STEP #1: Review the IIAs Professional Practices Framework The best place to begin our journey is by first

reviewing the IIAs Professional Practices Framework. Bydefinition, any profession needs to hold its members to a high and consistent level of behavior, and thep r o f e s s i o n o f i n t e r n a l a u d i t i n g i s n o d i f f e r e n t . B a s e d o n t h i s , t h e I I A p r o m u l g a t e s t h e Professional Practice Framework that is used as a guide for internal auditors in the performance of their work. The three categories of guidance are 1) The International Standards for the Professional Practice of Internal Auditing 1 ( Standards) ,2 ) P r a c t i c e A d v i s o r i e s , a n d 3)Code of Ethics. Note: A summary of the IIAStandards and Code of Ethics are shown in Appendices B and C Together these documents are considered to be essential for the pro f e s s i o n a l p r a c t i c e o f i n t e r n a l auditing. TheStandards have the following four purposes: 1)Outline the basic principles that represent the practice of internal auditing, as it should be. 2)Provide framework for performing and promoting a board range of value added internal auditingservices. 3)Establish the basis for the evaluation of internal auditing performance. 4)Foster (support) improved organizational processes and operations.The IIA Practice Advisories represent the best practices of implementing the Standards . The PracticeAdvisories are not mandatory and do not represent all of the considerations that may be necessarywhen applying them, but they are simply the recommended stet of items that should be addressed orfollowed.Finally, there are the IIAsCode of Ethics. Whereas the Standards provide guidance for internal auditors in the performance of their duties, The Code of Ethics provides an ethical guide for the conduct of internal auditors

STEP #2: Understand stakeholders requirements For this stage we are trying to answer the question, How can the internal audit activity best serve the organization? In order to answer this question, you need to do a lot of information gathering, and part of this process is to understand the stakeholders requirements. To better understan d the stakeholders requirements you can do the following: Interview senior management and member of the audit committee . This gives you a chance to start building a rapport with the top. As we have already said, without their full and un-mitigating support, the chances of your success are severely diminished. You want to ensure that they have a clear understanding of the internal audit function. You can then clarify their expectations. Review the audit committees Charter. You want to have clearer understanding of the audit committees responsibility regarding internal auditing (see below) Note: See Appendix D for a sample Audit Committee Charter. -Review with management and the chief audit executive the charter, activities, staffing, and organizational structure of the internal audit function. -Have final authority to review and approve the annual audit plan and all major changes to the plan. -Ensure there are no unjustified restrictions or limitations, and review and concur in the appointment, replacement, or dismissal of the chief audit executive. -At least once per year, review the performance of the CAE and concur with the annual compensation and salary adjustment. Review the effectiveness of the internal audit function, including compliance with The Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing. -On a regular basis, meet separately with the chief audit executive to discuss any matters that the committee or internal audit believes should be discussed privately. Meet with the external auditor. The external auditors would be in a good position to advise you on some of the problems they have identified during their own reviews. Coordination between the internal and external auditors is an important issue for the

internal auditing function and this is agood method to start developing a good, working relationship. Meet with other stakeholders,including operations managers. During these meetings you can get a better feel for their risks and concerns

STEP # 3: Develop an Internal Audit Charter After gathering all of the necessary information during the second stage, you should now be in a position to develop the Internal Audit Charter .During this stage you will be working with the board and senior management to articulate the mission for internal audit. It is the Charter that lets internal auditors do their work. It will probably be the CAE to write up the draft Charter, but for it to mean something it has to be approved by senior management and accepted by the audit committee. After its approval and acceptance, it then needs to be communicated to people within the company. The Charter should define the following items in respect to the internal audit activity: 1)The scope of the services (i.e., assurance and consulting) and work to be performed, 2)The objectives of the function, 3)The authority of the function to access records, personnel and physical properties in theorganization, 4)The accountability of the function, and 5)The responsibility of the function.Note: See Appendix E for a sample Internal Audit Function Charter. This sample Charter was adapted rom the one posted on the IIA website (www.theiia.org).Of course, no Charter can possibly encompass all of the activities that could be possible, so when tailoring your Charter, just make sure it fits your companys needs. Also, you need to recognize that even though the Charter is a formal and approved document (approved by senior management and accepted by the audit committee), it is not a document that is unchanging. In the beginning you should review the document at least annually (and more often as circumstances may require) to ensure that it is still relevant and addresses the needs and issues that the organization and the internal audit activity are facing. It may be good to include all of the activities you think you might want the internal audit function be involved in, in the coming two to three years. This does not mean you have to do these activities, only that you could if the need arose. One of the important things to remember when developing the Charter is to make sure that your function maintains its independence and objectivity. We look at these terms below.

