This article is an extract from a research study on the characteristics of internal audit in government offices as described in the state auditors' reports in Australia, Canada, Israel, the United Kingdom and the United States of America.
External auditing and internal auditing are not different levels of the same public and administrative function; two distinct functions are involved. State audit, which is an external audit by definition, is intended to serve the legislature and the public, while internal auditing is meant for the organization's management. It is not surprising, therefore, that internal auditing is one of the matters of interest of state audit, which evaluates it as an administrative function especially because of the uniqueness of internal audit as a tool in assisting state audit.
Internal auditing has been defined by the Institute of Internal Auditors as "an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization". The scope of internal auditing activity includes testing and evaluating the suitability of the internal control system for the needs of the organization. Due to their very nature, internal audit units do not generally publish their findings and recommendations. State audit reports on internal auditing of government offices therefore form one of the major sources of independent evaluation of the internal auditing units.
Israel's State Comptroller published dozens of reports on internal auditing of various ministries as sub-sections within the framework of reporting on the results of the audits of those ministries. The Comptroller General of the United States wrote an introduction to the 1986 report that examined this matter in respect of 99 divisions. Nevertheless, it appears that relative to the emphasis on the importance of the subject, comprehensive auditing was not conducted; the Israeli State Comptroller conducted five audits on this subject, the last one being in 1985. The subject was examined twice in U.K. (most recently in 1986). In Australia, a comprehensive review was conducted in 1989 as a follow-up of a limited examination conducted in 1973. In Canada, the subject was examined twice (most recently in 1984). The subject was examined thrice in the United States (most recently in 1986 as regards non-statutory bodies). It is clear, therefore, that the state auditors in these countries preferred individual examinations of specific internal auditing units rather than a comprehensive examination in the sector being audited.
The auditing methodologies and the comments of the various state auditors were not uniform, and they often did not conform to the emphasis set by the state auditors in their guidelines relating to internal auditing. Some of the comments and findings of the state auditors on the effectiveness of internal auditing are described in the succeeding paragraphs.
In a review conducted by Israel's State Comptroller in 1972, it was found that three government ministries did not have internal auditing units. In 1982, the Finance Ministry still did not have internal auditing, and numerous employees who were supposedly involved in internal auditing actually dealt with supervision of foreign exchange, i.e. they were involved in operational matters. Even the Division of the Accountant-General, who is responsible for the activities of the accountants of the various ministries, did not have an internal auditing unit.
In U.K., the Comptroller and Auditor General noted that most of the ministries had internal auditing units. Several small divisions did not have internal auditing units, but they were audited by the units of which they were a part, and occasionally by auditors hired from the private sectors.
The Australian Auditor General noted in his report that 30 per cent of the audited bodies did not have any form of internal auditing. Only half of the remaining bodies had an organic internal auditing unit. Another one-third handled auditing through contractors, and the rest made use of the services of auditing units of other bodies. The Auditor General found that the bodies which did not establish internal auditing units, were mainly small organizations.
In Canada, the Auditor General did not comment on this aspect. The Comptroller General of the United States found some government departments without auditors and others with an insufficient number of auditing staff.
In order to ensure the independence of the internal auditor, he must deal exclusively with auditing. Placing operational assignments on the auditor makes him a participant in departmental operations, which makes him, inter alia, dependent on his supervisors as regards the task to which he was assigned.
In 1972, Israel's government decided that the internal auditor should be directly subordinate to the director-general of his ministry. The service regulations authorised the internal auditor to demand and receive from the ministry and related authorities, any document or explanation necessary to conduct the audit. Nevertheless, the independence of the internal auditor was often not maintained, and he was asked to perform additional tasks. The terms of his employment were not fixed, and the auditor was consequently dependent on the director-general. In 1972, the State Comptroller found that in two ministries, the internal auditor was subordinate to the Deputy Director General or to his assistant. The same was true in 1981. By 1985, the situation had worsened; the State Comptroller reported that in 6 of the-26 divisions examined, the internal auditor was subordinate to middle-level administrators. In this regard, the State Comptroller noted that "in this situation, internal auditing does not benefit from the status that the Knesset wanted to grant it". The State Comptroller observed in all his reports that many internal auditors were involved in additional assignments (eight in 1967, one in 1972 and eleven in 1985). He also observed that "in the opinion of the audit, it is necessary that the internal auditors should not be involved in decision-making and implementation, since a situation may arise in which the internal auditor will have to audit the activities where he, or those subordinate to him, were involved in their implementation".
