How to do a good internal audit

Author: Xu Tianxiang, Fan Guoyou, Wei Huaining / Country: Mainland China
Publisher:
Publish Date: 2006-05-01
Features:
3. The Establishment Methods of Internal Audit Departments In departments or units with subordinate entities, the internal audit department can adopt decentralized management, centralized management, or a combination of both methods. The following explains each in detail:
1. Decentralized Management. The audit department of the department provides unified guidance to the internal audit departments of its subordinate units, while the subordinate audit departments independently exercise their audit authority. The advantages of decentralized management are:
(1) It allows internal audit personnel to become familiar with the environment and conditions of their respective units;
(2) It ensures timely and accurate audit information, making the audit work more targeted;
(3) It facilitates the timely identification, reporting, and resolution of issues by the audit department;
(4) It saves time and costs by avoiding the need for headquarters personnel to travel for audits.
The disadvantages are: It may lead to a larger internal audit department, and internal audit personnel may face certain constraints from their unit leaders, resulting in relatively lower independence. Decentralized management can be further divided into two types:
(1) Pure Decentralized Management: The headquarters' internal audit department dispatches specialists to reside in each subordinate unit.
(2) Institutional Decentralized Management: Each subordinate unit establishes its own audit department, which may not be under the supervision or command of the headquarters. Under institutional decentralized management, when handling the authority of the headquarters' internal audit department and the subordinate unit's internal audit department, the headquarters' audit department should uniformly formulate the following matters:
- Audit objectives, scope, personnel authority, organizational system, overall planning, research, promotion, and innovation;
- The establishment of general audit procedures and standards;
- The proposal of the overall budget;
- The review and submission of audit reports to higher authorities;
- Coordination with external auditor work;
- Implementation of key personnel training plans;
- Preservation of important archives;
- Supervision and coordination of audit departments in various regions, etc.
2. Centralized Management. Internal audit departments are not specifically set up at the grassroots level of subordinate units, but rather at the higher level of the department or unit itself. The advantages are:
(1) The dispatched internal audit personnel have higher authority over subordinate units, and their independence is also relatively high;
(2) Audit work can establish unified and high standards, making systematic planning easier;
(3) It avoids redundant internal audits between subordinate grassroots units;
(4) Internal audit personnel can interact with multiple parties, facilitating experience exchange and information sharing;
(5) It is easier to compare the activities, procedures, and methods of subordinate units.
However, it should be noted that when organizing audits, the plan of audit work must be strengthened, and the actual conditions of the subordinate units must be understood before proceeding with the work.
3. A Combination of Centralized and Decentralized Management. If necessary, centralized management can also be implemented for some smaller subordinate units within the department, where the internal audit department of the department reviews the affiliated units, and even a submission audit (where the affiliated units submit relevant vouchers, ledgers, statements, etc., for review by the audit department) can be adopted. For larger and more important subordinate enterprises, decentralized management is implemented, with each establishing its own internal audit department. When necessary, the upper-level internal audit department and its subordinate audit departments can conduct joint audits.
When selecting the establishment method of the internal audit department, the following factors should be considered:
- The size and nature of the enterprise;
- The number, size, nature, workload, geographical distribution, and local economic environment of subordinate units;
- The scope of internal audit and the audit tasks of subordinate units;
- The organization, scale, and establishment history of the internal audit department of the headquarters;
- The availability of qualified and sufficient personnel;
- The intentions of the top management;
- The cost comparison between centralized and decentralized management.
For example, large-scale enterprises or units with numerous subordinate entities are better suited to decentralized management. In this case, the audit departments established in each subordinate unit operate independently under unified guidance from the upper level. Additionally, in some small-scale enterprises or public institutions, internal audit departments may be established based on needs, or dedicated audit personnel may be assigned instead of setting up an internal audit department.
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