Review the Independence and Objectivity of the Internal Audit Function Independence: The function is a unique function within the organization. It is not part of the organizations regular management structure and as such does not play a management role within the organization. Ideally, you want the internal audit activity to functionally report to the Audit Committee of the Board of Directors, and administratively to the CEO or some other designated management person. Why is this? As with external auditors, internal auditors need to be protect their independence from any undue internal management pressure. This means that the internal auditor should be able to perform its Work freely and objectively without having to worry about individuals or groups within the organization influencing or affecting what it is trying to do. Functionally reporting to the Audit Committee or some other governing authority means that they are responsible for: Approving the functions Charter. Approving the internal audit risk assessment and related audit plan, Receiving communications from the CAE on the results of the function or other private meetings with the CAE without management present. Approving decisions regarding the appointment or removal of the CAE, and Making appropriate inquiries of management and the CAE to determine whether there are scope or budgetary limitations that impeded the ability of the function to execute its responsibilities. Now, when we are talking about independence, we know that you are not go to be as independent assay your companys external auditor because, one, it is management that is going to be involved in the approval of your budget, and two, if you need to buy some office supplies, youre not going to go to the audit committee to get approval for the expenditures. For issues like this you should go to someone in administration, perhaps the chief financial officer. Administrative reporting typically would include: Setting the budget for the function, Having the HR department administer personnel evaluations and compensation, Monitoring internal communications and information flows, and

Administering the organizations internal policies and procedures. The idea of independence is not to be taken lightly. Its this idea of independence that differentiates internal auditing from the other departments within your organization. When looking at independence you might want to consider seeking some external assistance in making sure the function is truly, as best it can, independent. External auditors might be in a good position to review the independence and objectivity of the internal audit activity. To some extent, external auditors also have some sake in the establishment of a wellrun internal audit function. Its possible that the external auditors may rely on some of the work of the internal auditors; so therefore, they want to have some comfort that the work of the internal auditors is not being manipulated. But their willingness to rely on some of the work will be diminished if they feel the internal audit function lacks independence, or objectivity. Objectivity: What we mean by objectivity is that you, as an internal auditor, have to be able to remain objective when conducting your work. You should1) Impartial .2) Have an unbiased attitude, and 3) Avoid conflicts of interest Being objective means that the conclusions or opinions that you are drawing are based solely on facts at hand, and are not influenced by feelings, emotions, relationships with others, monetary bribes or any other outside influence. Impairment of Objectivity: When we talk about objectivity you need to keep in mind others perception of whether the internal auditor is being objective or not. For example, if the internal auditor accepts a gift or money of significant value from the client, objectivity would be perceived to be impaired even if the auditor, in fact, was objective. Also, objectivity is assumed to be impaired if an auditor performs an assurance review of any activity over which he or she has recently had responsibility. Individuals who are assigned to or transferred to your department should not audit areas where they worked until a reasonable period of time haselapsed. Based on the IIA Standards, the amount of time is about one year.

STEP #4: Develop an initial Risk Assessment for your company Risk assessment is the systematic process of assessing and integrating professional judgment about probable adverse conditions and/or events. The questions should always be asked: What could go wrong here?

What assets do we need to protect? By answering these questions you can then understand the means of controlling the risks. The COSO study, Internal Control-Integrated Framework , summaries risk assessment in the following way: 6 Every entity faces a variety of risks from external and internal sources that must be assessed. A pre-condition to risk assessment is the establishment of objectives, linked at different level sand internally consistent. Risk Assessment is the identification and analysis of relevant risks to achievement of objectives, forming a basis for determining how the risks should be managed.Because economic, industry, regulatory and operating conditions will continue to change,mechanisms are needed to identify and deal with the special risks associated with change. The assessment of risks starts by developing the audit universe or list of all auditable entities. This would be a compilation of the subsidiaries, business units, departments, groups, processes, or other established subdivisions of an organization that exist to manage one or more business risks. The assessment of risk involves determining the volume of transactions and the average dollar amount per transaction, the dollar value of assets that are exposed to loss, as well as the probability that a loss will occur. The company objectives must be established before risks can be assessed. Risk assessment forms the basis for determining how risks (both internal and external) should be managed. External risks include changes in technology, changes in the market in which an entity operates, new legislation bringing new requirements, natural disasters, economic changes, a failure of a key supplier, or being sued, defrauded, or robbed. Internal risks include employee embezzlement accompanied by falsification of records to conceal the theft; lack of compliance with government regulations; or other illegal acts by employees, such as taking a bribe. Internal risks can also include disruption in computer

systems, poor management decisions, errors, or accidents. Changes in management responsibilities can affect control activities; and an ineffective board or audit committee may leave openings for fraudulent actions on the part of anyone within the company

STEP #5: Develop the Audit Plans Based on the IIA Standards 7 The CAE should establish risk-based plans to determine the priorities of the internal audit activity, consistent with the organizations goals. The function of the audit plan is to put into writing the audit goals, schedules, staffing needs, and reporting. The plan should also demonstrate that audit resources are used efficiently and effectively. Based on this, we can see that audit plans are a good method of promoting internal auditing in the company. Even though, audit plans are designed to act as a guide or roadmap for your company when you do the audits, you need to remember that the plans are not written in stone and might be modified during an audit if circumstances require it. The audit plan should be prepared at least annually, but it is highly recommended to develop strategic audit plans as well. The primary purpose of the strategic plans is to ensure sufficient internal audit coverage. Strategic Audit Plans: Strategic means in the future, so this plan would show your audit coverage going out two, three or more years. Developing this long-term plan is something you should not take lightly. Sawyer 8 identifies 6 purposes of the strategic plan. These are:1)To provide a guide for your internal audit department,2)To provide a basis for your budget request,3)A way of involving management and the board in audit planning,4)Provides the standard by which you can measure the accomplishments of your department,5)A means to show management and the board that your department is under competent control,and6)A notice to the external auditor of proposed audit coverage. Sawyer 9 also outlined some of the basic elements that every strategic plan should contain. These elements are: 1)All the operations of the company should be analyzed for audit ability and potential risks. 2)Each organizational component should be analyzed as to specific objectives, performancestandards, and controls. Proposed audit hours shoud be allocated each of the identifiableelements constituting an audit project. 3)Relative risks should be assessed, taking into account the objectives of internal control set forth in the Standards:107 Standard 2010.8

Sawyers Internal Auditing, 5th Edition, page 945.9 Sawyers Internal Auditing, 5th Edition, page 947.10 Standard 2120.A1.16

Reliability and integrity of information. Compliance with internal and external rules and regulations. Safeguarding assets. Economical and efficient use of resources. Achievement of established organizational objectives and goals. The big issue for the strategic plan is to make sure that all areas of the company are audited at least periodically. Without such a plan, it is possible that a certain area would never be audited because it does not meet the requirements for the annual audit. Now, we want to look at the annual audit planning process. Annual Audit Plans: The CAE has the responsibility to develop the annual audit plan based on the assessment of risk and the exposures that may affect the company. Based on risk and exposure the CAE can prioritize the activities to be audited. You just need to make certain that the plans are consistent with the Charter and with the goals of the company. How do you determine which engagements to conduct? Its ultimately the responsibility of the CAE to determine which engagements are to be performed. Sometimes it may come down to the judgment of the CAE in making this decision. Other factors to consider when prioritizing are: The length of time since the last engagement was performed in the area; Request from senior management, the audit committee or other governing bodies; An engagements relation to the external audit; Changing circumstances in the business, operations, programs, systems or controls;

Changes in the risk environment or control procedures in the department; The potential benefit that could be achieved from the engagement; and Changes in the skills of the available staff (it may be that a new employee has new skills, or training has given a staff member new skills) because new skills may enable conducting different types of engagements. Note: In the development of audit plans, it is generally recommended to leave some time for management request (usually about 10%).We have already mentioned that the primary factor in prioritizing engagements is risk. When we discussrisk assessment, you need to remember that there are two types of assessment s, quantitative (numerical) assessments as well as qualitative (characteristics) assessments. Quantitative assessments would include the dollar value of the assets at risk or the potential loss, while qualitative includes things such as the risk in the area of fraudulent behavior or the importance of the section to the operations of the business as a whole. One way to measure the extent of risk in different areas is to multiply the dollar amount that is at risk of loss by the percentage chance of the loss occurring. In this way, the CAE is able to address the fact that while petty cash is at great risk because it is cash that is, in essence, available to everyone in the organization, there is not much cash at risk at any one time because there is never much cash in petty cash at any point in time. When combining these factors, petty cash is probably a lower priority when compared to an area where there is a lower risk of loss, but the loss value would be much greater. The above discussion has focused on a monetary measurement. However, there are also risks that are not related to the assets of the company or a specific monetary amount that also need to be assessed. For example, control procedures (or, more accurately, lack of control procedures) may also be an area of risk that would need investigation. Note: See Appendix F for a sample Schedule of Audit Coverage for a threeyear period. The difference between this 3-year plan and the annual plan is that the annual plan would include the timing of the audits, and possibly the assigned personnel.

STEP #6: Build the budget You are going to build your internal audit budget based on the results of the risk assessment and audit plan. The internal audit budget must be sufficient to so you can deliver a risk-based plan developed during the fifth stage. The amount that you are going to budget to achieve your objectives will be driven by the audit plan, organizational structure, and staffing strategy. In 2004, the IIA conducted a random survey of 730 companies to get an idea of what companies spend to support their internal auditing functions (see Exhibit 1). The survey identified a general range of 0.03% to 0.22% of revenues for an internal audit budget. The percentage goes up to 1.33% of revenue for companies with revenue of less than 100 million USD.The following information below was provided by The IIA Global Auditing Information Network (GAIN)Reports: Exhibit 1 Average Internal Audit Cost By Revenue Revenue Range Internal AuditStaff CountAverageRevenueAverage InternalAuditAverage InternalAudit as % of Revenue<$100M3$36,900,254$277,8841.33%$100$500M4$218,576,736$474,4290.22%$500M-$1B7$755,271,735$945,4320.13%$1B$5B12$2,490,683,297$1,769,8900.07%$5B$15B23$9,229,594,016$3,720,1560.04%>$15B74$41,347,965,743$11,678,4230.03% Source: The IIA Global Auditing Information Network (GAIN).For more information visit website:www.theiia.org/gain You will have two classifications of costs in the internal audit budget: Capital expenditures andAdministrative expenses .1) Capital Expenditures include costs for purchasing desktop computers, notebooks, printers, copy machine, cell phones, office furniture, etc.2) Administrative costs could include the following: The salary of the CAE. The salary of remaining auditors. Travel expenses. This could be a significant cost, particularly, if your company has multiple locations. IT support costs.

Office equipment repair costs. Office supplies. General office maintenance costs

STEP #7: Determine the staffing requirements The CAE needs to make sure his or her staff is professional. This means having the right people in the right positions. This follows along the idea that its better to be understaffed then to hire the wrong people who could very quickly ruin the creditability of your department. But, the CAE does need to be concerned about not meeting the regulatory requirements, e.g., NYSE, Sarbanes-Oxley, and others. What staffing options do you have? In our earlier example, the company is going to float an IPO on the NYSE. In this case, the company is mandated to have an internal audit function. Again, listed companies may choose to outsource this function to a third party service provider other than its independent auditor. Based on this requirement, you have three alternatives. You can: (1) build the IAA in-house, (2) full you to source the IAA, or (3) partially outsource the IAA. Building in-house: This alternative tends to be the more traditional way of creating and building internal audit activities. Advantages to this approach can include the ability to groom employees for future needs within the company. The company also has the advantage of having staff available on a permanent basis who understand the culture, structure, and practices of the company. In addition, the full-time staff is in a position to further develop specialized skills through professional certification programs (i.e., CIA, CFSA,CISA, and others), which further professionalizes the department. Fully Outsourcing: Outsourcing is generally defined as contracting out the IAA to others who are not employees of the company. There are a variety of reasons why a company may consider fully outsourcing the internal auditing function, including:

have an operational function immediately,

dence and objectivity. This is because they would not be onstaff of the company.

What could be a disadvantage of outsourcing? One disadvantage could be that since the contracted auditors are not part of the company they might not have the loyalty to the company has in-house auditors. Also, inhouse auditors would be more familiar with the business environment of the company, and thus, be in a better position to help the company. Finally, internal auditing is supposed to be a value added function, but if executive management and the board are not a 100% on board, then outsourcing could limit the benefits of the IAA. Partial Outsourcing: Even with fully developed in-house internal auditing staff, its unlikely you will have the capability to provide complete audit coverage. In these cases, you should consider partially outsourcing to an outside organization that can provide specialized skills so you can meet your objectives. For example, if your company offers a pension plan then it is not unusual for an actuary to be hired to look at the reasonableness of future pension liabilities. Or, if your company produces environmental waste, it might be good to hire an outside firm to look at compliance with environmental laws. You should never think that your department has to be specialist in every area of the organization. It is just not realistic to think so. When deciding whether to hire in-house, outsource or possibly do both, you need to ask yourself: 1)What are the priorities for the internal auditing function? If you build in-house, can to hire the staff that can handle the work? Can they do the work professionally, and get it done on time? 2)If you outsource, can you improve the effectiveness of your department? What are the long-term implications? Will outsourcing save the company funds? How about longterm needs? 3)Can you source staff internally on a part-time basis to help meet the departments objectives? For example, if you had scheduled an environmental audit for the current period, perhaps the company has an experienced environmental engineer who could help with the audit. An important issue with this is to make sure the employee maintains his or her objectivity. The CAE simply needs to realize that outsourcing is a viable option. The company has particular needsand compliance deadlines and these factors will dictate whether building, outsour cing, or using acombination of both is right for your company. Each option has its benefits and risks so an analysis should be conducted to determine which option is the right option. Some of the things to consider in your analysis are:

Independence of the service provider. Allegiance of in-house versus external service provider. Professional standards followed by the service provider. Qualifications of the service provider. Staffing training, turnover, rotation of staff, management. Flexibility in staffing resources to meet engagement need or special request. Availability of resources. Retention of institutional knowledge for future assignments. Access to best practices or insight to alternative approaches. Culture of the company receptiveness to service providers. Coverage of remote locations (if relevant). Coordination with in-house internal audit services. Coordination with external auditors. Use of internal auditing as a training ground for internal promotions. Retention, access to and ownership of working papers. Acquisition and availability of specialty skills. Cost considerations. Good standing membership in an appropriate professional organization. Drafting Job Descriptions: By drafting descriptions, it will be much easier for you to determine whether your department is properly staffed. Having good job descriptions is also an important basis for the recruitment and promotion of staff. In Appendix G We have drafted sample job descriptions for the various internal auditing positions. We included job descriptions for the positions:

Chief Audit Executive Internal Auditing Manager Internal Auditing Senior Supervisor Internal Auditor SupervisorIts unlikely you would have the resources available to initially fill these positions, but again you alwaysneed to be thinking beyond current needs STEP #8: Establish a plan for the development of Staff Once youve hired the staff, staff development will be an important part of the long-term success of your department. Staff development consists of training, counseling and performance evaluations. Training needs to be provided with the goal of providing the staff with the necessary skills to performtheir jobs in the short term, and also to develop and broaden their skills for their l ong-termdevelopment. Individuals often see training as a benefit and a well-developed training program is an excellent recruiting tool for the company. Individuals personal desires should be considered, but are not the only consideration. This means that it is possible that people will be trained, or assigned to, areas and engagements that they are not personally interested in.However, not only should training benefit the individual, it should also help the functio n meet itsorganizational goals. As such, some staff may be trained in areas where the function does not currently have skills, but which are required in the company. Counseling, or mentoring, is a growing element of staff development. The CAE has a responsibility for counseling and assisting staff members in their growth in the organization. This is not to say that the CAE is supposed to have weekly counseling sessions with each member, but the CAE has a responsibility o step in as needed. In a large internal audit department, there may be a formal counseling/mentoring program and, in this case, the CAE most likely is responsible for the oversight and management of the process. Additionally, the CAE may be the counselor for some of the higher-level staff members in the department. Performance appraisals should be performed at least annually, and more often if needed. Theperformance evaluations need to focus on the skills that are necessary for the individual to perform their work and for IAA as a whole to perform its duties. These staff evaluations should be seen as a means of giving internal audit employees the opportunity to identify their weaknesses and give t hem anopportunity to improve their performance. The evaluation should not be based

on personal likes or dislikes or other non-job related factors. This is particularly true when the evaluation is an engagement evaluation of their work on a specific job, and not an annual evaluation. There should be sufficient time to allow everyone to prepare for conducting the annual evaluation. This usually involves the auditor and the manager both filling out the evaluation form and preparing for the meeting. The meeting should be scheduled when both parties are not pressed for time so that anything hat arises during the evaluation can be discussed and addressed without one person trying to hurry through the evaluation because of other commitments. The performance evaluation form can be a standard form (and will be a standard form in large companies) because this provides focus to the evaluation on the areas that are most important. However, for this process to work as well as possible, the evaluation needs to be carefully thought through by the evaluator and should not include standard comments that are applicable to everyone. Examples and specific references to events should be provided and included whenever possible. Note: See Appendix H for a sample internal auditing evaluation form.

