Effectiveness of the Internal Audit Function

The internal audit function is said to be effective when it provides reasonable assurance to stakeholders of an organization (Board Audit Committee, Executive Management, Shareholders or Customers) that management established internal controls (operational controls, IT controls, market or business controls, risk management, etc.) are working optimally and meet the needs and expectations of stakeholders. In doing so, the audit function most use a methodology that sufficiently test these controls and provide measurable metrics of its adequacy and effectiveness.

In answering the effectiveness question, the following should be considered.

  • 1. The internal audit charter and mission: This is where the internal audit function derives its authority and independence. Has the internal audit function been effectively empowered by Board Audit Committee (BAC) and Executive Management to perform its duties and has its independence, objectivity and reporting lines been clearly established and defined?
  • 2. Applicable laws and regulations: Here laws and regulations guiding the industry or sector/segment where the organization conducts its business activities must be identified and complied with throughout the organizations. As such, the organization/business must establish internal policies, procedures and controls to ensure strict compliance with applicable laws and regulations within its operating environment.
  • 3. Audit strategies and plans: The audit function should document/establish strategies and plans on how it intends to carry out its statutory functions and exercise mandates given to it by the Board Audit Committee. In doing so, it must put forward a realistic, effective and risk based audit strategies and plans on how to provide that reasonable assurance to BOA and other stakeholders on the effectiveness and adequacy of internal controls established by management to ensure realization of business/corporate objectives.

It is important to note that measurement of effectiveness and efficiency of the internal audit function can be both quantitative and qualitative. This is where obtaining regular independent feedback from key stakeholders on the effectiveness of internal audit functions and how its activities create value for stakeholders is important while adjustments are made where needed.

In determining the effectiveness of the internal audit function, below are some of the metrics identified to help in measuring how effective or otherwise the internal audit function is and what forms the opinion of key stakeholders in that direction.

  • 1. Audit plan coverage (audits performed as against audit plan).
  • 2. Quality of audit findings/observations.
  • 3. Improvements due to implemented recommendations.
  • 4. Revenue assurance and Cost savings initiatives (income losses recovered, duplicate payments and vendor over-payment detected).
  • 5. Potential fraud prevented.
  • 6. Savings on internal audit budget.
  • 7. Quality Assurance Review.

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