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2.1 Internal Audit’s

Management Focus 9 2.2 Operational Auditing

Concepts 10

2.3 Understanding and

Working with Managers and Management 11 2.4 Attributes of Management 14 2.5 Management and the

Internal Auditor 17

2.1

INTERNAL AUDIT’S MANAGEMENT FOCUS

Starting with the first edition in 1942, this book has continually emphasized that

service to management should be the major mission of internal audit. In the earlier

days, this internal audit mission objective was fairly narrow and emphasized more the needs of middle to senior management, such as a financial controller interested in the controls covering accounting processes. Over time, this internal audit mission has been broadened to cover the board of directors, stockholders, all levels of employees, government, and society. The controlling mission of inter- nal audit today is service to the overall organization, including those responsible for its governance. However, that mission still must have a strong internal man- agement focus. While the recipients of internal auditing services have special needs, management effectiveness is often the most major concern. If an organiza- tional unit is not well managed, everyone associated with it suffers. At the same time, management’s tasks are becoming more complex because of a rapidly changing worldwide environment with regard to changing technology, markets, regulatory factors, and societal values. These factors make it important for inter- nal audit to take a broad approach to the concept of service and assistance to the organization at every level and in every way. In order to properly assist manage- ment, an internal auditor must continuously strive to understand management needs, in terms of both general concepts and the unique characteristics of a par- ticular organization. Auditors need to understand some general concepts of man- agement theory and processes, how managers set their objectives, and how they identify and solve problems to achieve those objectives. All internal auditors

must learn to think like organization management in order to form partnership relationships and communication links.

Another important reason to understand management theory and practice is that internal auditors themselves are managers. Their roles include supervising audit projects and directing overall internal audit tasks. Internal auditors must be able to develop objectives and strategies to achieve those objectives, working through people and with other resources, just like other managers. Auditors cannot be qualified counselors to management if they cannot effectively manage their own operations. Internal auditors should provide a model that can be observed and followed by others in the organization. In this way, internal audi- tors will also be viewed as likely candidates for other management-level posi- tions in their organizations.

This chapter considers some of the more general concepts of management and also discusses communication techniques that will help an auditor gain a better understanding of management needs. This chapter should be read in con- junction with other audit management chapters such as Chapter 4, “Internal Controls Fundamentals: COSO Framework,” and Chapter 14, “Directing and Per- forming Internal Audits,” among others. Effective internal auditing involves understanding management needs and working with management to serve those needs. That understanding is an essential ingredient for establishing inter- nal audit credibility such that management will respect and listen to internal audit’s counsel. Working together, managers and internal auditors can achieve increased effectiveness and promote overall organizational welfare.

2.2

OPERATIONAL AUDITING CONCEPTS

A basic theme and message in this chapter and throughout this book is that an internal auditor is primarily an operational auditor, no matter whether reviewing a cash management process, information systems service delivery, or Sarbanes- Oxley Act (SOA) Section 404 internal controls. The expression “operational audi- tor” can cause some confusion with noninternal auditors who often tend to think that all auditors, whether internal or external, do about the same tasks. That is cer- tainly not true. Internal auditors, with their strong operational approach, have a unique and important role in service organization management at all levels.

The objective of operational auditing is, as defined in the IIA’s “Statement of Responsibilities” standards1 _{“to assist members of the organization in the}

effective discharge of their responsibilities.” To accomplish this, internal audi- tors must place themselves in the position of both general and departmental management to see things from both perspectives and to provide constructive service and recommendations to the overall organization. This starts with an internal auditor gaining a clear understanding of management’s objectives in some areas as well as a good knowledge of the operations that will be reviewed. This places an internal auditor in a much different role than the public accoun- tant external auditor who primarily focuses on the organization’s published financial statements and the supporting financial auditing standards. An inter- nal auditor may become involved in some of these financial accounting issues,

but will primarily focus on organizational processes and operations. Many of these operational areas will be discussed in greater detail in other chapters of this book.

Internal auditors should regularly take an operational approach in their audits and appraisals of management performance. For example, today they often will be helping to complete the SOA internal controls assessment require- ments, called Section 404 and discussed in Chapter 6, “Evaluating Internal Con- trols: Section 404 Assessments.” By doing this work, they will improve the overall internal controls environment and will help to satisfy a corporate legal requirement. However, line or operational management may not see much addi- tional value in these reports unless internal audit serves management through appraisals of operations and suggestions for improvement when appropriate. Managers of business operations will be more interested in such areas as:

• Suggestions to improve operations at all levels to help managers achieve their objectives

• The manner in which the results of operations, including audit recalcula- tions of performance, are reported back to senior management levels • The impact of overall organizational policies, instructions, and allocations

on the operation being reviewed

In many larger organizations where many employees have little direct con- tact with senior management, internal auditors may be one of the few groups with regular, face-to-face links with senior corporate management beyond peri- odic financial performance reports or other high-level meetings. Managers at all levels look to internal auditors to appraise their operations and to make con- structive suggestions. While it may sometimes be necessary, management is not looking to an internal auditor to make a series of minor, nit-picking recommen- dations. Internal audit has the high-level objective of serving management’s needs through constructive operational auditing recommendations.

2.3

UNDERSTANDING AND WORKING WITH MANAGERS