STEP #9: Communicate the existence of the Internal Audit Company

Function

in

the

This next step seems obvious, but it is a very critical part of establishing the internal audit function int he organization. You have to have some level of confidence that when you actually start your work you will have the complete cooperation of the employees and departments in the organization. Without their complete cooperation, you just wont be able to do your work.When management communicates the existence of the internal auditing activity th ey should bepromoting the function as a management orientated resource, not a futile exercise. If they do this, internal auditors have a better chance of getting what they need. Sawyer listed some ways for management to market the internal audit function. Brochures. An easily read non-technical booklet can go a long way toward removing the mystery and hence the fear from internal auditing. Bulletins/newsletters. Bulletins can highlight urgent, current findings. Newsletters can beanecdotal and hence easily understood without getting into internal audit jargon. Organization publications. These often include human interest stories on employees. And a well-written story might be accepted and useful in showing the human side of internal auditing. Organization programs. Many organizations sponsor civic or charitable activities. Helping to lead one of these will present internal auditors in a favorable light. Open house/open door. Hosting an open house lets internal auditors meet operating personnel under relaxed circumstances. Client vs. auditee. In both written and oral statements it is preferable to refer to the people being audited as clients or customers. Advisory board. To develop an interchange of information about organization re organization, changes, and developments, develop an advisory board of operating managers, chaired by the chief audit executive. Subjects discussed could relate to risk exposures and potential problems. The boardis advisory only but can augment the approach to what and when to audit. Pre-audit meeting. This is good way to start building a relationship with the client. During the meeting you can explain internal auditing and its true function one that is more than the mysterious resident critic.

Risk rating. This has generally been regarded as a one-dimension, internal audit function. But by promoting liaisons between internal auditors and selected operating people, it can be developed into a problem solving partnership. Post audit questionnaire. Properly used, the questionnaire can be a valuable quality assurance tool. Client opinions can help fine-tune the audit process. Client training. This can include courses for client personnel and a period of actually working in the internal audit function for top-level new hires who are destined for management positions. This can offer hands-on training in assessing internal controls and valuable experience when the trainees take on the jobs they were hired for. Quality programs. Internal auditors can be in the forefront of the quality quest sweeping the country. Audit reports receive wide distribution in the organization and should be quality-oriented to foster the attitude of doing it right the first time

STEP #10: Establish a quality assurance program Our final stage is the establishment of a quality assurance program. It is through this program that wewill be able to measure the success of the internal audit activity.At this point, you might be asking yourself, So, whos going to be auditing the internal auditors? The answer, in short is, they will be auditing themselves. So, how can internal auditors, audit themselves? You do this by being objective and by being professional. The role of auditing the internal auditing function falls on the shoulders of the CAE.According to the Standards: The CAE should develop and maintain a quality assurance and improvement program (QAIP) that covers all aspects of the internal audit activity and continuously monitors its effectiveness. Thisprogram includes periodic internal and external quality assessments and ongoing in ternalmonitoring. Each part of the program should be designed to help the internal auditing activity add value and improve the organizations operations and to provide assurance that the internal audit activity is in conformity with the Standards and the Code of Ethics. Thus, it is the QAIP that justifies the internal audit activity, but it will be the CAE doing the justifying. Therefore, the internal audit function is really auditing itself. But, as we will see later this is only partially true. Quality Program Assessment: The CAE will be responsible for the implementation of a quality program, the monitoring of that quality program and the assessment of the quality of the program. The quality program should include both internal and external assessments. The function of these internal and external assessments is for the company stakeholders to feel comfortable with the services the IA function is providing to the organization. Theyre asking theques tion -Is the internal auditing function contributing to the overall success of the organization? Quality program assessments should include evaluation, if appropriate, of: Compliance with the Standards and Code of Ethics, including timely corrective actions to remedy any significant instances of noncompliance, Adequacy of the IAAs charter, goals, objectives, policies, and procedures,

Contribution to the organizations governance, risk management and control processes. Compliance with applicable laws, regulations, and other governmental or industry standards, Effectiveness of continuous improvement activities and adoption of best practices, and Whether the auditing activity adds value and improves the organizations operations. The results of these assessments will then be provided to the above-mentioned stakeholders. A problem that can often arise when doing quality program assessments is that qualities can mean different things to different people. This is particularly true of service operations such as the internal audit function. For example, the internal audit department may be conforming to the Standards, but that doesnt mean its operating in an effective or efficient manner. To resolve this potential problem, organizations develop quality circles. A quality circle is a group of employees (anywhere from five to 15 employees) who are intimately familiar with an operation and are brought together to improve quality and productivity. They do this by studying the operation, or problem, making recommendations, and depending on the operation, they may have the authority to implement recommendations.Quality circles frequently use benchmarking as a means to improve q uality and productivity. Benchmarking is the process of a company using the standards set by other companies as a target or model for its own operations. (This is also called best practices.) It is the process of continuously trying to emulate (imitate) the best companies in the world. By striving to meet the standards of the best companies, an organization may be able to create a competitive advantage by achieving a higher standard than its competitors. Benchmarking can use both financial (profit margin) and non-financial (%of defects).The company that is used as the benchmark does not necessarily need to be in the same industry as the company that is trying to improve

