Internal Audit Report Writing

Faculty: CA Ravi Harihara Iyer

Evolution of Internal Auditing

Traditional to.......Technology centric mindset

Agenda
ICAI Standards on Internal Audit (SIA) SIA 4 Reporting Internal Audit Report Writing

IA Report Writing Objective

Inform

Action

Persuade

Record

ICAI Standards on Internal Audit

SIA 1 Planning an Internal Audit SIA 2 Basic Principles Governing Internal Audit SIA 3 Documentation SIA 4 Reporting SIA 5 Sampling SIA 6 Analytical Procedures SIA 7 Quality Assurance in Internal Audit SIA 8 Terms of Internal Audit Engagement SIA 9 Communication with Management SIA 10 Internal Audit Evidence SIA 11 Consideration of Fraud in an Internal Audit SIA 12 Internal Control Evaluation SIA 13 Enterprise Risk Management SIA 14 Internal Audit in an IT Environment SIA 15 Knowledge of the Entity and its Environment SIA 16 Using the Work of an Expert SIA 17 Consideration of Laws and Regulations in an Internal Audit

SIA 4 Reporting
f Standard Basic elements of the audit report Establish standards on the form and content of the internal auditors report. Layout of the internal audit report includes: Titles, Addressee, Report distribution list, Period of coverage of the report, Opening or introductory paragraph, Objectives paragraph, Scope paragraph, Executive summary, Observations, findings and recommendations, Action taken report Date of the report, place of signature and Membership number. Ensure that internal audit report is : Clear and Factual, Specific and Concise, Unambiguous and Timely, Complies with generally accepted audit procedures in India. Different stages of communication are: Discussion of draft, Exit meeting, Formal draft Final report Describe the limitation For intended purpose and limited to distribution list

Auditor should excise due professional care

Communication to management

Limitation on scope and restriction on usage & circulation

Internal Audit Report Readers

Audited unit Management of the audited unit Executives responsible for the audited unit Process owners Larger organization Executives in the organization CAE and IA function Board / Audit Committee External Auditors

Readers are at various levels with different purposes, needs and usage time

5 Cs?

5 Cs Report Writing Toolkit

Component Description Statement of the issue : What is the key point you want to communicate to your readers? E.g. Capital expenditure of Rs. 10.8 crores for the hospital equipment upgrade project were not monitored, and time and budget overruns were not approved

Condition

Criterion

Description of What Should Be: What is the policy, standard, principle or business practice you are evaluating? E.g. Finance policy requires continuous monitoring by the project manager and VP approval of capital expenditure over Rs. 2 crores

Consequence

Explanation of the Significance or Impact: What is the impact or materiality? What has gone or could go wrong as a result of the condition? E.g. The equipment upgrade project was over budget by 30% and the contractors paid no penalties
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5 Cs Report Writing Toolkit

Component Description Explanation of What Allowed the Condition to Occur : What is the root cause of the problem ? Why was the condition not detected or corrected? E.g. A project manager had not been appointed to manage the hospital equipment upgrade project

Cause

Corrective Action

Description of action Necessary to Correct the Condition: What is the policy, standard, principle or business practice you are evaluating? E.g. The Finance manager will require a VPs written approval of all capital expenditure project plans, monthly reports and cost overruns. The VP will appoint a project manager for each capital expenditure project
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Sample Comment Sheet

Heading Criteria Text Text .. Bulleted text Bulleted text . Text. Text . Text. Text .

Condition

Causes Effects

Recommen-dations

Action Plan

Mapping 5 Cs with Objectives

Condition Criteria

Inform

Action
Persuade

Cause Corrective Action

Record

Consequence

The Report Writing Process

Workpapers 1

Detailed Comments Worksheets 2

Prioritized and consolidated Comments Worksheets 3

Main Report 4 5

Executive Summary

Effective use of Comment Worksheets

Right time
In the field During the review As soon as you identify to issue to communicate to the client or complete a section of work

Right way
Prompt review by your manager Periodic discussion and presentations to clients

Quality of Comment worksheets will minimize future rewriting

Tips
State Criteria in positive and measureable terms Finance policy requires transactions over Rs 50,000 to be approved by the Division Manager Accounts should be reconciled by an individual who does not have responsibility for transaction entry

Clarity on criteria: Sharpen thinking, focus your testing, significance of findings and relationships

Tips
Statement of Condition should be factual, specific, objective and written in 1 sentence Transactions over Rs. 50000 were not properly approved by the Divisional Manager Accounts reconciliation was not separated from data entry

Examples of weak, vague condition statements: Control weaknesses were noted Procedures for reconciling accounts need to be improved Exceptions were noted in the review of large transactions Comment sheet Conclusion and evidence

Tips
Choose facts or examples that convey the significance or extent of the Condition: Sixty percent of the 20 transactions reviewed were not authorized by the Division manager The accounts clerk who enters accounting transactions also does the weekly reconciliation

Tips
Consider the following questions to describe the Consequence (Risk/impact): So what? What has gone wrong or could go wrong as a result of the condition? What is the probable cost to the company? What is the risk or extent of the exposure? How does this affect the clients business or operation?

