True value of internal audit and development of capable internal auditor

“True” Value of Internal Audit a nd Development of “Capable” I nternal Auditor Keizo Tsuchiya President Japan Registration Organization for Corporate Social Responsibility

IRCA Forum 2013

ⓒ 2013 J CSR. All Rights Reserved.

2013/06/23

Significant Interest in Internal Audit Amount of Information Uploaded to the Internet 

Importance of Internal Audit: 1,210,000 hits

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Credibility of Internal Audit:

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Value of Internal Audit: 1,500,000 hits

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Effectiveness of Internal Audit:

1,260,000 hits 1,860,000 hits

Are they a large number or small number?  Corporate Value ： 1,260,000 hits (the same as “Credibility of Internal Audit”) 

Computer Virus (including virus) ： 889,000 hits, which is far less than the above ！ ！



Akashiya Sanma ： 1,850,000 hits

Search results of “Yahoo! JAPAN“ on May 5, 2013

ⓒ 2013 J CSR. All Rights Reserved.

Value of Internal Audit

â“’ 2013 J CSR. All Rights Reserved.

Value of Internal Audit 

Cost vs. Effectiveness (Value) 

Calculate internal audit costs

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Annual cost of training to develop internal auditors or use of external personnel as internal auditor

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Mandays of internal audit 

Mandays for audit planning, Mandays for audit execution (auditors/auditees), Mandays for analysis/ wrap-up and reporting

Example ： An organization with 200 employees and 10 Departments to be audited 5 internal auditors (appointed from different Departments in the organization) 3 internal audit teams (including 1 observer)  Pre-audit training: 1 day （ by an external tutor)  



5 mandays + Tutor fee

Preparation for internal audit (Collection of information and preparation of internal audit plan): 1 day/team (6 mandays in total) ） Internal audit: 3 days  

Mandays on the auditor side: ６ mandays Mandays on the auditee side: 6 mandays

Analysis/Wrap-up: 1 day/team (6 mandays in total)  Reporting: 0.5 day/team (3 mandays in total) Total mandays + External tutor fee and all other expenses: 1.3 million yen 

ⓒ 2013 J CSR. All Rights Reserved.

Value of Internal audit 

Effectiveness (Value) 

Level of usefulness of information acquired by internal audit

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Level of usefulness for top management ・・ How well does internal audit report meet expectatio ns of top management? 

Example:

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Internal Audit Report

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Nonconformity: Record of xxx training was not kept in Department Y.

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Summary: 3 concerns and 8 opportunities for improvement

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It was found that training records were not kept in some

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Departments; e.g. Study session about accidents taking

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place in competitors.

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Interesting information

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was delivered

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Not interested

100 80 60 40 20 0 (%)

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Value of internal audit for top management:

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1.3 million yen x 30% ＝ 390,000 yen ⓒ 2013 J CSR. All Rights Reserved.

Value of Internal Audit 

Value to provide top management with useful information

Matured

Acceptable

Audit results containing more Valuable information that top than 80 ％ of information that management can use as useful top management wanted Value: 1.04M ～ 1.3M yen Audit results containing 60%~80 ％ of information that top management wanted Value: 780,000 ～ 1.04M yen

information Less valuable information that top management can use just as reference

Limited quality of internal audit that may overlook risks of accidents and miss opportunities for improvement in operations Not Audit results containing less than 80% of information collected in Established 20% of information that top internal audit is extremely low Immature

Audit results containing 20%~60 ％ of information that top management wanted Value: 260,000 ～ 780,000 yen

management wanted Value: 0 ～ 260,000 yen

in value for the use of business ⓒ 2013 J CSR. All Rights Reserved. management.

Value of Internal Audit 

Internal audit must contribute to achievement of objectives and targets of an organization.

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Internal audit must appropriately report changes in risks relating to manag ement of an organization.

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Internal audit must satisfy expectations of top management in correctly re porting current status of an organization.

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Internal audit is not a means for certification, but an effective means to im plement a management system.

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Internal audit is also an activity to demonstrate validity of autonomous ma nagement of an organization. 

Valid in terms of customer (public) expectations, competitiveness and efficiency ⇒ Internal audit also provides useful information for communication with the third party.

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Internal audit is a professional work, but anyone can conduct it if he/she is familiar with an organization. It is not difficult to create value. It is necess ary, however, to appoint those who are highly ethical and trusted.

⇒ Enhance quality of assessment ！ Enhance quality of analysis and evaluation ！ ⓒ 2013 J CSR. All Rights Reserved.

Development of Internal Auditor ~ A Means to Directly Enhance Value of Internal Audit ~

â“’ 2013 J CSR. All Rights Reserved.