Appendix D Audit Committee Charter - Sample PURPOSE: To assist the board of directors in fulfilling its oversight responsibilities for the financial r eportingprocess, the system of internal control, the audit process, and the company's process for monitoring compliance with laws and regulations and the code of conduct. AUTHORITY: The audit committee has authority to conduct or authorize investigations into any matters within its scope of responsibility. It is empowered to: Appoint, compensate, and oversee the work of any registered public accounting firm employed bythe organization. Resolve any disagreements between management and the auditor regarding financial reporting. Pre-approve all auditing and non-audit services. Retain independent counsel, accountants, or others to advise the committee or assist in the conduct of an investigation. Seek any information it requires from employees-all of whom are directed to cooperate with the committee's requests-or external parties. Meet with company officers, external auditors, or outside counsel, as necessary. COMPOSITION: The audit committee will consist of at least three and no more than six members of the board of directors. The board or its nominating committee will appoint committee members and the committee chair. Each committee member will be both independent and financially literate. At least one member shall be designated as the "financial expert," as defined by applicable legislation and regulation. MEETINGS: The committee will meet at least four times a year, with authority to convene additional meetings, as circumstances require. All committee members are expected to attend each meeting, in person or vital- or video-conference. The committee will invite members of management, auditors or others to attend meetings and provide pertinent information, as necessary. It will hold private meetings with auditors (see below) and

executive sessions. Meeting agendas will be prepared and provided in advanceto members, along with appropriate briefing materials. Minutes will be prepared. RESPONSIBILITIES: The committee will carry out the following responsibilities: Financial Statements Review significant accounting and reporting issues, including complex or unusual transactions and highly judgmental areas, and recent professional and regulatory pronouncements, and understand their impact on the financial statements. Review with management and the external auditors the results of the audit, including a nydifficulties encountered. Review the annual financial statements, and consider whether they are complete, consistent within formation known to committee members, and reflect appropriate accounting principles. Review other sections of the annual report and related regulatory filings before release and consider he accuracy and completeness of the information. Review with management and the external auditors all matters required to be communicated to the committee under generally accepted auditing Standards. Understand how management develops interim financial information, and the nature and extent of internal and external auditor involvement. Review interim financial reports with management and the external auditors before filing with regulators, and consider whether they are complete and consistent with the information known to committee members. Internal Control Consider the effectiveness of the company's internal control system, including informati ontechnology security and control. Understand the scope of internal and external auditors' review of internal control over financialreporting, and obtain reports on significant findings and recommendations, toge ther with management's responses.

Internal Audit Review with management and the chief audit executive the charter, activities, staffing, andorganizational structure of the internal audit function. Have final authority to review and approve the annual audit plan and all major changes to the plan. Ensure there are no unjustified restrictions or limitations, and review and concur in thea ppointment, replacement, or dismissal of the chief audit executive. At least once per year, review the performance of the CAE and concur with the annual compensation and salary adjustment. Review the effectiveness of the internal audit function, including compliance with The Institute of Internal Auditors' International Standards for the Professional Practice of Internal Auditing. On a regular basis, meet separately with the chief audit exec utive to discuss any matters that the committee or internal audit believes should be discussed privately. External Audi Review the external auditors' proposed audit scope and approach, including coordination of audit effort with internal audit. Review the performance of the external auditors, and exercise final approval on the appointment or discharge of the auditors. Review and confirm the independence of the external auditors by obtaining statements from the auditors on relationships between the auditors and the company, including non-audit services, and discussing the relationships with the auditors. On a regular basis, meet separately with the external auditors to discuss any matters that the committee or auditors believe should be discussed privately. Compliance Review the effectiveness of the system for monitoring compliance with laws and regulations and the results of management's investigation and follow-up (including disciplinary action) of any instances of noncompliance. Review the findings of any examinations by regulatory agencies, and any auditor observations.

Review the process for communicating the code of conduct to company personnel, and for monitoring compliance therewith. Obtain regular updates from management and company legal counsel regarding compli ancematters. Reporting Responsibilities Regularly report to the board of directors about committee activities, issues, and relate drecommendations. Provide an open avenue of communication between internal audit, the external auditors, and the board of directors. Report annually to the shareholders, describing the committee's composition, responsibilities andhow they were discharged, and any other information required by rule, including approval of non-audit services. Review any other reports the company issues that relate to committee responsibilities. Other Responsibilities Perform other activities related to this charter as requested by the board of directors. Institute and oversee special investigations as needed. Review and assess the adequacy of the committee charter annually, requesting board approval for proposed changes, and ensure appropriate disclosure as may be required by law or regulation. Confirm annually that all responsibilities outlined in this charter have bee n carried out. Evaluate the committee's and individual members' performance on a regular basis

