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WAK Model - The way of best solution for an organization internal audit process, (1st part)

Summary: “WAK” model is a internal auditing process tool by which this tools an internal auditor wishing to implement an strategic process to complete the auditing program, only these presented three stage of WAK model process are well elaborated and know, for base on this process tool an internal auditor is able to formulate and implement the auditing aim, Auditors can work in a wide variety of settings. Auditors employed by private business, corporations, and financial companies also employed by both state and government agencies.

“WAK” model approach that if you want to be an auditor. You must have excellent analytical skills and great attention to detail. You must be proficient in accounting and auditing computer software & changes in law. Auditors should also possess a high standard of professional integrity as decisions are implemented on the basis of their statements and service.

Confronted with difficult dynamics of economic environment, businesses put an increasing emphasis on finance, management. Accounting and audit becomes more important and relevant to our daily life- as a bridge. Audit, financial, & business related education / literacy is not the only permeate in people's life but also control vital business arteries and eventually; the entire economic systems which exposed to such a business world.

I feel strongly that it is necessary to prepare everyone with a set of quantitative and analytical skills what would make them geared up to face the real financial /economical problems with confidently.

As a financial consultant, I found that without any doubt “Internal auditing” is most important than ever in business today. Internal auditing function is playing a very important role to a wide range of business from local to global business organizations of manufacturing and services industries. After a long study I discovered that if it is possible to make the whole Internal Auditing process in a framework through apply in an easy way. Then both of the parties (Auditors and business organizations) could find out the errors and resolve in the process of Internal Auditing to achieve the ultimate goal of the business.

I would like to interpretation my view on the explanation about the internal audit & auditors activities before going into the “WAK MODEL”. I have tried to make clear all the parts of internal auditing ahead of the WAK MODEL because I believe that the people who are related with accounts, finance, auditing and also the business owners will understand overall about the internal auditing. What is the necessary of Internal Auditing? And where is the use of “WAK MODEL”. This model will help the students/learners for bearing in mind as a career to become an internal auditor.

A. Internal audit overview:

01. Summary: Internal Audit Activity and Internal Auditor in the Ethical Culture of an Organization stresses that internal auditors, like everyone else in a company, have a role to play in corporate ethics--a role that can vary by the existence of, lack of, or degree of development of the organization's ethical culture. In fact, the internal auditor's role can be shaped as well by the existence, or lack, of an individual designated the chief ethics officer, furthermore internal auditors setting out to perform an ethics audit face both their own concerns about the often-uncharted territory of such tasks as well as the concerns of their colleagues and supervisors. Those concerns, experts say, can be allayed once such an audit is fully developed. Seemingly diaphanous notions can, in fact, be quantified and examined, and issues of appropriate versus inappropriate behavior can be addressed successfully.

02. Introduction > internal audit

These introductions describe - “the Internal Auditor’s responsibilities with respect to the internal audit function. The Internal Auditor describes audit planning and scheduling, and discusses the scope and types of internal audits generally performed at the organization as well Internal auditors verify the effectiveness of their organization's internal controls and check for mismanagement, waste, or fraud. They examine and evaluate their financial and information systems, management procedures, and internal controls to ensure that records are accurate & controls are adequate. They also review company operations, evaluating their efficiency, effectiveness, and compliance with corporate policies and government regulations,

03. Why should organization audit?

There are many sophisticated management tools available to organizations to help them undertake activities like business process re-engineering, continuous performance improvement or balance scorecards and business excellence to conduct some sort of initial assessment or audit to establish a starting position or baseline, this baseline information is then used as a reference against which improvements in performance over time can be measured,

As far as data protection is concerned the key reasons for carrying out audit activities are:

• Determines the risk appetite of the organization

• Establishes the risk management framework

• Identifies potential threats and assesses risks

• Decides on response to risks like implementation of control

• Monitors and coordinates the risk management processes and the outcomes,

• Provides assurance on the effectiveness of risk management processes

Internal audit can be the key source providing objective assurance that all the significant risks have been identified, risk management process is working effectively and efficiently, risks are being reported and controls are effective. As part of this work, the internal audit activity will provide advice, coaching and facilitation services to assist executive management in carrying out their responsibilities.

04. Who conducts an internal audit?

Some organizations are large enough to have a designated internal audit function. However most internal audit are carried out by staff members from within the organization,

05. Definition of auditing

“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.”

In different - “Independence allows internal auditors to carry out their work freely and objectively. This concept requires that internal auditors are independent of the activity they audit “Objectivity is an independent mental attitude which requires internal auditors to perform audits in such a manner that they have an honest belief in their work product and that no significant quality compromises are made. Objectivity requires that internal auditors do not subordinate their judgment on audit matters to others”

06. What are the advantages of an internal audit?

An internal audit offers several advantages; I have presented some of important advantages:

• In directs management’s attention to the key business issues. The audit analyzes weaknesses in the system of control and become the basis for practical recommendation for improvement.

