What is the internal audit charter?

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By Alan Simpson CA

2 April 2017

What is an internal audit charter and why is it important to have one?

An internal audit charter is a document, approved by the audit committee and board, formally establishing the remit and terms of reference of the internal audit function within the organisation.

The internal audit function’s standing is bolstered by having such a charter as it:

  • Establishes internal audit’s position within the organisation.
  • Helps to reinforce the objectivity and independence of internal audit.
  • Delineates the scope and range of internal audit activities.
  • Establishes the lines of reporting from the Head of Internal Audit to management and the audit committee.
  • Gives additional credibility and formal recognition of status to internal audit.
  • Gives formal recognition of internal audit’s right of access to all personnel, physical records, data, IT systems, digital communications, locations and physical property of the organisation.
  • Enhances the professionalism and esprit de corps of the internal audit function.

If the internal audit function has adopted the Institute of Internal Auditors (IIA) International Standards for the Professional Practice of Internal Auditing, it is mandatory to have an internal audit charter in place.

Definition of an internal audit charter

The Chartered Institute of Internal Auditors gives this description: “The charter provides the organisation with an agreement relating to the work internal audit will undertake and the support it will receive. It may also be seen as a bench-marking tool against which it can measure the effectiveness in fulfilling its commitment. The charter can act as a service level agreement with the board or audit committee so that there is a clear understanding of the role, purpose and position of internal audit within the organisation and the scope and nature of its work.”

Who should prepare the charter and how often should it be revised?

The Head of Internal Audit (or person with equivalent name and status in the audit function) should be the individual who prepares a draft of the charter and then discusses it fully with senior management and the board to ensure that it faithfully encapsulates their understanding of the role and expectations of the internal audit function. Following this exercise, the draft should then be approved (by being minuted) by the board through the audit committee.

The charter should be reviewed from time to time (say every 1 to 2 years) to ensure that it continues to be appropriate for the needs of the organisation. Events such as major group acquisitions/disposals or rapidly changing market conditions may require it to be revisited sooner than this.

What should the charter contain?

It should have the following contents:

  • The overall purpose of the internal audit function and how it adds value to the organisation.
  • The objectives of internal audit.
  • The responsibilities of internal audit and the range of its remit. The type of assurance services should be defined in the charter.
  • The nature of consulting services.
  • Independence of internal audit and how this is to be established and protected to enable objective and unbiased opinions to be given.
  • A statement that internal audit will not have any direct operational responsibility or authority over any of the areas audited nor will they have any part in implementing internal controls, developing procedures, installing systems or preparing records or engage in any other similar activity that may impair, or be seen to impair their judgement as auditors.
  • Reporting lines to the audit committee.
  • A clear statement that unrestricted access to all parts of the organisation is vital to enable internal audit to give assurance to the audit committee and board.
  • Internal audit’s approach to planning work coverage based on its assessment of risks, the reporting of progress against the audit plan and budget.
  • A quality assurance and continuous improvement programme for the function.
  • A statement, given by the Chair of the Audit Committee, the Head of Internal Audit, and the Chief Executive Officer all endorsing the charter.

Topics

  • Audit and Assurance
  • Committees and boards
  • Corporate Governance
  • Private sector

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