Appendix E Sample Internal Audit Charter Mission and Scope of Work: The mission of the internal audit department is to provide independent, objective assura nce andconsulting services designed to add value and improve the companys operations. It helps the companyby bringing a systematic, disciplined approach to evaluate and improve the eff ectiveness of riskmanagement, control, and governance processes. Role: The Internal Auditing Function is established by the Board of Directors, and its responsibilities are defined by the Audit Committee of the Board of Directors as part of their oversight function. Professional Standards: The internal auditing staff shall govern themselves by adherence to The Institute of Internal Auditors Code of Ethics. The Institutes International Standards for the Professional Practice of Internal Auditing ( Standards ) shall constitute the operating procedures for the department. These twodocuments co nstitute an addendum to their charter. The Institute of Internal Auditors PracticeAdvisor ies will be adhered to as applicable. In addition, Inte rnal Auditing will adhere to the companys policies and procedures and Internal Auditings Standard Operating Procedures Manual. The Standard Operating Procedures Manual shall include attribute, performance, and implementation standards to guide the Department. Authority: The chief audit executive and staff of ATMs internal audit department are authorized to: Have unrestricted access to all functions, records, property, and personnel. Have full and free access to the audit committee. Allocate resources, set frequencies, select subjects, determine scopes of work, and apply the techniques required to accomplish audit objectives.

Obtain the necessary assistance of personnel in units of the organization where they perform audits, as well as other specialized services from within or outside the organization. The chief audit executive and staff of the internal audit department are not authorized to: Perform any operational duties for the organization or its affiliates. Initiate or approve accounting transactions external to the internal auditing department. Direct the activities of any organization employee not employed by the internal auditing department, except to the extent such employees have been appropriately assigned to auditing teams or to otherwise assist the internal auditors. Organizational Status: The CAE shall report administratively to the Chief Executive Officer (CEO) and functionally to the Audit Committee of the Board of Directors. Independence: All internal audit activities shall remain free of influence by any element in the organization, including matters of audit selection, scope procedures, frequency, timing, or report content to permit maintenance of an independent and objective mental attitude necessary in rendering reports. Internal auditors shall have no direct operational responsibility or authority over any of the activities they review. Accordingly, they shall not develop nor install systems or procedures, prepare records, or engage in any other activity which would normally be audited. Mission and Scope of Work: The scope of work of the internal audit department is to determine whether the organizations network of risk management, control, and governance processes, as designed and represented by management, is adequate and functioning in a manner to ensure: Risks are appropriately identified and managed. Interaction with the various governance groups occurs as needed. Significant financial, managerial, and operating information is accurate, reliable, and timely. Employees actions are in compliance with policies, standards, procedures, and applicable laws and regulations.

Resources are acquired economically, used efficiently, and adequately protected. Programs, plans, and objectives are achieved. Quality and continuous improvement are fostered in the organizations control process. Significant legislative or regulatory issues impacting the organization are recognized and addressed appropriately. Opportunities for improving management control, profitability, and the organizations image may be identified during audits. They will be communicated to the appropriate level of management. Audit Planning: Annually, the CAE shall submit to senior management and the Audit Committee a summary of the audit work schedule, staffing plan, and budget for the following fiscal year. The audit work schedule is to be developed based on a prioritization of the audit universe using a risk-based methodology. Any significant deviation from the formally approved work schedule shall be communicated to senior management and the Audit Committee through periodic activity reports. Reporting: A written report will be prepared and issued by the CAE or designee following the conclusion of each audit and will be distributed as appropriate. A copy of each audit report and a summarization will be forwarded to the CAE and the Chairman of the Audit Committee The CAE or designee may include in the audit report the auditees response and corrective action taken or to be taken in regard to the specific findings and recommendations. Managements response should include a timetable for anticipated completion of action to be taken and an explanation for any recommendations not addressed. In cases where a response is not included within the audit report, management of the audited areashould respond, in writing, within thirty days of publication to Internal Auditing and those on the distribution list. Internal Auditing shall be responsible for appropriate follow-up on audit findings and recommendations. All significant findings will remain in an open issues file until cleared by the CAE or the Audit Committee. Periodic Assessment: The CAE should periodically assess whether the purpose, authority, and responsibility, as defined in this charter, continue to be adequate to enable the internal auditing activity to accomplish its objectives. The result of this periodic assessment should be

communicated to senior management and the Board of Directors.Chief Audit Executive ______________________Chief Executive Officer __ ____________________Audit Committee Chairman______________________Date ______________________

Appendix G Job (Position) Descriptions for Internal Auditing Staff Help to facilitate the recruiting by stating explicit job requirements. Provide a means to justify salaries. Means to express the managements expectations. Method for the internal audit activity to engage in personnel planning.The following job (position) descriptions are presented in Sawyers Internal Auditing 5 th edition, pages839, 846-848. CHIEF AUDIT EXECUTIVE Authority: The chief audit executive is authorized to direct a broad, comprehensive program of internal auditing within the organization. Internal auditing examines and evaluates the adequacy and effectiveness of thesystems of management control provided by the organization to direct its activities to ward theaccomplishment of its objectives in accordance with organization polices and plans. In accomplishing these activities, the chief audit executive and members of the audit staff are authorized to have full, free, and unrestricted access to all organization functions, records, property, and personnel. Responsibility: The chief audit executive is responsible for: Establishing policies for the auditing activity and directing its technical and administrative functions. Developing and executing a comprehensive audit programs evaluation of management controls provided over all organization activities. for the

Examining the effectiveness of all levels of management in their stewardship of organiz ationresources and their compliance with established policies and procedures. Recommending improvement of managements controls designed to safeguard organiz ationresources, promote organization growth, and ensure compliance with government l aws andregulations. Reviewing procedures and records for

Their adequacy to accomplish intended objectives, and appraising policies and plans relating to the activity or function under audit review. Authorizing the publication of reports on audits, including recommendations for improvement. Appraising the adequacy of operating managements actions to correct reported deficie ntconditions; accepting adequate corrective action; continuing reviews with appropriate managementpersonnel on action the chief audit executive considers inadequate until th ere has been asatisfactory resolution of the matter. Conducting special audits as requested by management, including the reviews of representations made by persons outside the organization. Acting in a consulting capacity relative to the above areas of responsibility.