The U.K. Comptroller and Auditor General noted that internal auditors were subordinate to the director-general but held administrative positions which were lower than division heads.
The Australian Auditor General indicated that the independence of the internal auditors was generally sufficient. However, in small organisations, the auditors were given additional assignments, which increased their dependence on their supervisors.
The Canadian Auditor General found substantial improvement in this area. In 1974, the number of auditing divisions whose powers were not restricted constituted some 30 per cent of all the divisions examined whereas by 1978 this figure had reached 90 per cent.
The Comptroller General of the United States noted that in several of the divisions, the independence of the internal auditor was not sufficiently ensured. In this area, he found improvement as regards the internal auditor in the Department of Defence.
The level of knowledge and skill of internal auditors has enormous impact on the effectiveness of the audit. Without appropriate knowledge, the scope of the audit will suffer, as will its range, costs, efficiency and reporting.
In this connection, the State Comptroller of Israel had observed in 1986 that "the lack of necessary expertise of most of the employees in the internal auditing unit ultimately leads to a relatively narrow range of concentration of areas audited". Until 1969, there was no delineation of the special aptitudes required for an internal auditor. In that year, it was specified that an auditor must be an economist, accountant, or graduate in business administration; the director of the auditing unit must, in addition, have three years of auditing experience. In 1972, the State Comptroller found that only three directors of auditing divisions had academic degrees. In 1985, he found that 60 per cent of the auditing division staff were academically qualified but eight of the directors of the internal auditing divisions were not. The State Comptroller also noted that auditing staff also had knowledge of law, auditing and public administration. He emphasized the lack of employees skilled in auditing computerized systems.
The Comptroller General of the United States also emphasized the importance of internal auditors' being able to audit computerized systems. He dedicated two reports to this subject. He also emphasized the need for developing aptitude for detecting cases of forgery, fraud and embezzlement and noted in 1978 that improvements had been made. He highlighted the difficulties in executing financial audits due to lack of staff with appropriate knowledge.
The Australian Auditor General pointed out in his survey that only 43 per cent of the internal auditors had academic degrees, few held degrees in internal auditing or information systems auditing, and that the auditors had minimal work experience, which was due to the high turnover of auditors who resigned in favour of more favourable administrative positions.
The U.K. report indicated that many auditors had insufficient qualifications . Training courses were held mostly for newly recruited staff at lower levels. Here again, the high staff turnover affected the accumulation of experience; the movement of experienced auditors to private sector was also noted.
The Canadian Auditor General made similar observations; many internal auditors did not have appropriate qualifications, especially in the field of auditing computer systems. He also noted that directors of the auditing divisions did not have appropriate knowledge and qualifications.
State auditors observed that appropriately qualified auditors could not be hired, given the low salaries offered. The low salaries also led to a high rate of turnover in favor of other government positions or work in the private sector, and the loss of experienced personnel. The demand that positions be fixed for academics in internal auditing was, in effect, a demand for the raising of their salaries.
Israel's State Comptroller observed in 1981 that the internal auditing activity in the Ports Authority was irregular. In 1986, he observed that for six years no internal auditing was conducted in the Division of the Accountant General of the Finance Ministry.
The Australian Auditor General found the frequency of internal auditing to be as follows:
| Periodicity of audit | Percentage of
those responding to audit |
| Once a year | 13.8 |
| Once in two years | 18.2 |
| Once in three years | 20.5 |
| Once in four years | 43.2 |
| No information | 4.5 |
The state auditors observed that the range of the examination conducted by the internal auditors did not cover all organizational units. This was due to additional assignments imposed on the auditors, which prevented them from auditing the divisions in which they were involved, and due to the subordination of the auditors to administrators at levels that were insufficiently high which did not permit them to audit the activities of those levels above them.
