ⓒ 2013 j csr. all rights reserved. “t rue ” v alue of i nternal a udit and d evelopment of...

ⓒ 2013 J CSR. All Rights Reserved.

“TRUE” VALUE OF INTERNAL AUDIT AND DEVELOPMENT OF “CAPABLE” INTERNAL AUDITOR

IRCA Forum 2013

2013/06/23

Keizo Tsuchiya

President

Japan Registration Organization for Corporate Social Responsibility

ⓒ 2013 J CSR. All Rights Reserved.2

SIGNIFICANT INTEREST IN INTERNAL AUDIT

Amount of Information Uploaded to the Internet Importance of Internal Audit: 1,210,000 hits Credibility of Internal Audit: 1,260,000 hits Value of Internal Audit: 1,500,000 hits Effectiveness of Internal Audit: 1,860,000 hits

Are they a large number or small number? Corporate Value ： 1,260,000 hits (the same as “Credibility of Internal

Audit”) Computer Virus (including virus) ： 889,000 hits, which is far less than the

above ！！ Akashiya Sanma ： 1,850,000 hits

Search results of “Yahoo! JAPAN“ on May 5, 2013


VALUE OF INTERNAL AUDIT


VALUE OF INTERNAL AUDIT Cost vs. Effectiveness (Value)

Calculate internal audit costs Annual cost of training to develop internal auditors or use of external

personnel as internal auditor Mandays of internal audit

- Mandays for audit planning, Mandays for audit execution (auditors/auditees), Mandays for analysis/wrap-up and reporting

Example：An organization with 200 employees and 10 Departments to be audited5 internal auditors (appointed from different Departments in the organization)3 internal audit teams (including 1 observer) Pre-audit training: 1 day（by an external tutor)

5 mandays + Tutor fee Preparation for internal audit (Collection of information and preparation of internal

audit plan): 1 day/team (6 mandays in total)） Internal audit: 3 days

Mandays on the auditor side: ６mandays Mandays on the auditee side: 6 mandays

Analysis/Wrap-up: 1 day/team (6 mandays in total) Reporting: 0.5 day/team (3 mandays in total)Total mandays + External tutor fee and all other expenses: 1.3 million yen


VALUE OF INTERNAL AUDIT Effectiveness (Value)

Level of usefulness of information acquired by internal audit Level of usefulness for top management ・・ How well does internal

audit report meet expectations of top management?Example:Internal Audit ReportNonconformity: Record of xxx training was not kept in Department Y.Summary: 3 concerns and 8 opportunities for improvement

It was found that training records were not kept in some Departments; e.g. Study session about accidents taking place in competitors.

Interesting information Not interestedwas delivered

100 80 60 40 20 0 　 (%)

Value of internal audit for top management:

1.3 million yen x 30% ＝ 390,000 yen


VALUE OF INTERNAL AUDIT Value to provide top management with useful

informationMatured Audit results containing more

than 80 ％ of information that top management wantedValue: 1.04M ～ 1.3M yen

Valuable information that top management can use as useful information

Acceptable Audit results containing 60%~80 ％ of information that top management wantedValue: 780,000 ～ 1.04M yen

Less valuable information that top management can use just as reference

Immature Audit results containing 20%~60 ％ of information that top management wantedValue: 260,000 ～ 780,000 yen

Limited quality of internal audit that may overlook risks of accidents and miss opportunities for improvement in operations

Not Established

Audit results containing less than 20% of information that top management wantedValue: 0 ～ 260,000 yen

80% of information collected in internal audit is extremely low in value for the use of business management.


VALUE OF INTERNAL AUDIT Internal audit must contribute to achievement of objectives and

targets of an organization. Internal audit must appropriately report changes in risks relating to

management of an organization. Internal audit must satisfy expectations of top management in

correctly reporting current status of an organization. Internal audit is not a means for certification, but an effective

means to implement a management system. Internal audit is also an activity to demonstrate validity of

autonomous management of an organization. Valid in terms of customer (public) expectations, competitiveness and

efficiency⇒ Internal audit also provides useful information for

communication with the third party. Internal audit is a professional work, but anyone can conduct it if

he/she is familiar with an organization. It is not difficult to create value. It is necessary, however, to appoint those who are highly ethical and trusted.

