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The internal audit ban could result in “two ships passing in the night” but may also be a chance for the emancipation of internal audit from financial auditing

21 Jun

The Financial Reporting Council has confirmed that it is to prohibit internal auditors from helping out the external audit team (http://ow.ly/mfKoI). In today’s comment Richard Chambers fears that the new UK FRC restrictions on internal and external audit cooperation could result in “two ships passing in the night”. I share his concern.

This, however, may also be a chance for the emancipation of internal audit from financial auditing. To date, external audit often views internal audit as auxiliary to what external audit is tasked to do, that is auditing the financial statements. From that perspective, internal audit is not recognized – and will not be recognized – as a full profession but as a subordinate profession.

A PwC survey (2009) demonstrated, only 13% of internal audit functions spent 25% or more of their resources on strategic and business risks, while these two risk areas are the prime causes of value destruction (60%), followed by operational problems (20%), and only 15% stem from financial risks and a mere 5% from compliance-related risks. That signals that internal audit functions tend to allocate time and resources poorly, and may often examine the wrong issues, exerting too much effort towards auditing financial reporting and compliance controls at the expenses of more critical and relevant strategic, business and operational audit subjects. From that perspective, the internal audit ban represents an opportunity to clarify the internal audit value proposition in practice – which may well be quite different from what external audit is doing.

Please share your view on this.

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