Thought leadership series
Risk and Advisory Services
Internal audit’s role in modern corporate governance
Recent events have highlighted the critical role of boards of directors in promoting good corporate governance. In particular, boards are being charged with ultimate responsibility for the effectiveness of their organisations’ internal control systems. An effective internal audit function plays a key role in assisting the board to discharge its governance responsibilities. Yet how does the board – and its audit committee – satisfy itself that internal audit is functioning effectively and efficiently?
The board’s responsibility for internal controls
Through working with a broad range of organisations in Hong Kong and internationally, KPMG has identified a number of best practices in relation to the role played by the board audit and/or risk management committees. s
Recent events have highlighted the critical role of boards of directors in
s s s
Assessing the scope and effectiveness of the systems established by management to identify, assess, manage and monitor the various risks arising from the organisation’s activities. Ensuring senior management establishes and maintains adequate and effective internal controls. Satisfying itself that appropriate controls are in place for monitoring compliance with laws, regulations, supervisory requirements and relevant internal policies. Monitoring and reviewing the effectiveness of the internal audit function. Reviewing and assessing the internal audit plan and its progress. Ensuring that the internal audit function is adequately resourced and enjoys appropriate standing within the organisation. Considering management’s response to major internal audit recommendations and progress in their implementation. Approving the appointment or dismissal of the head of internal audit.
promoting good corporate governance.
I n t e r n a l a u d i t ’s r o l e i n m o d e r n c o r p o r a t e g ove r n a n c e
Internal audit assists the board discharge its corporate governance responsibilities Corporate governance developments both locally and around the world have reaffirmed the board’s responsibility for ensuring the effectiveness of their organisation’s internal control framework. These developments have highlighted the key role that internal audit can play in supporting the board in ensuring adequate oversight of internal controls and in doing so form an integral part of an organisation’s corporate governance framework.
The structure and reporting lines adopted for the internal audit function should promote independence, objectivity, consistency and business understanding.
The key role of internal audit is to assist the board and/or its audit committee in discharging its governance responsibilities by delivering: s An objective evaluation of the existing risk and internal control framework. s Systematic analysis of business processes and associated controls. s Reviews of the existence and value of assets. s A source of information on major frauds and irregularities. s Ad hoc reviews of other areas of concern, including unacceptable levels of risk. s Reviews of the compliance framework and specific compliance issues. s Reviews of operational and financial performance. s Recommendations for more effective and efficient use of resources. s Assessments of the accomplishment of corporate goals and objectives. s Feedback on adherence to the organisation’s values and code of conduct/code of ethics. However in attempting to adequately discharge their responsibilities, internal auditors often find themselves in an anomalous position. They report to senior management within the organisation, yet are expected to objectively review management’s conduct and effectiveness. The only satisfactory solution to this problem is for internal audit to report primarily and directly to the...