Every audit committee should assess the effectiveness of the organization’s internal audit function at least annually, if not throughout the year. The critical role that internal audit plays requires the audit committee to ensure that the organization receives substantial benefits from the investments made in the internal audit function. Though the charter, scope, funding and activities of internal audit vary from company to company, audit committees should at least consider the following questions when evaluating their company’s internal audit function:
- Has the function met the terms of its written charter?
- Is the function assisting the company in identifying and addressing the most significant risks?
- Are members of the internal audit function technically competent and proficient? Does the function have the necessary resources to address key risks and issues adequately and appropriately?
- Is the function being led by a competent CAE who has the respect of company management, the audit committee and the internal audit staff?
- Is the function sufficiently objective in its mindset and approach? Is the audit committee assisting in creating and maintaining this objective viewpoint?
- Is the function efficient in its efforts, methods and approach?
- Is the function delivering on the definition of internal auditing? That is, is it adding value, helping to improve operations, and bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes?
The evaluation of internal audit functions ranges from informal processes to formal, documented appraisals, including the use of outside advisors and the completion of a quality assessment review every five years, in accordance with the IIA Standards. Audit committees need to determine the appropriate scope and formality of this evaluation.
The audit committee should also receive an annual self-assessment on the internal audit function from the head of internal audit. This could be supplemented by discussions with management, external auditors and other stakeholders as relevant. It is essential that the evaluation process is understood and agreed upon by the board, audit committee and appropriate stakeholders.
You can read more on the audit committee’s role with internal audit in Protiviti’s Guide to Internal Audit and explore these tools on KnowledgeLeader: