Professional Documents
Culture Documents
present methods
Mort Dittenhofer
Florida International University, Miami, Florida, USA
Keywords
Abstract
Introduction
Internal auditing is developing as a
substantial element of management in both
the public and the private sectors. It has
become so important that the major public
accounting firms are entering the field
through what is being known as
``outsourcing'' and gosourcing. Because of its
importance and because of its continuous
escalation into the management process, it is
essential that action be taken to ensure that
the performance of internal auditing
conforms to high quality standards. It is also
important to determine that it is a productive
process that enhances its goals and objectives.
There is a substantial body of knowledge
being developed in the area of internal
auditing productivity, primarily through the
efforts of the international organization, The
Institute of Internal Auditors. These efforts
are providing considerable progress in
achieving higher quality performance in the
internal auditing activity. It is the objective
of this paper to describe performance
measures that relate to:
.
the identification of auditee goals and
objectives;
.
the identification of criteria that signify
the achievement of these goals and
objectives;
.
the quantification of these criteria; and
.
the observation, analysis and reporting of
these criteria; and
.
the measurement of the effectiveness of
the internal auditing operation in helping
to assure the achievement of the auditee's
goals and objectives.
This approach is at variance with the
traditional pattern of internal auditing
effectiveness which has been closely related
to the performance of elements of the current
internal auditing standards structure[1] or to
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[ 443 ]
Mort Dittenhofer
Internal auditing
effectiveness: an expansion of
present methods
Managerial Auditing Journal
16/8 [2001] 443450
[ 444 ]
What is productivity?
Productivity (not necessarily efficiency)
could be considered to be the degree of
accomplishment of the objectives and goals
for which an organization's resources have
been provided. Thus, in order to determine
whether an internal auditing organization is
productive we must first define its objectives.
Second, we must be able to identify the
factors that represent the achievement of
these objectives. Thirdly, we must develop a
measurement process that will establish the
degree of achievement of these factors.
Finally, we must be able to convert these
achievements to a statement of
accomplishment actually the degree of
productivity that has been accomplished.
Productivity could be measured as degrees
of efficiency and of effectiveness. The first,
efficiency is related to the output per unit of
input. It is a mechanical measure of how well
the organization has utilized its resources in
producing measurable output. Output is
usually measured in units produced or in
some similar fashion. The measurements are
usually of a discrete measurable quantity of a
definable product or service.
Mort Dittenhofer
Internal auditing
effectiveness: an expansion of
present methods
Managerial Auditing Journal
16/8 [2001] 443450
[ 445 ]
Mort Dittenhofer
Internal auditing
effectiveness: an expansion of
present methods
Managerial Auditing Journal
16/8 [2001] 443450
[ 446 ]
Mort Dittenhofer
Internal auditing
effectiveness: an expansion of
present methods
Managerial Auditing Journal
16/8 [2001] 443450
1 Financial
.
External auditors find accounting
deficiencies.
.
Subsequent financial period operations
disclose inaccuracies.
.
Evidences surface of malfeasance,
misfeasance and/or nonfeasance in
financial reporting.
[ 447 ]
Mort Dittenhofer
Internal auditing
effectiveness: an expansion of
present methods
Managerial Auditing Journal
16/8 [2001] 443450
2 Operating
.
Analytical auditing during a
subsequent period discloses operating
activities that were inappropriate and
which were based on faulty operating
information or reports.
.
Asset shortages such as inventories
resulted from faulty operating reports.
.
Defective production causing returns
from customers resulted from
inaccurate reports that did not focus
management's attention to improper
production activities.
[ 448 ]
production functions;
administrative functions; or
.
support functions.
2 Events have occurred that indicated that
the organization was functioning in a noneconomic manner in the use of resources
such as:
.
facilities and equipment;
.
supplies, both administrative and
production;
.
utilization of worker skills.
.
.
Mort Dittenhofer
Internal auditing
effectiveness: an expansion of
present methods
Managerial Auditing Journal
16/8 [2001] 443450
Criteria importance
2 Important but not decisive.
.
3 Little importance statute only
recommends does not require.
.
Inventory audit
Operation area
.
Safeguarding of assets.
Audit deficiency
.
Auditor did verify and report returns to
stock resulting from large customer
returns but did not determine that auditee
took corrective action.
Criteria
.
Recording of returns to inventory.
Audit evaluation
.
1 Complete failure to resolve the
unexplained losses of inventory problem.
Criteria importance
.
3 Little importance inventory is not a
major asset.
Audit defiency
.
Auditor did not completely review large
purchases to ensure that the bid process
was proper.
Environmental audit
Operation area(s)
.
Reliability of financial information.
.
Compliance with laws and statutes.
Audit deficiency
.
During an environmental audit, the
internal auditor reviewed some auditee
accrual controls and methods but did not
review the accrued controls for all
remediation costs.
Criteria
.
GAAP requires disclosure of all liabilities.
.
Regulations recommends liability funding
for remediation.
Audit evaluation
.
2 Partial failure to detect the problem.
Operation area
.
Compliance with good business practices.
Criteria
.
Purchasing should follow generally
accepted bid practices.
Audit evaluation
.
2 Partial failure to detect the problem
the audit was incomplete.
Criteria importance
.
1 Great importance most purchases are
handled through the bid process.
[ 449 ]
Mort Dittenhofer
Internal auditing
effectiveness: an expansion of
present methods
Managerial Auditing Journal
16/8 [2001] 443450
[ 450 ]
Note
References
Appendix
Examples of internal auditing output:
.
Number of audits completed.
.
Adherence to audit budget and plan.
.
Amount of savings and collections:
actual,
potential.
.
External audit fee reductions.
.
Number of audit findings:
reported,
implemented.
.
Quality of working papers.
.
Quality of audit findings and
recommendations.