Audit is a word derived from the word Auditus, from Latin, which means “a hearing”, past participle of audire “hear”. To hear or see whether an event is true. This outlines the work of auditors in general.
The Audit activity has been in place since 4000 BC, where it mainly focused on checking of financial transactions. Later it developed to a modern verification activity during the industrial revolution. Thereafter auditing was introduced in America where foreign investors demanded independent checks on financial soundness of companies’ records. The evolution of the concept of auditing gave rise to a distinction between internal and external auditing. Internal auditing is an activity that exists within an organisation; this enables internal auditors to fulfil their function in an entity as the eyes and ears of management.
During the 1900s economic growth made it difficult for management to maintain control of business activities and operational efficiency. To overcome these problems people known as internal auditors were appointed to review and report on effectiveness of corporate governance, risk management and control processes within the organisation. This gave rise to different definitions of internal auditing in the course of time. (Coetzee, Bruyn and Fourie)
Today by definition, In the Institute of Internal auditor’s International Professional Practices Framework (A guidance for internal auditors).” Internal Auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operation. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, internal control, and governance processes” (About the Profession: Definition of Internal Auditing)
The distinction between internal and external auditing is that internal auditors are employed by management to perform consultation and assurance activities on business’ operations. That is why internal auditors are seen as the “right-hand man” of the Chief executive officer of an entity. (Mango)
Whereas external auditors are employed by shareholders to ensure financial statements’ compliance to regulations concerned with financial reporting and correctness of financial figures. (Mango)
The internal audit activity is separate (independent) from all other functions of management (i.e. Finance, marketing, Production, Human resources etc.). This is to enable internal auditors to perform their duties, as the eyes and ears, independently as a department and yet also objectively as individuals.
The scope of the internal audit activity is written in a charter, representing policies, ethics, and responsibilities of internal auditors. The charter is approved by the audit committee. A committee that is also separate from management to ensure audit findings incriminating management will be addressed by the...