Internal audit is a function within companies that involves risk management. Among other things, it deals with a company’s internal control systems and any deficiencies within these. An internal audit department is mandatory within public companies. This department plays a crucial role in the long-term growth and success of companies.
Internal auditors follow internal auditing standards to ensure their work meets a specific benchmark. These standards exist to help auditors understand how they should operate within a company. However, they do not specify the primary purpose of a company’s internal audit function. Instead, this purpose comes from within the company.
What is the Audit Charter?
The audit charter, or internal audit charter, is a formal document that specifies the primary purpose of an internal audit department. As mentioned, this statement differs for each company. It defines the role of an internal audit often included in a company’s policies manual. Every company must have a clearly defined and articulated audit charter to clarify its purpose for internal audit.
It defines several factors. It includes the authority and responsibility of internal auditors and their position within the organization. It also sets out the nature of the services that the internal audit function provides. The audit charter also involves defining how all of these can help a company achieve its objectives.
It acts as a manual for internal auditors. In any company, the audit committee and the board of directors are responsible for approving the charter. It also helps other parties understand the role of internal auditors within a company. The scope, responsibilities, deadlines, and rights in internal audits come from the internal audit charter.
What are the Components of an Audit Charter?
There are several factors that audit charters must define. The Institute of Internal Auditors identified seven fundamental areas that support the overall effectiveness of the activity. Therefore, these are areas that audit charters must cover. These fundamental components of an audit charter are as below.
1. Mission and Purpose
The internal audit charter must clarify the mission and purpose of the internal audit function. As mentioned, it is one of the primary reasons why companies use this charter. This area can help define the purpose and function of the internal audit department.
2. Adherence to International Standard for Internal Audting’s Professional Practice
The audit charter shall need to have adhered to IIA’s International Professional Practice Framework (IPPF); therefore, the internal audit function shall be designed and the audit charter shall need to include detail about how the internal audit function is in accordance with the IIA’s IPPF framework.
The internal audit charter must also clarify the authority provided to the internal auditors. By defining these, the audit charter can help provide a clear picture of the scope of the internal audit activity. It also establishes that the internal audit function has the necessary rights to fulfill its duties.
4. Independence and Objectivity
Internal auditors need to be independent of a company’s management. Therefore, it must also include a statement about it. It must ensure that the auditors can be independent of the company’s management and ascertain objectivity.
5. Scope of Internal Audit Activities
One of the other primary areas that the internal audit charter must clarify is the scope of internal audit activities. This statement will usually mention the auditors’ roles in risk management, internal control system, corporate governance, etc. It will also define the auditors’ duties to report to the management.
The internal audit charter must also define the responsibilities of the internal auditors. These responsibilities will be in line with the scope and authority defined above. Similarly, the responsibilities will also include any requirements by standard bodies or regulatory compliance duties.
7. Quality Assurance and Improvement Program
The audit charter must also include guidance related to quality assurance and improvement. These must comply with the IIA standards. On top of that, it must ensure that there are requirements for auditors to report to ascertain quality assurance.
What is the Audit Charter Important?
The internal audit charter provides a guideline for a company’s internal audit function. It helps determine how this function will operate within the company. Similarly, it allows any governing bodies within a company to reinforce the value placed on internal audits. In the absence of an audit charter, these are not possible.
It also establishes a reporting line within a company. It can further strengthen the independence and objectivity of internal auditors. On top of that, it also defines the auditors’ authority within a company. By doing so, it can help avoid any future conflicts within a company. Similarly, it provides the auditors with the necessary authority to effectively complete their work.
The audit charter also provides the scope of work for internal auditors. Since the requirements for the internal audit function may differ between companies, it can be significantly helpful. Lastly, it guides internal auditors regarding what is expected of them within a company. Overall, it provides a reference point for the internal auditors to use.
The audit charter is a document that defines the primary purpose of an internal audit department, among other things. There are various components that it must cover. However, the Institute of Internal Auditors suggests it must cover seven fundamental areas. It is of significant importance within companies, as discussed above.
- 7 Vital Components of an Internal Audit Charter [source]