by ensuring the appropriate actions had been taken. Based on the annual report 2011, audit committee had followed the scope of responsibility to review and approved the internal audit plan prepared by the Internal Audit Function. They examined and evaluated the adequacy and effectiveness of the internal control and the quality of performance in carrying out assigned responsibilities.

According to the IIA, the internal auditors are expected to apply and uphold the principles in Code of Ethics that are integrity, objectivity, confidentiality, professional competency and due care, and also professional behavior in order to provide the valuable and reliable source of information to audit committee. Moreover, the audit committees also had the authority to review the internal audit reports and related party transactions to consider potential conflict of interest situation within the group disclosed by the management. To ensure that internal auditors carry out their responsibilities that approved and periodically review the internal audit charter and a management approved document. The audit committees of Silver Bird Group Berhad had gave suggestions on the internal audit programme and the results of the internal audit process to ensure that appropriate actions are taken on the recommendations of the internal audit function. Audit committees are working closely with internal auditor to develop and build upon mutual understanding and agreement which will help internal auditors add value in identify the enterprise and manage for current and evolving risks. Audit committees also act as a support and guidance that can help in focus on internal audit’s role. Thus, the audit committees can improve and strengthen the independence and objectivity of the directors and the internal and external auditors.

In most listed companies, the internal audit’s periodic reports to the audit committee stand out as a crucial area for actionable improvement. Financial reporting by legislators, security analysts, institutional investors and regulators, the roles of audit committees in enhancing the role of internal audit in meeting board of directors’ needs and also to maintain the good corporate governance are become crucial now. The chairman of audit committee in Silver Bird Group Berhad ensured the internal auditors to be substantially improving the financial reports by providing information at the right level of detail. The information for the financial report is including an executive summary or some other thoughtful introduction that provides the context for the balance of the report. The audit committee also reviewed the annual audited financial statements and external auditors’ reports and their audit findings by comparing with the internal audit report. This is to ensure the financial report is reliability and comparability with the information given by the internal auditor. Besides that, the audit committee of Silver Bird Group Berhad reviewed the unaudited quarterly report on the consolidated results of the Group for the quarters ended 31 October 2010, 31 January 2011, 30 April 2011 and 31 July 2011 as reported by the management. This is to enhance the quality, objectivity and credibility of the financial reporting for Silver Bird Group Berhad in year 2011. Based on the above activity taken by the audit committee of Silver Bird Group Berhad, the audit committees enhance the published financial information needed by shareholder and public confidence because it has been reviewed by an independent committee.

In conclusion for this section, the audit committee should ensure the appropriate actions taken by the auditors in the internal audit process and provide important and useful details for the internal auditors to improve the integrity of financial reports. The following section will be focus on the audit committees bring the negative aspects that affected the role of internal audit to meet the requirement of board of directors.

Negative aspects of how audit committees can enhance the role of internal audit in meeting board of directors’ needs.

This section focus on the audit committees brings the negative aspects that affected the role of internal audit to meet the requirement of board of directors. Based on the annual report 2011 for Silver Bird Group Berhad, at the summary of activities of the internal audit function stated that the internal audit conducted did not reveal weaknesses which would result in material losses, contingencies or uncertainties that would require disclosure in the annual report. This shows that the lack of professional due care and independence within the audit committee. Based on The Star News, Silver Bird Group Berhad’s audit committees have been poor record-keeping and unverifiable sales transactions due to their doubtful payment for property refurbishments and machinery upgrades.

While another fact proven audit committee did not play part or their role to ensure the efficiency and effectiveness of the audit control. In the case of Silver Bird Group Berhad, it was found that there were no proper internal controls to enforce the management team to have proper records kept under the requirements of the Companies Act 1965, thus the financial records are unreliable which provided by the internal auditor. Evidence found in the The Star News stated that there were no evidences or details recorded for the payments made amounting to RM7.6mil for the refurbishment of an existing warehouse and factory as well as information to verify additions of plant and equipment amounting to RM4.9mil. Nevertheless, the revenues and cost of sales amounting to RM31.9mil and RM31.3mil from the sweetened creamer business were also not able to be verified. Besides that, the external auditors also stated that they were not able to verify the sales transactions with six customers from the bakery businesses and telecommunication businesses amounting to RM149mil.

According to the Silver Bird Group Berhad’s financial report for the financial year ended 31 October 2011, there are bad debts and additional allowance that needed to be made for impairment losses on receivables. This in fact revealed that the audit committee failed to perform their duties to work with the board of directors in establishing a sound framework to determine the company’s level of risk tolerance and actively identify, assess and monitor key business risks to safeguard shareholders’ investments and the company’s assets. Nevertheless the lack of proper internal control in the organization had led to several circumstances that may render the values attributed to the organization’s current assets in the financial statement to be misleading as stated in the financial report.

Next, in the case of Silver Bird Group Berhad, it was revealed that there was a lack of independence within the audit committee. The external auditors from Crowe Horwath, had refused to express an opinion on the financial statements because they were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. External auditor in the financial report had stated that, "During the course of our audit for Financial Year ended 2011, we expressed concerns to the audit committee and the board of directors over the validity and recording of certain transactions for which we were not able to obtain the sufficient and appropriate audit evidence and satisfactory explanations from management," It was not the responsible for external auditors to detect fraud as their role is to provide reasonable assurance that the financial statements are free from material misstatement, and to form an opinion on the financial statements whether they are of true and fair view. The lack of independence in the audit committee had result in the failure to detect and aware of the frequent cash calls issued via private placements of shares, bonds or commercial papers and rights issues for working capital purposes over the years since its listing in June 2002. Besides that, institutional investors such as Berjaya Group and Lembaga Tabung Haji which had 20.6% and 22.2% respective control over the company had failed to install Non-Executive Director in the audit committee to review the risk and internal control in the firm. The audit committee had also failed to use their voting rights to remove CEO Datuk Jackson for his regular demand of cash calls when the business is not expanding. Nevertheless, these threats had raised the awareness of the regulators to question the company, as these matters had cast a significant doubt on the financial performance and position of the company.

Summary for this section, lack of independent of audit committee and failed to perform their duties and responsibilities which can bring the result in failure to detect and aware the fraudulent happen and will bring high risk to the company and its shareholders and stakeholders as well.

Conclusion

As observed in the analysis, an Audit Committee is necessary to be established by the Board of Directors in every listed company in accordance with the Malaysian Code on Corporate Governance which purpose is to enhance the role of internal audit in meeting the needs of the board of directors as well as maintaining good corporate governance. The Audit Committee should consist of not less than three members including the Chairman and are preferably be non-executive directors. The reason behind this is to ensure that the decision making and feedback on the performance of financial management are honest and accurate.

The internal audit today were required to manage the company risk as well as help the company to reduce the cost, improve the organization performance and create a value added to achieve higher stakeholder demands. Thus, it will be importance to the audit committee to play the responsibilities by enhancing the internal audit which helps to ensure the integrity and transparency information of the financial reporting controls and procedures implemented by management. They also responsible in protect the interest of the shareholders and other stakeholders.

However, the Audit Committee were consists of both positive and negative aspects in enhancing the role of internal audit in meeting Board of Directors’ needs and it cannot be achieved without the collaboration of internal auditors. The responsibility for the audit committees is needed to review and approve the internal audit plan which prepared by the internal audit function. They are then required to examine and evaluate the adequacy and effectiveness of internal control and the quality of performance in completing assigned responsibilities. They also gave suggestions to their internal auditor by ensure the appropriate actions are taken by the auditors in the internal audit process. Besides that, it is the responsibilities of the audit committee to provide important and useful details for the internal auditors to improve the integrity of financial reports. The internal auditors are then in turn expected to apply and uphold the principles that are integrity, confidentiality, professional competency and objectivity in order to provide valuable and reliable source of information to the audit committee.

In the other hand, there also have negative aspect by audit committee enhancing the roles of internal auditor. According to the Silver Bird Group Berhad’s annual report 2011, it had showed that lack of professional due care and independent within the audit committee because of the internal auditor conducted did not reveal weaknesses which lead in material losses, contingencies or uncertainties that would require disclosure in the annual report. In additional, there was no proper internal controls to ensure that the management team to have a proper records kept. Thus the financial records prepared by the internal auditors were unreliable and proved that the audit committee did not take part on their role to ensure the efficiency and effectiveness of the audit control.

In conclusion, audit committee will act as an agency theory to the board of directors which they need to assist the board of directors in discharging its oversight responsibilities. Audit committee should review the activities, resources and organizational structure of the internal audit function and ensure no unjustified restriction or limitation is made. In additional, good corporate governance practices carry out by audit committee can bring benefits to company and its stakeholders. Thus, audit committee performing their duties by maintains the effective working relationships with the board of directors, management, and the internal and external auditors.