How to Develop Internal Auditor? 

The quickest way is to have a candidate internal auditor experience a good internal au dit.

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But opportunities to practice internal audits are limited in number. ⇒ The limited opportunities must be effectively organized.

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To organize a good internal audit → To put in place the four conditions: Condition 1 ： Top management’s support and commitment to the public, people and business Condition 2 ： Training of internal auditors Condition 3 ： Cooperation of Departments to be audited Condition 4 ： Establish PDCA of internal audit which facilitates development of internal auditors

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Utilizing the limited opportunities of internal audit effectively, an organization, based on the above conditions, encourages a candidate internal auditor to experience a good and successful internal audit.

ⓒ 2013 J CSR. All Rights Reserved.

Conditions to Organize a Good Internal Audit Condition １： Top management’s support and com mitment to the public, people and business Organization in which internal audit makes a valuable contribution

Organization in which internal audit does not make a valuable contribution

Top management recognizes benefits of internal audit and actively supports internal audit.

Top management is not interested in internal audit.

Top management commits to

Top management does not address problems.

address all the problems.

Top management does not distort Top management disguises facts the truth.

Good internal auditors are developed as internal audit is respected as precious information source. Internal audit will become effective in providing information that top

Top management approach to internal audit accelerates departments’ uncooperative response to internal audit.

When being appointed as internal ⓒ 2013 J CSR. All Rights Reserved.

Conditions to Organize a Good Internal Audit

Condition ２： Training of internal auditors 

Participate in practical training 

Lectures, no matter how much they are, do not yield a positive effect.

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Practical training is essential to develop a good internal auditor.

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Understand a practical image of internal audit

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How to conduct interview

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Audit trail

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Collection of evidences

Respond to information obtained in internal audit to deepen understanding about intern al audit 

Workload has increased suddenly ・・・ What would you assess?

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The organizational structure has ben changed ・・・ What would you assess?

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Customer requirements have been changed ・・・ What would you assess?

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Processes have been changed ・・・ What would you assess?

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Conditions to Organize a Good Internal Audit

Condition 3 ： Cooperation of Departments to be audited 

Internal auditor must make maximum use of limited opport unities of internal audit and identify “key to success.”

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It is important for an internal auditor to improve his/her ow n ability and brush up auditing skills, but Condition 3 helps h im/her compensate for the lack of the skills. 

Make it a priority to give an internal audit “successful exp erience”



Enjoying delicious dishes is essential for a cook to develop his/her skills.

Cooperation of Departments to be audited   

Actively participate in identification of problems Provide sufficient information on both positive and negative facts Trust internal auditors ⓒ 2013 J CSR. All Rights Reserved.

Conditions to Organize a Good Internal Audit

Condition 4 ： Establish PDCA of internal audit which faci litates development of internal auditors 

Plan － Preparation of internal audit

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Do － Execution of internal audit ⇐ Carry out internal audit based on Conditions １ ~ ４・・ (Wishing for success) － Analysis/reporting of internal audit results

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Check － Evaluation of quality of internal audit

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Act

－ Feedback of the evaluation results leads to development of capable internal auditors

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Preparation of Internal Audit

(Essential to Enhance Effectiveness of Internal Audit) 

Preliminary information collection 

Understand objectives of the internal audit ・・・ (Support of top m anagement)

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Define information that needs to be collected from Departments to be audited and relevant Departments in order to satisfy the internal audit objectives

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Changes, targets, processes/procedures, events (incidents/acciden ts, what is done well/what is not done well/what is concerned), ch allenges ・・・（ Cooperation of Departments to be audited ）

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Organize preliminary information so as to make it useful in internal audit

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Identification of key processes

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Sub-processes, conditions, criteria, qualification and training which affect the k ey processes

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Risks and expected problems

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What needs to be assessed? 

What will be sampled and how much samples will be taken?

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What information needs to be extracted?

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Analysis/Reporting of Internal Audit Results 

Try to produce an internal audit report to have people say “Go od Job!!”

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Analyze internal audit results as much as possible and examin e the analysis results

Example of Analysis: 

Internal audit results generally have the following two aspects:

1.

Management system (procedures and rules ）

2.

Performance (degree of achievement of targets ）

.Analyze

and examine the results based on the combination of the a bove two aspects:

A)

Rules are strictly observed and targets are achieved.

B)

Rules are strictly observed but targets are not achieved.

C)

Although rules are not observed, targets are achieved.

D)

Rules are not observed and targets are not achieved. ⓒ 2013 J CSR. All Rights Reserved.

