What is Internal Audit Charter? Guidance

Overview:

Internal Audit Charter is the formal document describing the main purpose of internal audit, right, obligation, reporting line, authority, and code of ethics that internal auditor should have.

In general, this document is approved by the audit committee and the board of directors.

This document helps other departments, executive officers as well as the board of directors to understand what internal audit activities are and help the internal auditors themselves to know their scope, right, responsibilities, and reporting line.

The following items should be included in what you need to know Internal Audit Charter.

Definition of Internal audit, Code of Ethics, and the standard of Internal Audit:

Internal Audit Charter should define clearly what are the internal audit activities. Such a definition could be copied from the official definition of internal audit or tailored for easy understanding.

The code of ethics is very important. It helps to maintain the quality of the internal audit and how people around respect it. All of the ethical codes should be clearly defined.

Formal training should provide to all audit staff. These codes should also tailor and simplify so that all related parties can understand.

The Internal Audit Code of Ethics is here.

Purpose, and Scope of Internal Audit

The internal Audit Chart should state the common purpose of the internal auditor. Remember, the Charter is the official document for the internal auditor.

Therefore, the purpose here should state clearly link to the organization. And not too general.

The scope of internal audit activities should be clearly stated here. However, the Charter should write in an open scope by not limiting or restricting internal audits.

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It simply means not restricting the internal audit itself.

Independence

Internal Audit activities are independent of operation, and this department is not under the control of executive officers like the CFO or CEO of the organization.

The internal Audit department is under the control of the Audit Committee, which is the sub-board of directors or sometimes could be under the control of the board of directors.

But, it must not be under the control of the executive.

Independence here refers to both the department and mine.

The main reason to put Independence in the Internal Audit Charter is to let them have freedom in their work.

Authority of Internal Audit

The authority of the internal auditor must be defined by the board of directors and audit committee. Like internal audit has the authority to engage with an external or internal resource for their work.

Somehow, the internal audit might not have enough skills or information to do their job. In that situation, the internal auditor needs to seek the available resource.

Responsibilities of Internal Audit

This is probably the important part. Internal audit responsibilities should be documented here in detail. All of the responsibilities should be included here. If there is a problem with internal audits, Internal Audit Charter is the best place to go.

Make sure all of the responsibilities are included here, and also make that some sensitive responsibilities are clearly excluded.

Reporting line of Internal auditor

In general, Internal audit reports to the Audit Committee and Board of Directors. In case there is no Audit Committee and Board of Directors, Internal Audit should report to the owner of the company.

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For benefit, the organization chart should be included in this section.

Right and Obligation of Internal Auditor

The right of the Internal Auditor is very important, and I can say it is part of the success of internal audit activities. Therefore, the right of internal audit should state very clearly and inform those related parties to know.

In some companies, an internal audit could not access certain information. They are generally restricted and limited by the executive.

Prepare by Chief of Internal Auditor

Who is responsible for preparing the Internal Audit Charter?

Well, Intern Audit Charter is generally prepared by the Chief of Internal Auditor or Head of the Internal Audit Department.

This charter should be reviewed annually to reflect the problem that happened during the year.

Final Approval from the Board of Internal Audit

Last but not least, the Internal Audit Charter should be approved by the Board of Directors and the Audit Committee.

This is how we ensure that all of these documents are respected by the executive, especially the CEO and CFO. That means when there is a restriction from certain management or department by not allowing the internal auditors to access certain documents and information, this issue will report to the Board of Directors.

Conclusion:

All of the above factors are what you should include in your Internal Audit Charter. It should be reviewed and updated annually.

I hope this article is helpful, and if you have any suggestions. Drop your comment below.