⇒ Enhance quality of assessment ！ Enhance quality of analysis and evaluation ！


DEVELOPMENT OF INTERNAL AUDITOR

~ A MEANS TO DIRECTLY ENHANCE VALUE OF INTERNAL AUDIT ~


HOW TO DEVELOP INTERNAL AUDITOR? The quickest way is to have a candidate internal auditor experience a

good internal audit. But opportunities to practice internal audits are limited in number.

⇒ The limited opportunities must be effectively organized.

To organize a good internal audit → To put in place the four conditions:Condition 1 ： Top management’s support and commitment to the public, people and business Condition 2 ： Training of internal auditorsCondition 3 ： Cooperation of Departments to be audited Condition 4 ： Establish PDCA of internal audit which facilitates development of internal auditors

Utilizing the limited opportunities of internal audit effectively, an organization, based on the above conditions, encourages a candidate internal auditor to experience a good and successful internal audit.


CONDITIONS TO ORGANIZE A GOOD INTERNAL AUDITCondition １： Top management’s support and commitment to the public, people and businessOrganization in which internal audit

makes a valuable contribution

Organization in which internal audit does not make a valuable

contribution

Top management recognizes benefits of internal audit and actively supports internal audit.

Top management is not interested in internal audit.

Top management commits to address all the problems.

Top management does not address problems.

Top management does not distort the truth. Top management disguises facts

Good internal auditors are developed as internal audit is respected as precious information source. Internal audit will become effective in providing information that top management wants.

Top management approach to internal audit accelerates departments’ uncooperative response to internal audit. When being appointed as internal auditor, people try to find a reason to decline the appointment.


CONDITIONS TO ORGANIZE A GOOD INTERNAL AUDIT

Condition ２： Training of internal auditors Participate in practical training

Lectures, no matter how much they are, do not yield a positive effect.

Practical training is essential to develop a good internal auditor. Understand a practical image of internal audit

- How to conduct interview- Audit trail- Collection of evidences

Respond to information obtained in internal audit to deepen understanding about internal audit - Workload has increased suddenly ・・・ What would you assess?- The organizational structure has ben changed ・・・ What would

you assess?- Customer requirements have been changed ・・・ What would you

assess?- Processes have been changed ・・・ What would you assess?



Condition 3 ： Cooperation of Departments to be audited Internal auditor must make maximum use of limited

opportunities of internal audit and identify “key to success.”

It is important for an internal auditor to improve his/her own ability and brush up auditing skills, but Condition 3 helps him/her compensate for the lack of the skills. Make it a priority to give an internal audit “successful

experience” Enjoying delicious dishes is essential for a cook to develop his/her

skills.Cooperation of Departments to be audited

Actively participate in identification of problems Provide sufficient information on both positive

and negative facts Trust internal auditors



Condition 4 ： Establish PDCA of internal audit which facilitates development of internal auditors Plan － Preparation of internal audit Do － Execution of internal audit

⇐ Carry out internal audit based on Conditions １ ~ ４・・ (Wishing for success)

－ Analysis/reporting of internal audit results Check － Evaluation of quality of internal audit Act － Feedback of the evaluation results leads

to development of capable internal auditors


PREPARATION OF INTERNAL AUDIT (ESSENTIAL TO ENHANCE EFFECTIVENESS OF INTERNAL AUDIT)

Preliminary information collection Understand objectives of the internal audit ・・・

(Support of top management) Define information that needs to be collected from

Departments to be audited and relevant Departments in order to satisfy the internal audit objectives

Changes, targets, processes/procedures, events (incidents/accidents, what is done well/what is not done well/what is concerned), challenges・・・（ Cooperation of Departments to be audited ）

Organize preliminary information so as to make it useful in internal audit Identification of key processes Sub-processes, conditions, criteria, qualification and training

which affect the key processes Risks and expected problems What needs to be assessed?

- What will be sampled and how much samples will be taken?- What information needs to be extracted?


ANALYSIS/REPORTING OF INTERNAL AUDIT RESULTS

Try to produce an internal audit report to have people say “Good Job!!”

Analyze internal audit results as much as possible and examine the analysis results

Example of Analysis: Internal audit results generally have the following two

aspects:1. Management system (procedures and rules ）2. Performance (degree of achievement of targets ）

Analyze and examine the results based on the combination of the above two aspects:

A) Rules are strictly observed and targets are achieved. B) Rules are strictly observed but targets are not

achieved.C) Although rules are not observed, targets are achieved.D) Rules are not observed and targets are not achieved.