Tips
Analyze the likely Cause: Common causes include: System design or use Process Policy Human error Resources Circumstantial factors volume, staffing or emergency Be specific and descriptive, not judgmental

Tips
Make a Preliminary Corrective Action/Recommendation

Aim at preventing the condition from recurring

Focus on a solution and not a band-aid fix

Organize the report for Impact and Readability

Sections of the report Objective of the audit assignment Scope of work Background information Overall conclusion / Rating Key point or results Recommendations or Action Plans Appendices/Annexure Identifying Data for a Report Title of the Report Date of the Report Time period covered Details of audit team field work and reviewer Identifying Number of the Report Distribution list

Sentence Tips
Put information of greatest significance up front in your report Follow the lead of newspaper journalists Headline gets attention First sentence tells the key point of the story Think multi-layered CAKE Keep your highest-level readers favorite flavors at the top

Think Business Newspaper and Blackforest Cake

Additional Sentence writing resources

http://www.youtube.com/watch?v=w183qB0KDFg&feature=related

Deadly Sins of Report Writing

1. Filler Phrases
Filler phrases take up space but add no meaning. You can delete them without changing the meaning of the sentence.
Examples During our review We noted that It was noted Review of . . . disclosed It was determined that This is to inform you that There is potential that . . . could. . Develop and implement procedures to ensure that. . . Our examination of . . . identified that . . . It is understood that Edited for Conciseness

This column is blank because these phrases need no replacement. Just delete them.

2. Redundant Modifiers
Redundant modifiers use unnecessary adjectives or adverbs or turn a simple adjective into a long phrase. Examples Edited for Conciseness

System tools Current tools that are available in the system Support functions that would be Support functions of assistance to users In June In the month of June Daily On a daily basis Many steps A wide variety of processing steps Charges resulting from these transactions Charges that resulted from these types of transactions Independent, experienced Competent and responsible personnel personnel from outside the organization

3. Drawn-Out Verbs
Drawn-out verbs turn simple action verbs into a noun phrase. Drawnout verbs often contain a noun with the tion ending, and they always require a preposition.

Examples Ensure the implementation of Perform a verification of Make an adjustment to Conduct an analysis of Do a review of Perform testing of Perform a reconciliation of

Edited for Conciseness Implement Verify Adjust Analyze Review Test Reconcile

4. Overstated Language
Overstated language uses longer, more complicated words where simpler, shorter words would suffice.

Examples
Utilization Additionally Due to the fact that In order to Formal written procedures By means of At this point in time Sufficient to provide reasonable assurance that

Edited for Conciseness

Use Also Because To Written procedures By; through Now Sufficient

5. Empty Words
Empty words offer generalizations and do not stand alone.
Examples Edited for Conciseness Enhance controls Improve efficiencies Used to its full advantage Appropriate Improvement is needed It appears that Areas requiring attention Ensure appropriateness Some issues This column is blank because there are no direct substitutes for empty words. You Generally adequate should use concrete and precise words Inefficient instead of empty words. Several

6. Passive Voice
Passive voice uses a form of to be followed by the past participle and, usually, a prepositional phrase. Examples
Procedures are being performed manually by users The handling of collections is performed by the department Reconciliations of suspense accounts are performed by the supervisor A management review will be completed of the account Performance evaluations have been received by staff

Edited for Conciseness

Users perform manual procedures The department handles collections The supervisor reconciles suspense accounts The manager will review the account Staff have received performance evaluations

7. Repetition
Repetition results from using the same word within the sentence or repeating it from one sentence to the next.
Examples Our test of expense reports revealed that expense reports contained exceptions. Supporting documentation was not attached to support expenses Procedures are in place to prioritize program changes and properly monitor program changes. Edited for Conciseness Expense reports contained exceptions. Supporting documentation was not attached. Procedures are in place to prioritize and monitor program changes.

Example
Increased utilization of SAP would enhance controls and improve efficiencies. During the review of the procurement process, we noted that key departmental personnel are not trained regularly on SAP system features. SAP provides certain functionalities that facilitate processes; however, we noted that certain users are not completely familiar with them. As a result, the system is not being used to its full advantage and some processes are still being performed manually by the users. Below are certain tools within SAP that are not being used that we identified during our review: Request for Quotation (RFQ) to obtain prices from vendors. Price analysis for comparison among vendors. Third party performance metrics such as quality and service levels. Utilization of the above tools would enhance controls and improve efficiencies. Management should conduct an analysis of the current tools that are available in the system. Additionally, it should be determined which of the current tools would provide the support functions that would be of assistance to users.

Deadly Sins of Wordiness Highlighted

Increased utilization4 of SAP would enhance controls and improve efficiencies5. During the review of the procurement process, we noted that1 key departmental personnel are not trained regularly5 on SAP system features. SAP provides certain functionalities5 that facilitate processes; however, we noted that1 certain users are not completely2 familiar with them. As a result, the system is not being3 used to its full advantage and some processes are still being performed manually by the users3&6. Below are certain5 tools within SAP that are not being used that we identified during our review2&1: Request for Quotation (RFQ) to obtain7 prices from vendors. Price analysis for comparison among vendors. Third party performance metrics such as4 quality and service levels. Utilization4 of the above tools would enhance controls and improve efficiencies. Management should conduct an analysis3 of the current2 tools that are available in the system2. Additionally4, it should be determined1 which of the current5 tools would provide the support functions that would be of assistance2 to users. The Sins of Wordiness : 1. Filler Phrases, 2. Redundant Modifiers, 3. Drawn-Out Verbs, 4. Overstated Language, 5. Empty Words, 6. Passive Voice, 7. Repetition

Example of a Concise Narrative

Key personnel are not trained on SAP features that facilitate certain processes. As a result, the system is not used to its full advantage. The following SAP Tools are available to replace manual processes : Request for Quotation from vendors Price analysis to compare vendors quotes Third-party quality and service metrics Management should determine which tools can support system users.

Wordy vs Concise
Original version : 165 words (approx) Revised version : 60 words (approx)

That is a 60% reduction in the length of the paragraph

Tips
Mark Twain once apologized to his friend for writing him a long letter

I would have written you a shorter letter, but I didnt have the time
Say it concisely

Summary
Inform

Condition Criteria

Action
Persuade

Cause Corrective Action

Record

Consequence (Risk)

Dont write to get read, write to get Results

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Thank you