INTERNAL AUDITING - MANAGER Purpose: To administer the internal audit activity of an assigned location or operation. To develop a comprehensive, practical program of engagement coverage for the assigned location or operation. To obtain accomplishment of the program in accordance with acceptable engagement standards and stipulated schedules. To maintain effective working relations with executive and operating management. Authority and Responsibility: Within the general guidelines provided by the chief audit executive: Prepares a comprehensive, long-range program of engagement coverage for the location to which assigned. Identifies those activities subject to engagement coverage, evaluates their significance, andassesses the degree of risk inherent in the activity in terms of cost, schedule, and quality. Establishes the related departmental structure. Obtains and maintains an audit staff capable of accomplishing the internal au dit function.

Assigns engagement areas, staff, and budget to supervisors. Develops a system of cost and schedule control over engagement projects. Establishes standards of performance and, by review, determines that performance meets the standards. Provides executive management within the assigned location with reports on engagem entcoverage and engagement results, and interprets those results so as to improve the engagement program and the engagement coverage. Establishes and monitors accomplishment of objectives directed toward increasing the internal audit activity's ability to serve management. INTERNAL AUDITING - SUPERVISOR Purpose: To develop a comprehensive, practical program of engagement coverage for assigned areas. To supervise the activities of staff assigned to the review of various organizational and functional activities. To ensure conformance with acceptable standards, plans, budgets, and schedules. To maintain effective working relations with operating management. To provide for and conduct research and develop manuals and training guides. Authority and Responsibility: Under the general guidance of a manager: Supervises the work of staff engaged in the reviews of organizational and functional activities Provides a comprehensive, practical schedule of annual engagement coverage within general areas assigned by the manager. Determines areas of risk and appraises their significance in relation to operational factors of cost, schedule, and quality. Classifies engagement projects as to degree of risk and significance and as to frequency of coverage. Provides for flexibility in engagement schedules so as to be responsive to management's special needs.

Schedules projects and staff assignments so as to comply with management's needs, within the scope of the internal audit activity's overall schedule. Coordinates the program with the organization's public accountant. Reviews and approves the purpose, scope, and approach of each engagement project for assigned areas. Directs engagement projects to see that professional standards are maintained in the planning and execution and in the accumulation of information. Counsels and guides staff to see that the approved engagement objectives are met and that adequate, practical coverage is achieved. Reviews and edits engagement communications and, in organizations with the auditor in-charge for the assigned project, discusses the communications with appropriate management. Presents oral briefing to branch-level management. Provides for and performs research on engagement techniques. Provides formal plans for the recruiting, selecting, training, evaluating, and supervising of staff personnel. Develops manuals and other training aids. Accumulates data, maintains records, and prepares reports on th e administration of engagement projects and other assigned activities. Identifies factors causing deficient conditions and recommends courses of action to improve the conditions, including special surveys and audits. Provides for a flow of communication from operating management to the manager and to the chief audit executive. Assists in evaluating overall results of the engagements. INTERNAL AUDITOR - SENIOR Purpose: To conduct reviews of assigned organizational and functional activities. To evaluate the adequacy and effectiveness of the management controls over those activities. To determine whether organizational units are performing their planning, accounting, custodial, riskmanagement, or control activities in compliance with management instructions, appli

cablestatements of policy and procedures, and in a manner consistent with both organizational objectives and high standards of administrative practice. To plan and execute engagements in accordance with accepted standards. To report engagement observations and to make recommendations for correcting unsatisfactory conditions, improving operations, and reducing cost To perform special reviews at the request of management To direct the activities of assistants. Authority and Responsibility: Under the general guidance of a supervisor: Surveys functions and activities in assigned areas to determine the nature of operations and the adequacy of the system of control to achieve established objectives. Determines the direction and thrust of the proposed engagement effort. Plans the theory and scope of the engagement, and prepares an engagement work program. Determines the engagement procedures to be used, including statistical sampling and the use of information technology. Identifies the key control points of the system. Evaluates a system's effectiveness through the application of a knowledge of business systems,including financial, manufacturing, engineering, procurement, and other operations, and anunderstanding of engagement techniques. Recommends necessary staff required to complete the engagement. Performs the engagement in a professional manner and in accordance with the approv edengagement work program. Obtains, analyzes, and appraises information as a basis for an informed, objective con clusion(opinion) on the adequacy and effectiveness of the system and the efficiency of performance of the activities being reviewed. Directs, counsels, and instructs staff assistants assigned to the engagement, and reviews their work for sufficiency of scope and for accuracy.

Makes oral or written presentations to management during and at the conclusion of the engagement, discussing observations and recommending corrective action to improve operations and reduce cost. Prepares formal written communications, expressing opinions on the adequacy and effectiveness of the system and the efficiency with which activities are carried out. Appraises the adequacy of the corrective action taken to improve deficient conditions