EXAMPLE OF ANALYSIS:A) Rules are strictly observed and targets are achieved.

B) Rules are strictly observed but targets are not achieved.

C) Although rules are not observed, targets are achieved

D) Rules are not observed and targets are not achieved.

Targets Achieved

Targets not

Achieved

Rules Violated Rules Observed

C) ＋ α possible cases ：1.May not have achieved targets if

rules were observed2.May have set too easy targets 3.May disregard rules4.May turn to “D” when some specific

conditions are added

D) ＋ α possible cases ：1.May have achieved targets if rules

were observed2.May not have achieved targets

even if rules were observed3.May have set too aggressive

targets compared with capability4.May have problems in awareness5.May have problems in equipment

capability

A) ＋ α possible cases ：1.May be able to find more effective

processes2.May have set too easy targets3.May turn to B, C or D when some

specific conditions are added

B) ＋ α possible cases ：1.May have flaws in rules2.May have set too aggressive

targets compared with capability3.May have problems in equipment

capability4.May have problems in willingness

to achieve targets5.May turn to A when some specific

conditions are added


REPORTING OF INTERNAL AUDIT RESULTS Report isolated failure of achievement or violation as a

deficiency Top management does not pay attention ／ It is Departments

that are expected to address such deficiency ／ It is not necessary to report each one of such deficiency

Also report magnitude of impacts Top management becomes aware of need for prioritization.

Also report analysis results Top management understands a need to take initiative; e.g.

allocation of resources. Also report those areas focused in the internal audit

Top management understands credibility of the results and problems in the process to derive conclusion.

Also report considerations on risks The report helps top management develop a next strategy.

→ “Good Job!!”

Drill down and Sort out


EVALUATION OF QUALITY OF INTERNAL AUDITSelf-Evaluation Quality of preparation

Was preliminary information acquired effectively? Was the organized preliminary information useful? Were key processes identified correctly? Were risks to an organization identified properly? Was practical image of internal audit useful?

： Quality of internal audit

Was progress of target achievement in audited Departments assessed? Was degree of process maturity assessed? Were strength and weakness of an organization assessed? Was sufficient assessment conducted to meet the objective of the internal

audit? Was cooperation of audited Departments sufficient?

： Quality of analysis/reporting

Was the information obtained in the internal audit analyzed based on facts to identify relevance and risks?

Was the internal audit report compiled in a way to effectively communicate what needs to be communicated?

：


EVALUATION OF QUALITY OF INTERNAL AUDIT Evaluation of internal audit by audited Departments →

Questionnaire survey, etc. Internal audit is a service to Departments to be audited, and

therefore quality of internal audit can be regarded as service quality.

Such a technique as “Servqual” that is widely used to evaluate service quality is considered to be used to evaluate quality of internal audit.

SERVQUAL SERVQUAL is a technique to evaluate service quality by measuring a gap

between a service “expected” by users and an actual service “perceived” by users. In this technique, 22 questions are asked for five dimensions determining perceived quality (evaluation on the scale of one to seven). Five dimensions

Tangibles: physical facilities, appearance of equipment and employeesReliability: capability to execute a committed service accuratelyResponsiveness: willingness to assist customers and promptly provide a

serviceAssurance: employees’ knowledge, politeness and capability to provide

confidence and trustEmpathy: consideration given to customers and care for each individual


SUMMARY Significance of enhancing internal audit

Raise value of input to top management

Development of internal auditors is a key to the enhancement of internal audit.

Organizing a good internal audit is essential for development of internal auditors.Condition 1: Top management’s support and commitment to the public, people and businessCondition 2: Training of internal auditorsCondition 3: Cooperation of Departments to be auditedCondition 4: Establish PDCA of internal audit which facilitates development of internal auditors

A good internal auditor is developed by utilizing limited opportunities of internal audit, experiencing a good and successful internal audit based on the organized good internal audit conditions, and receiving feedback of internal audit quality evaluation results.


ASSISTANCE TO ENHANCE INTERNAL AUDIT VALUE

Use of the IRCA’s OEA (Organisations employing auditors) program http://www.irca.org/ja/OEAs/

J CSR provides information on audit of organizations through the website of Auditor Bank.Thank you very much for your kind attention.

http://www.auditorbank.com/

ⓒ 2013 j csr. all rights reserved. “t rue ” v alue of i nternal a udit and d evelopment of...

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