• It gives management confidence when controls are operating satisfactorily.

•It identifies opportunities for improving efficiency and effectiveness.

•It gives early notice of potential problems, so that management can take action to head them off,

07. Scope of Internal Audits

The internal audit function’s scope of operations is by its very nature quite expansive. The internal audit function will assist the College in fulfilling its vision, mission, strategic initiatives, and objectives, while adhering to its core values, by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of enterprise-wide risk management, internal control systems, and governance processes.

The external auditors have to express an opinion on accuracy and fairness of financial information. The scope of internal audit is much wider than statutory/external audit. It should ideally cover all the organization’s activities. They include:

•Financial audit –accuracy, completeness and fairness of financial statements

•Operational audit- effectiveness and efficiency of operations

•Safeguarding of assets

•Review of projects

•Management audit

•Fraud detection- developing fraud exposures for every audit and detecting red flags

•Review of effectiveness of internal control

•Compliance with laws, regulations, policies and procedures

•Preservation of ethical culture – monitors the ethical climate and report on red flags that may compromise ethics

•Providing advice on reducing waste or inefficiency

08. Objectives of the internal audit:

An internal audits primary object is to examine key controls

Financial – how is money handled within the organization? For example – who authorizes payment, and what checks and balance are in place to prevent unauthorized spending and fraud

Administrative – are these conducive to meeting strategic objectives.

System related – what system are in place departmentally and across the organization and how do they fit together,

The first step is to determine which of the above considerations are you priorities and set the broad audit objectives to reflect them,

09. Role of auditors

The auditor’s opinion on the truth, fairness, accuracy etc. of the financial statement imposes a larger responsibility on the auditor, which transcends the relationship with the client. The external auditor has to maintain total independence from the client. The auditor is supposed to be a watchdog. Government, creditors, investors and the business and financial community rely on the independence, objectivity and integrity of the auditors for maintaining confidence in operations of a company.

Too continually review and update control for adequacy and ensure controls established are strictly adhered to and in line with the guiding objectives of the Centre. Directly Ensure Compliance in all departments

• Monthly checks the Cashier record and the Supervisor’s posting into the cash book and Pastel.
• Verifies and checks all supporting documents for purpose, beneficiary, value authorization and date

• Check and ensure that relevant processes are followed for stock requisition

• Ensure internal control measures are operating as laid down

• Ensure overview function of internal audit is spread all over the operation of the Centre

• Carry out Spot check on all movable assets including cash

10. Responsibilities of auditors

• Internal Auditor:

Internal Audit is a service to management. Its functions include examining and evaluating internal control and providing assurance to the management. It is a part of the organization’s system of internal control and its scope includes ALL aspects of internal control, not just financial control. The scope of internal audit is much wider than statutory/external audit as discussed in detail above. It should ideally cover all the organization’s activities.

In short approach:

• Develop, document, implement, test, and maintain a comprehensive internal audit plan and system of internal controls to help provide assurance that applicable laws, regulations, and College policies and procedures are complied with judiciously

• Examine financial transactions for accuracy and compliance with institutional policies and applicable laws and regulations

• Evaluate financial and operational procedures to assure adequate internal controls are present;

• Identify, assess, and evaluate the College’s risk areas; make appropriate recommendations for improved internal controls and accounting procedures; and research and adopt industry best practices where appropriate

• Work with the senior leadership of the College to identify key business risks, assess those risks, and establish risk management procedures and practices based on industry best practices

External Auditor

External auditors have to express an opinion on accuracy and fairness of financial information. An external audit program encompasses a full-scope financial statement audit, an attestation of internal controls over financial reporting, or other agreed-upon external audit procedures.

A typical report includes inter IIA, information on

• Whether they have obtained all the necessary information

• Whether the companies has kept all the requisite books of accounts

• Whether the financial statements are in conformity with books of accounts

• The financial statements present a true and fair view of the state of affairs

• Proper records for assets, inventory, loans etc. have been maintained by the company

• Adequacy of internal control procedures

• Existence of internal audit system commensurate with nature and size of business.

• Details of statutory dues and matters under litigation

Although internal and external auditors have different and clearly defined roles they do share the same broad purpose of serving the public by helping to ensure the highest standards of regularity and propriety for the use resources and in promoting efficient, effective and economic administration.

