(b)Need for internal audit
For establishing an internal audit department
Value for money (VFM) audits
MonteHodge has some relatively complex systems such as the stock market monitoring systems. Internal audit may be able to offer VFM services or review potential upgrades to these systems checking again whether value for money is provided.
Computer systems
Maintenance of computer systems is critical to MonteHodge’s business. Without computers, the company cannot operate. Internal audit could review the effectiveness of backup and disaster recovery arrangements.
Internal control systems
Internal control systems appear to be limited. Internal audit could check whether basic control systems are needed, recommending implementation of controls where appropriate.
Effect on audit fee
Provision of internal audit may decrease the audit fee where external auditors can place reliance on the work of internal audit. This is unlikely to happen during the first year of internal audit due to lack of experience.
Image to clients
Provision of internal audit will enable MonteHodge Co to provide a better ‘image’ to its clients. Good controls imply client monies are safe with MonteHodge.
Corporate governance
Although MonteHodge does not need to comply with corporate governance regulations, internal audit could still recommend policies for good corporate governance. For example, suggesting that the chairman and chief executive officer roles are split.
Compliance with regulations
MonteHodge is in the financial services industry. In most jurisdictions, this industry has a significant amount of regulation. An internal audit department could help ensure compliance with those regulations, especially as additional regulations are expected in the future.
Assistance to financial accountant
The financial accountant in MonteHodge is not qualified. Internal audit could therefore provide assistance in compliance with financial reporting standards, etc as well as recommending control systems.
Against establishing of internal audit department
No statutory requirement
As there is no statutory requirement, the directors may see internal audit as a waste of time and money and therefore not consider establishing the department.
Accounting systems
Many accounting systems are not necessarily complex so the directors may not see the need for another department to review their operations, check integrity, etc.
Family business
MonteHodge is owned by a few shareholders in the same family. There is therefore not the need to provide assurance to other shareholders on the effectiveness of controls, accuracy of financial accounting systems, etc.
Potential cost
There would be a cost of establishing and maintaining the internal audit department. Given that the directors consider focus on profit and trusting employees to be important, then it is unlikely that they would consider the additional cost of establishing internal audit.
Review threat
Some directors may feel challenged by an internal audit department reviewing their work (especially the financial accountant). They are likely therefore not to want to establish an internal audit department.
|
