Internal Audit and Corporate Governance | Audit. Tax. Advisory

Internal Audit and Corporate Governance in Kenya

The synergy of efficient and ethical corporate governance and internal audit function is not only vital but also fatal for shareholders and various stakeholders. This synergy compromise was recently echoed when a case of Flying Squad intercept Ksh.2 billion in a safe inside Barclays Bank Kenya, nevertheless, two bank officials being the key players were arrested therefore stipulating a breach on the internal control overhaul. Proper internal control facilitates early detection and prevention of such scenarios. In this article, we discuss the role of internal audits in corporate governance, the responsibilities of internal auditors, and the difference between internal and external audits.

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The role of Internal Audit in Corporate Governance

An internal audit involves examining, evaluating, and monitoring internal control policies and procedures. Internal auditors provide assurance to the management regarding the effectiveness of a company’s risk management and internal control systems. Generally, companies are not required to carry out internal audit arrangements; however, it is a part of good corporate governance practice to establish a separate internal audit department or simply outsource this function if more appropriate. Consequently, internal audit is typically a feature of large corporations.

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The main responsibilities of internal auditors include providing assurance regarding the following:

  • Internal controls are effective
  • Financial and key managerial information in the reports is fair and reliable
  • Systems are running effectively
  • Implemented internal control procedures are adhered to

The difference between internal audit and external audit in corporate governance

Although some of the work carried out by internal auditors is similar to that performed by external auditors, particularly in areas dealing with the assessment of internal controls, there are a range of important distinctions including;

  1. Internal auditors report to the directors or the audit committee, while external auditors report to the shareholders.
  2. The objective of the internal audit department is to add value to the company by improving the company’s operations and internal controls, while the aim of the external audit is to provide independent opinions on the financial statements of the company.
  3. In relation to the company, internal auditors are usually employees (or the function is outsourced), whereas external auditors are independent of the company.
  4. In contrast to external auditors, there are no legal requirements regarding the qualification of internal audit specialists.
  5. Regarding publicity, reports produced by internal auditors are private, whereas those of external auditors are publicly available.

Consequently, the work of internal auditors differs from the work of external auditors in terms of strategic planning, materiality, and procedures used to obtain the required level of evidence. For instance, in order to obtain assurance over a company’s revenue, external auditors are likely to test the efficiency of key controls and request several counterparties (based on the materiality level) to confirm annual turnovers with the company. In contrast to that, internal auditors may not set any materiality level, but they are likely to test all relevant controls implemented and review a rather large sample of internal invoices.

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