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Building quality into internal audit

8.  A need for measures

Performance measures are important to managing quality and continuous improvement. They provide information on the degree to which the internal audit function is meeting its objectives and agreed quality standards.

Activity 6 The problem with measures

List some of the potential problems with performance measures.

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You are probably aware of the balanced scorecard performance management tool developed by Kaplan and Norton (1992, from Turner, 2009). The balanced scorecard has been adapted for internal audit functions, first by Frigo (2002), and more recently by Global IIA (2010). The framework suggests four areas, or performance categories, for internal audit (see Figure 3): audit committee, management and internal audit clients, internal audit processes, and innovation and capabilities. The model can be further adapted to meet the particular needs of the organisation. Using this model, the head of internal audit sets internal audit’s objectives and performance measures within the four performance categories. The key features of the framework are:

• performance measures are driven by the internal audit’s objective
• there is an interrelationship between measures across the four performance categories
• measurements drive behaviour.

Table 3 illustrates a simple balanced scorecard for an audit function.

Figure 3 Balanced scorecard for internal audit

 

Adapted from Global IIA, 2010.

Table 3 Example of a simple balanced scorecard with performance measures

Table 4 Questions to ask about your measures

9. Continuous improvement

The activities and procesess in place should provide the function and individuals within it with learning opportunities and information so that they become more effective and efficient at meeting existing and future stakeholder needs. So, information gathered through reviews and performance measurement processes should be fed back to the function and internal audit team for review and analysis to enable them to learn from them.

10. Demonstrating internal audit quality

The internal audit function can use the outcomes of its quality systems and processes to demonstrate the valuable work of the function. As Cain (2008) writes, ‘if you are putting in the effort to deliver a quality service why not crow about it’. The outcomes can also be used as a basis for dialogue with stakeholders on their future needs.

The processes and activities that form part of quality assurance programme also provide an opportunity for internal auditors to talk to stakeholder and raise the profile of internal audit (IIA, 2008). The International Standards require periodic internal assessments and an external quality assessment at least once every five years. These processes allow the internal audit function to report that its work is ‘conducted in conformance with the International Standards’.

Summary

• An internal audit function is effective when it fulfills two criterions. First, it meets the Definition of Internal Auditing, the Code of Ethics and the International Standard for the Professional Practice of Internal Auditing. Second, it addresses key stakeholders’ expectations.
• The five components for building in quality are: agree objectives; develop policies, processes and procedures; maintain ongoing review of activities; periodic assessment and reporting of achievements; and external assessments.
• Categorising stakeholders helps you analyse their needs. You can do this in a number of ways. One way is to break stakeholders into four groups: regulators, partner, influencers, and customers and clients.
• Metrics are used to ascertain the degree to which the internal audit function is meeting its objectives and agreed quality standards. The balanced scorecard is one tool by which internal audit can set and monitor performance. Four possible performance categories are audit committee, management and clients, internal processes, and innovation and capabilities.

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References

Boddy, D. (with Paton, S.) (2011, 5^th edn), Management: An Introduction, Harlow (UK), Pearson Education Limited.

Cain, J. (2008), Evaluating internal audit effectiveness: quality assurance and improvement programmes [notes and presentation from workshop], unpublished.

Chartered Institute of Internal Auditors (2007), Quality assurance and improvement programmes [professional guidance], London, Chartered Institute of Internal Auditors.

Frigo, M. (2002), A Balanced Scorecard Framework for Internal Auditing Departments, Florida (USA), IIA Research Foundation.

Global IIA (2010), Measuring internal audit effectiveness and efficiency [practice guide], Florida (USA), Global IIA.

Institute of Internal Auditors – UK and Ireland (2008), Raising the profile of the internal audit activity [professional guidance], London, IIA.

Turner, D., (2009), The Internal Audit Environment, London, Chartered Institute of Internal Auditors.

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