Example of Analysis: A)

Rules are strictly observed and targets are achieved.

B)

Rules are strictly observed but targets are not achieved.

C)

Although rules are not observed, targets are achieved

D)

Rules are not observed and targets are not achieved.

Targets Achieved

Targets not Achieved

C) ＋ α possible cases ：

A) ＋ α possible cases ：

D) ＋ α possible cases ：

B) ＋ α possible cases ：

1.May not have achieved targets if rules were observed 2.May have set too easy targets 3.May disregard rules 4.May turn to “D” when some specific conditions are added

1.May have achieved targets if rules were observed 2.May not have achieved targets even if rules were observed 3.May have set too aggressive targets compared with capability 4.May have problems in awareness 5.May have problems in equipment capability

Rules Violated

1.May be able to find more effective processes 2.May have set too easy targets 3.May turn to B, C or D when some specific conditions are added

1.May have flaws in rules 2.May have set too aggressive targets compared with capability 3.May have problems in equipment capability 4.May have problems in willingness to achieve targets 5.May turn to A when some specific conditions are added

Rules Observed ⓒ 2013 J CSR. All Rights Reserved.

Reporting of Internal Audit Results 

Report isolated failure of achievement or violation as a deficiency 

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Also report magnitude of impacts 

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Top management understands a need to take initiative; e.g. allocation of res ources.

Also report those areas focused in the internal audit 

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Top management becomes aware of need for prioritization.

Also report analysis results 

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Top management does not pay attention ／ It is Departments that are expect ed to address such deficiency ／ It is not necessary to report each one of suc h deficiency

Top management understands credibility of the results and problems in the process to derive conclusion.

Also report considerations on risks 

The report helps top management develop a next strategy. d Job!!”

→ “Goo

Drill down and Sort out ⓒ 2013 J CSR. All Rights Reserved.

Evaluation of Quality of Internal Audit Self-Evaluation 

Quality of preparation 

Was preliminary information acquired effectively?

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Was the organized preliminary information useful?

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Were key processes identified correctly?

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Were risks to an organization identified properly?

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Was practical image of internal audit useful? ：

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Quality of internal audit 

Was progress of target achievement in audited Departments assessed?

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Was degree of process maturity assessed?

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Were strength and weakness of an organization assessed?

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Was sufficient assessment conducted to meet the objective of the internal audit?

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Was cooperation of audited Departments sufficient? ：

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Quality of analysis/reporting 

Was the information obtained in the internal audit analyzed based on facts to identify relevance and risks?

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Was the internal audit report compiled in a way to effectively communicate what needs to be communicated? ： ⓒ 2013 J CSR. All Rights Reserved.

Evaluation of Quality of Internal Audit 

Evaluation of internal audit by audited Departments → Questionnai re survey, etc. 

Internal audit is a service to Departments to be audited, and th erefore quality of internal audit can be regarded as service quali ty.

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Such a technique as “Servqual” that is widely used to evaluate s ervice quality is considered to be used to evaluate quality of int ernal audit.

SERVQUAL  SERVQUAL is a technique to evaluate service quality by measuring a gap between a service “expected” by users and an actual service “perceived” by users. In this technique, 22 questions are asked for five dimensions determining perceived quality (evaluation on the scale of one to seven).  Five dimensions  Tangibles: physical facilities, appearance of equipment and employees  Reliability: capability to execute a committed service accurately  Responsiveness: willingness to assist customers and promptly provide a service  Assurance: employees’ knowledge, politeness and capability to provide confidence and trust  Empathy: consideration given to customers and care for each individual ⓒ 2013 J CSR. All Rights Reserved.

Summary 

Significance of enhancing internal audit 

Raise value of input to top management

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Development of internal auditors is a key to the enhancement of internal audit.

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Organizing a good internal audit is essential for development of internal auditors.

Condition 1: Top management’s support and commitment to the public, people and business Condition 2: Training of internal auditors Condition 3: Cooperation of Departments to be audited Condition 4: Establish PDCA of internal audit which facilitates development of internal auditors

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A good internal auditor is developed by utilizing limited opportunities of internal a udit, experiencing a good and successful internal audit based on the organized go od internal audit conditions, and receiving feedback of internal audit quality evalu ation results.

ⓒ 2013 J CSR. All Rights Reserved.

Assistance to Enhance Internal Audit Value 

Use of the IRCA’s OEA (Organisations employing au ditors) program 

http://www.irca.org/ja/OEAs/

J CSR provides information on audit of organizations through the website of Auditor Bank.

Thank you very much for your kind attention. http://www.auditorbank.com/

ⓒ 2013 J CSR. All Rights Reserved.