While it is generally reflective of a larger organization to have an internal audit function, it is recommended by State Law in New York that organizations with a minimum level of activity, utilize an internal audit function. The audit committee will be expected to evaluate the internal audit function, thus the chief audit executive. Part of that process is the review the internal audit charter periodically and considering updating as necessary.
Using a formal assessment process makes the most sense. Your committee can then submit recommendations to the board for any changes in processes and procedures. The process occurs when your committee meets at least once annually with members of executive management and the independent auditors to discuss the performance of the CAE, if applicable. It is important to discuss job satisfaction and other employment issues with the CAE. Report to the full board on the performance of the CAE, including the effectiveness of the internal audit function.
Your committee also has a role in the review and approval of the appointment, replacement, reassignment, or dismissal of the Chief Audit Executive. You will be working with the CAE at least twice a year. The audit committee chair should be available if any unforeseen issues arise between meetings relating to the CAE.
Topics to include in the review with management and the CAE are significant findings on internal audits during the year and the evaluation of management’s responses to them. Questioning whether Internal Audit encountered any difficulties during its audits, such as any restrictions on the scope of work or access to required information is highly important. In preparation, review all internal audit reports issued since the previous meeting and planned for the upcoming year, along with the status of each planned audit. Structure your evaluation to include a review and discussion of the findings for each audit completed since the prior meeting, and, of course management’s response to the findings.
Costs are always a concern especially when there is both internal and external audits involved. Be sure to evaluate the internal audit department budget and staffing with the CAE. That information can then be utilized to report on the status of all internal audits planned for the next quarter and/or year. Clearly, Internal Audit should provide a summary of findings for completed audits, including management’s plan to address findings and weaknesses identified.
Internal Audit should meet separately with the independent auditors to discuss Internal Audit’s compliance with its Charter and Standards. Many have a requirement for a peer review once every five years. For those organizations which receive federal funds, Internal Audit is required to have a peer review once every three years if the independent auditors plan to rely on their work to reduce the external audit scope.
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