2.8 The Internal Audit Function (IAF)
2.8.3 The history of internal auditing
According to Munteanu and Zaharia (2014:2239), the IAF has undergone various, redefined stages in its need to evolve within organisations because of changes in technology, leadership and governance principles to which organisations must adapt. Table 2.1 describes the changes to which the IAF had to adopt over the years to remain current and in line with the latest trends within and the needs of organisations.
Table 2.1. Changes to the IAF over the course of its existence.
Change Year Description
Checking the accounting records
1950 The group of auditors had the duty of examining the validity and accuracy of accounting records. These examinations served as a way to test the performance of the IAF, which were incorrectly stated in the past following various errors recognised within accounting records.
Evaluation of conformity 1960 IAs used to evaluate the degree of compliance with financial procedures by using checklists when executing functions within the financial accounting department. The IAF performed surprise audits to assess the control activities and examine records to identify non-compliance, which were considered successful.
Examination of procedures 1970 With exciting improvements to the IAF in the 1960s, the function exercised greater care to ensure accurate procedures had been followed. To identify and eliminate the causes that led to prior challenges, the IAF had the significant role of examining documents and checking records, which would assist
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Change Year Description
auditors in identifying errors caused by non-clarity, or inaccurate interpretation of procedures. Management thus considered the IAs and their opinions helpful, as the IAF recommended solutions for improvement.
Evaluation of controls 1980 Improvements to controls were possible when greater care was exercised towards various tools of control.
Consequently, the performance of an entity is not professed as being the consequence of compliance with the manual procedures, but the result of the communication of all control tools that the employees were permitted to use for performing their tasks. The IA became a management consultant regarding various types of controls that could be implemented within the organisation.
Report on the internal control system
1990 A fresh phase in the development of the IAF occurred between 1980 and 1990 where independent assurance providers assessed the functioning of internal controls and delivered quality assessments on work performed by IAs towards internal controls.
These assessments were done to determine whether the IAF performed its responsibilities within the guidelines of the internal audit process.
Evaluation of the risk management system
2000 The last decade (1990–2000), before the start of the new millennium, served as a period in which there was extensive use of risk management to prevent further scandals, lack of poor governance, and other irregularities that negatively affected the performance within entities. The incorporation of new systems of operational risk management brought about the
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Change Year Description
realisation for the importance of good governance in both the private and public sectors. Organisations soon realised the importance of IAF and its role towards risk management, as IAs inspected and evaluated risk management processes implemented by management, and then rendering opinions on the adequacy and effectiveness of these processes and recommending ways to improve them.
Improvement of the risk management system
2001 From 2001, the work of the IAF was classified by equality due to the employment of the IA standards, which convinced large organisations to follow the concept of risk management. Because of the reliance on risk management, leaders of organisations who adapted the risk management approach within their organisations began to raise fears relating to risk identification, assessment, and the implementation of internal control actions leading to the accomplishment of their organisations’ planned goals.
Reporting of activity performed
2002 While IA work was performed according to the standards, it enjoyed the support of management in assisting the organisation towards achieving its goals and became the norm to report results of IAs’ work performed to top management in the organisation.
This reporting was also incorporated within annual reports. Noteworthy, IA recommendations could transform the management plan and the implementation of the organisation of some tangible steps that lead to the realisation of the planned targets.
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Change Year Description
Adding a value plus 2003 Professionals to the field informed a strategy of adding value that included gaining a maximum competency of IA reflected in the stability among the effect as a consequence of applying the recommendations, and costs related to the internal audit structure; supporting management in executing a structure of control within the entity; setting up an overall outline on which the audit committee could rely; the plan for the internal audit within the entity and guarantee to the committee affiliates and management aids on which recommendations are based; and recognising the vital aspects considering the existing development and the trends established by the entity activity.
Consolidation of the internal audit
2004 – 2009
As IA serves as a qualified and competent function able to render an opinion on relationships, processes, and management systems, it also supports and strengthens them. It serves as an instrument that can underline the management’s alertness and destroy unprofessionalism. The internal audit activity is grounded on an elastic frame of reference with the capability to acclimatise in compliance with the procedures governing several areas of activity and culture of an organisation.
Capacity of managing financial risk
2010 – 2013
At the end of 2013, the IAF followed a new approach that highlighted grounds for the mitigation of various risk management issues. Although IA departments have significantly enriched the ability of organisations to control their financial risks, new challenges come to the fore because of market trends and
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Change Year Description
shareholders.
Source: Munteanu and Zaharia’s (2014:2239-2242).
PwC (2015:2) reports on market-related characteristics from its Annual Global CEO survey, indicating that reported regulation, opposition, and fluctuations in client behaviours are developments that are most troublesome to organisations and inspire others to re-evaluate its propositions. As opportunities of companies increase within markets, companies are instituting actions to capitalise on these changes by increasing their operations in new markets, acquiring more resources, creating joint projects, fundamentally revolutionising their product and service portfolio, and expanding into new industries. New areas of opportunities available to entities bring various risks that contest the capability of companies to effectively accomplish their objectives. IA, therefore, must evolve to serve the entity in times when the need for transformation within the businesses are essential to its survival (PwC, 2015:3).