Internal Audit Function: Corporate Governance Mechanism

Internal audit function (IAF) is an important corporate governance mechanism which complements the activities of Audit Committee and Board of Directors (BOD).

According to Millichamp and Taylor (2012), “Corporate Governance as the system by which companies are directed and controlled”(p.16). An organisation’s IAF contribute to Corporate governance by serving as a resource to the BOD and Audit Committee by providing information, assurance and advice (Gramling and Hermanson, 2006). With the consequences of corporate scandals such as Enron, Corporate governance received significant attention from regulators and the public. This matter has increases awareness and demand for internal assurance on corporate governance processes. The quality

Objectivity is a state of mind which biases do not inappropriately affect judgements, assessments and decisions while independence means free from material conflicts of interest that threaten objectivity. Stewart and Subramaniam (2010) illustrates that in IIA (1999):

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps on oragnisation accomplish its objectives by bringing a systemic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.

Objectivity is a state of mind and independence is the state of affairs which allow an internal auditors to operate with objectivity’s attitudes. objectivity also mentioned in

Code of Ethic Rule which internal auditors require to show highest level of professional objectivity in terms of gathering, evaluating and communicating information regarding activities. Some threats can occur at the internal audit function such as self-review means that internal auditor review their own work, personal relationship, where the auditor is a family or friend of the auditee and also pressure from auditee and other audit team.

Outsourcing and co-sourcing are sourcing options to consider that can give assurance to meet objective. Outsourcing is when external parties are use as source of finished products or services. Its benefit is allowing auditor to be independent from management structure (Millichamp and Taylor, 2012, p.299). It also provides specialized skills and wide range of professional expertise can help bring in their knowledge. Training cost can also be eliminated and reduce biased assessment and hence reduce risks. However, the costs can be high and clients may only pay for what they contracted for. Other drawback is that commitment to objectives of organization may be lack. Co- sourcing is when external resources participate on joint engagement with internal audit staffs. It can help to extend organisation’s staffs and cost saving. Disadvantages are it requires continuous cooperation to ensure smooth delivery of internal audit services and also continuous investment for