An internal Audit Charter is a formal document describing the primary purpose of an internal audit, its right, obligations, reporting line, authority, and code of ethics that an internal auditor should have.
Generally, this document is approved by the audit committee and the board of directors.
This document helps other departments, executive officers, and the board of directors 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:
The internal Audit Charter should clearly define what the internal audit activities are. 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 the 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.
It simply means not restricting the internal audit itself.
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 give them freedom in their work.
Authority of Internal Audit
The board of directors and audit committee must define the authority of the internal auditor. Like internal audit has the authority to engage with an external or internal resource for their work.
Somehow, the internal auditor 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.
Ensure all of the responsibilities are included here, and also make sure some sensitive responsibilities are clearly excluded.
Reporting line of Internal auditor
Internal audit reports to the Audit Committee and Board of Directors. If there is no Audit Committee or Board of Directors, Internal Audit should report to the company’s owner.
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 clearly state and inform those related parties.
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?
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 during the year.
Final Approval from the Board of Internal Audit
Lastly, 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 this issue will report to the Board of Directors when there is a restriction from specific management or department by not allowing the internal auditors to access certain documents and information.
All of the above factors are what you should include in your Internal Audit Charter. It should be reviewed and updated annually.
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