11. Types of Audits

In preparing the Annual Internal Audit Plan, the Internal Auditor shall determine the type of audit to be performed for each auditor. The following is a summary of the various types of audits which will generally be conducted:

I. Financial audit:

Financial audits are designed to validate the accuracy and completeness of records and account balances. Financial audits will utilize substantive tests, analytical reviews, and other validation procedures which may or may not include functional tests or transaction reviews.

In financial audits, significance or materiality is usually defined as a monetary value consequently, planning decisions mainly involve the intended degree of audit assurance and the extent of audit work required to provide it. The requirements will vary from one organization to another and applicable laws and regulations. Some activities common to most audits:

•Risk assessment

•Defining Materiality

•Financial statement assertions

•Financial analysis of cash flow statement

•Compliance and substantiate procedures

•Analytical procedures

Meeting these objectives involves verification of:

•Revenue

•Sales

•Bank deposits

•Bank reconciliation

•Accounts payable

•Accounts receivable

•Disbursements

•Petty cash transactions

•Loans & Advances

•Assets

II. Operational Audits

This type of audit involves a thorough review of a department’s operating procedures and internal controls. They deal with broad performance issues, focusing on whether funds and resources have been economically, efficiently and effectively managed to fulfill the mission and objectives. An operational audit includes elements of a compliance audit, a financial audit, and an information systems audit. In particular, management audits examine and report on matters related to any or all of the following:

•The adequacy of management systems, controls and practices, including those intended to control and safeguard assets, to ensure due regard to economy, efficiency and effectiveness;

•The extent to which resources have been managed with due regard to economy and efficiency; and,

•The extent to which programs, operations or activities of an entity have been effective.

III. Departmental Audits:

Departmental audits are designed to review and evaluate the activities and operations of a particular College function, activity, department, or unit under review. Departmental audits will evaluate accounting controls, ensure compliance with College policies and procedures, applicable laws and regulations, and validate the records and account balances of the auditor. Departmental audits will utilize a complete battery of audit tests and procedures, including, but not limited to, functional tests, transaction reviews, substantive tests, and analytical reviews.

IV. Operational Audits:

Operational audits are designed to evaluate procedures and controls which impact the attainment of the College’s organizational goals and objectives. Operational audits also measure compliance with College policies and procedures as well as applicable laws and regulations. During operational audits, functional tests and transaction reviews will be utilized.

V. Grant and Contract Audits:

Grant and contract audits are designed to evaluate the contracting process, compliance with the provisions of grants and contracts, and third-party contractual performance. These audits may be performed with respect to any function, activity, department, or unit of the College and shall include all types of contracts; e.g., federal and private grants and contracts, construction contracts, and professional service contracts.

VI. Fraud and Financial Irregularity Audits:

Fraud and financial irregularity audits are designed to verify the existence and magnitude of suspected fraud and financial irregularities. Fraud and financial irregularity audits may be conducted at the request of the Finance Committee of the Board of Trustees, the President, and other senior members of College management; as a result of a tip from the College’s whistleblower hotline; or at the discretion of the Internal Auditor. The Internal Auditor shall utilize the highest level of discretion when undertaking a fraud or financial irregularity audit. The Internal Auditor shall promptly notify the Finance Committee of the Board of Trustees (including the Chair of the Finance Committee), the President, and any other member of senior management which may be appropriate, of any significant findings which result from a fraud or financial irregularity audit.

VII. Follow-up Audits:

Follow-up audits are designed to determine whether corrective action has been taken on previous audit recommendations. These audits are usually conducted six months after the Final Audit Report was issued and usually include only the deficiencies reported in the Final Audit Report. The follow-up audit shall include such functional or substantive tests that are necessary to verify that necessary and appropriate corrective actions have been taken

12. The Phased Audit Approach

A phased audit approach is generally used to conduct, watch, and whole internal audits in a timely and skilled manner. This approach may not be followed for certain special projects requested by the Finance Committee of the Board of Trustees and/or senior management, during fraud or financial irregularity audits, and under other special circumstances.

This phased audit approach allows the Internal Auditor to:

• Establish guidelines for completing internal audits;

• Identify the entire internal audit process, rather than emphasizing the fieldwork

Component as the extent of the internal audit process;

•Establish responsibilities and outputs for each phase of the internal audit process; and

• Provide regular communication that serves to control and document the internal audit progress.

This audit approach is the mechanism for planning, executing, and controlling the internal audit function through periodic reports and appraisals as the internal audit process progresses.

As discussed below in more detail, the phased audit approach consists of five phases:

• The planning phase;

• The organizing phase;

• The preliminary phase;

• The conducting phase; and

• The reporting phase.

Every phase of the internal audit development has definite requirements and produces specific deliverables.

 

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