THE ROLES OF INTERNAL AUDIT FUNCTION IN ENHANCING RISK MANAGEMENT

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Risk management and internal auditing are both elements in the five interrelated components of the internal control system in organizations, which are control environment, risk assessment, control activities, information and communication, and monitoring (COSO, 1994). Consequently, risk management activity has fallen under risk assessment, and it is described in three processes; appraise the significance of the risk, assess the impact and the likelihood of the risk, manage the risk (COSO, 1994; Moeller, 2011). Accordingly, internal auditing and risk management each cover different specific purposes in the internal control system (COSO, 1994; Moeller, 2011). So, the study discussed all the elements of the COSO internal control framework, and analyzed risk assessment and monitoring in depth to clarify the purpose of each in detail. This will help in underlining the nature of the activities, which should refer to internal auditing and risk management. On the other hand, COSO internal control framework organized an integrated relationship between all internal control elements as well as their activities (Moeller. 2011). As a result, there is an integrated relationship between risk management and internal auditing. Vasile and Georgiana’s (2006) study demonstrated how internal auditors could help risk managers to achieve their roles in an integration activity. This study clarified this integration from the perspective of COSO and other empirical studies.

Thus the definition of internal auditing demonstrates the new role of internal auditing, the ‘Risk Based Audit’, in which the audit activities are derived from perceiving and managing risk in companies. Accordingly, their plan should be based on assessing the risk and the impact (Pickett, 2005; the IIA, 2004). Nonetheless, Kalbers (1995 as cited by Spira & Page, 2003) argued that in terms of the new definition for internal auditing, organizations should be aware of the roles of conflict, which may contradict the roles of internal audit in organizations. In particular, the contemporary internal auditing concept, the risk based audit, may cause confusion for companies in distinguishing between risk management and internal auditing activities. Likewise inside inspecting is an inward capacity of a company built up by the administration to fortify corporate administration. Since interior examiners invest all their energy with one organization their insight about the organization’s operations and inner controls is much more prominent than that of outer inspectors. Interior reviewing is an autonomous, unbiased, guarantee and checking action intended to enhance worth and advance on a company’s processes. It aids an organization realize its goals by means of an organized and controlled method to assess and advance the usefulness of peril administration, mitigation and authority processes (Institute of Internal Auditors of America (11A), 2005). (Klener and Rashid 2003) characterize RM as the administration of operational and monetary dangers at the same time keeping in mind the end goal to augment the cost adequacy of hazard administration inside the requirements of the association’s resistance for hazard. Despite the fact that this definition includes operational dangers, it neglects to value that organizations are presented to different dangers like vital and reputational dangers furthermore neglects to distinguish who is in charge of hazard administration in association. The definition likewise neglects to demonstrate the linkage of hazard administration to the association’s targets. COSO (2004) then again portrays RM as “a methodology, influenced by a substance’s top administrative staff, organization and other work drive, associated in strategy setting and over the wander, proposed to recognize potential events that may impact the component, and regulate risk to be inside its peril longing for, to give sensible affirmation concerning the achievement of component goals”