Recommendations

This section provides recommendations for improvement and enhances the role of internal auditor. Based on the evidences that we had obtained and analyzed from the Silver Bird Group Berhad, there are few recommendations to made by us for improvements and enhance the roles of internal audit.

The first recommendation is the independent auditor should always be update the current practices such as the International Professional Practices Framework and be a catalyst for improvement with the objective of ensuring that the organization as a whole can accomplish its strategic objectives. In order to achieve the strategic objectives, internal auditor has to ensure there is always a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. For this Silver Bird Group Berhad, it has poor governance process which the Executive Directors lacking of honesty. According to the Malaysian Code on Corporate Governance, it emphasized on strengthening board structure and composition recognizing the role of directors as active and responsible fiduciaries. This is to make sure the company has an effective governance structure by conducts itself in compliance with laws and ethical values. For this reason, the company shall implement the appropriate management of risks and level of intern controls. Therefore, internal auditor has to enhance their concern on the role of director by ensuring directors following the roles under the Malaysian Code on Corporate Governance.

The second recommendation is the proper review on the "add on" for the accounting system which to ensure the completeness, accuracy, and validity its existence and effectiveness from time to time. Internal audit should concern more on the level activities operated by Silver Bird Group Berhad due to the size of the company grows. Therefore, it is an onerous task for an internal auditor to review all the internal control of the company. It requires a lot of substantial time and effort. Thus, internal audit has to compose each of the separate components of internal control undertake by ensure that it is perform by specially assigned staff within the company. The internal control may involve such as control activities, information and communication processes as well as processes for monitoring the continuing effectiveness of the system of internal control. Based on this company, there is weakness for an internal control and test of controls. It shown that there were improperly maintained accounting records kept as per the requirements of the Companies Act 1965. Internal auditor was not able to verify the material balances and unverifiable sales transaction performed by the company. It result the previous environment for internal control may no longer be adequate in the current environment. Hence, internal auditor should suggest and enhance the internal control to prevent fraud and detect fraud, ensure accuracy and completeness of accounting records, and ensure adherence to management policies. However, there is unavoidable risk that some material misstatement may remain undiscovered due either to negligence, inefficiency, judgment wrongly, compliance on control has deteriorated or communication breakdown. In additional, management may delegate to internal audit committees some of its supervisory functions, especially with respect to the review of internal control.

Next, the internal auditor must enhance their back-bone of accounting profession which is ethical behavior. In this Silver Bird Group Berhad was contented that auditor from Crowe Horwath failed to discover or detect the financial irregularities and lacks of independence. As mentioned on the Council of the Malaysian Institute Accountant (MIA), it had pursuant to Section 10(a) of the Accountants Act 1967 which set a by laws on professional conduct and ethics. Thus, as auditors, they strongly believe that they had fully performed their duties professionally with fundamental principles in this company. As an internal auditor, auditor should always hold the fundamental principles such as integrity, objectivity, professional competence and due care, confidentiality and professional behavior. Internal auditor’s duty is to serve the shareholders with verify the financial statements prepared by the company’s management by independent opinion. If internal auditor did not perform independence as their concept fundamental, it has no credibility for the shareholders to rely with confidence. Add on for this company, company contended that independent auditors were unable to obtain sufficient appropriate audit evidence in order to provide independence audit opinion. Yet, it was a problem that auditor unable collect sufficient and appropriate audit evidence and satisfactory explanation from management. As we can see, auditors will always have right to seek for audit evidence which serve the needs of the shareholders and indirectly other users of financial statements in order for them to make informed decisions. Thus, this can show that internal auditor’s independent is from management in fact and in appearance.

Last but not least, the recommendations for improvements and enhance the roles of internal audit is internal auditor should fully understand Silver Bird Group Berhad’s needs and priorities in order to ensure every shareholder and indirectly other users of financial statements felt heard. This can clearly display the need for internal auditor’s work and its value. With extensive experience of an internal auditor can lead companies able to understand and support company’s internal audit systems in their quality management system. Therefore, internal auditor should also need to implement a future plan that focuses on value, measurement and accountability. This is ease for internal auditor to identify the business objective, roles and responsibilities of each parties involved and implementation timing. Internal auditor must declare that the future plan is appropriately possessing and its respective owners are held accountability for achieving the plan’s objective and targets. Additional, this internal audit plan should be carried out at least once per month in order to perform the risk assessment. Improving the use of technology is able help internal auditor ease to perform their internal audit program which described in the Institute of Internal Auditors (IIA).



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