For full time internal auditors, when of the biggest problem with independence is that the auditors must report to someone within the entity, and both the independence and both the independence and status of the chief internal auditor will depend on who he report to within the management hierarchy.
The following methods or measures can be used to enhance the independence and status of internal auditor within the entity:
- Internal auditor must report to the highest level of management, or to the audit committee if there is one.
- Internal auditor should be given autonomy in deciding the scope of internal audit work. This is to avoid risk that the internal auditors might be assigned to investigation of non contentious areas of the business. The scope of internal audit work should be decided by chief internal auditor or by audit committee.
- Another method of enhancing internal auditor’s independence, is to rotate internal audit staff. The internal auditors should not be allowed to become too familiar with the operation that they audit or management responsible for them. To reduce the familiarity threat, internal auditors should be rotated regularly, say every three to five years, and at the end of this time they should be assigned to other jobs within the entity.
- The chief internal auditor should be appointed by audit committee or independent body. This is important in maintaining internal auditor’s independence since if senior executive is allowed to appoint chief internal auditor he may end up appointing ‘yes man’ who he think will not cause trouble. Therefore to avoid this, audit committee should be given power to appoint chief internal auditor subject perhaps to approval by the board of directors.
- Another method of enhancing independence of internal auditor is to exempt internal auditors in participating in making decision regarding operation of the entity including designing internal control. This should be done to enable internal auditors avoid self review, that is, auditing the work they were involved to prepare.