Internal audit is an independent advisory and consultancy function established by the management of the entity to monitor internal control and help manage risk. The internal audit function is independent in the sense that it does not involve in day to day activities of the entity.
The growing recognition of the benefits of good internal control by management, and the complexities of an adequate system of internal controls have led to the development of internal auditing as a form of control over all other internal controls. The emergence of the internal auditor as specialist in internal controls is the result of an evolutionary process similar in many ways to the evolution of independent external auditing.
The following are factors which has contributed to the growth of internal audit function:
- Increased size of businesses by merger and takeover has brought a need for sophisticated internal control systems which need to be constantly reviewed for adequacy and for correct operation.
- Globalization and the consequent need to keep an eye on overseas branches and subsidiaries.
- Use of computer for data processing tends to mean that individual scrutiny and supervision of transactions no longer occur. This means that a department is needed to ensure the continuing proper operation of other controls over transactions.
- Increased sophistication of management techniques required more accurate management accounts reports, this requires extra control over the accounting records which the internal audit department can ensure.
- High costs of external audit – Directors have requested that an efficient internal audit department can help the external auditors to cut down on their works and so reduce their fees.
- Greater competition and lower margins requiring tighter control over all aspects of a business.
- Growth in legislation and regulation and hence the need for compliance.
- Increase of dishonest acts and reduction of moral standards.