Israel's State Comptroller observed that audits of the internal audits were conducted on marginal issues that did not characterize the main activity of the audited ministries. In 1968, he had noted that proposed budget figures of the ministries were not audited, nor was the reasonableness or desirability of administrative activity examined. In 1969, he observed that the auditing of the Division of the Accountant General did not deal with activities of the division, and also demanded that the examination of the administration of the Ministry of Defence be broadened. In 1969 and 1973, the Comptroller noted that auditing in financial areas was insufficient. In 1986, the Comptroller once again noted that a portion of the audits dealt with marginal matters, and added that examinations of computerized systems were not being conducted.
The Comptroller General of the United States observed that internal auditors did not allocate sufficient time for financial auditing. He noted that government funds and contracts were not adequately audited. In 1986, the Comptroller observed that the internal auditors did not undertake examinations designed to disclose embezzlement and fraud.
The Australian Auditor General found that in 77 per cent of the organizations that conducted internal auditing, the focus had changed from exclusively financial and regularity audits to also cover performance audits. Nevertheless, as recently as in 1989 only a few of the audited organizations conducted such examinations.
The U.K. Comptroller and Auditor General was satisfied with the scope of internal auditing; he noted that value-for-money auditing was conducted in all departments, but felt that there was inadequate auditing of computerized systems and in organisations not directly subordinate to the ministries that were examined. The Canadian Auditor General also observed that inadequate auditing was conducted of computerized systems.
This aspect of internal auditing was discussed only in SAI - Israel's Audit Reports. According to the Service Regulations, the internal auditor must examine, inter alia, the actions of audited bodies following a citizen's complaint. The State Comptroller noted that a close relationship did not exist between the handling of the complaints from the public and internal audit. He found, therefore, that in 1985, 18 of 31 units that were examined did not bring citizens' complaint to the knowledge of the internal auditor.
According to the Israeli Civil Service Regulations, internal auditing must be conducted on the basis of a previously planned programme. Israel's State Comptroller noted in 1982 that "in the absence of annual work plans, a situation may arise in which the order of priorities of determining the subjects for audit will be disrupted, periodic auditing will be negatively affected, and certain areas will be left unexamined". He also found that many auditing divisions had annual work plans, but had not set time-tables for executing these plans.
The Comptroller General of the United States also noted the lack of planning in several divisions. The Australian Auditor General found periodic planning of internal audit work. In U.K., all the divisions were found to have multi-year plans. But one-half of the divisions did not define the goals of the audit with sufficient specificity.
The Canadian Auditor General found that in most of the ministries, a long-term auditing plan, approved by the division director, had been prepared. Nevertheless, some ministries Hid not set an order of priorities for the planned subjects of examination.
The findings of Israel's State Comptroller indicate that in 1972, 1981 and 1985, several departments did not implement their periodic work plans. One reason for this failure was the need to comply with the urgent demands of the management to examine specific subjects that had priority over the planned subjects of examination. Another reason was the lack of adequate personnel.
One-half of the divisions in Australia indicated that they had attained their planned goals, but two-thirds reported that the implementation did not reach the expected level of quality due to lack of adequate personnel.
Israel's State Comptroller noted in 1986 that there were instances in which reports were not submitted on completion of internal audits. The Australian Auditor General found that in 99 per cent of the divisions that had internal auditing, written reports were submitted. The Comptroller and Auditor General of U.K. also found that written reports were being submitted. In Canada, the Auditor General observed that the reports included many unimportant findings, which were reported in overly fine detail; also, no effort was made to arrive at general conclusions from reports on various audited bodies with similar interests.
Israel's Civil Service Regulations provide that the internal auditor's reports should be submitted to the Minister, the director-general, and the directors of the audited divisions. The State Comptroller found that in 1985, the internal auditors' reports were not being submitted to the Minister, were occasionally not submitted to the director-general, and at times were reported to lower level administrators. The Australian survey indicated that only in 16 per cent of the units that conduct internal auditing, were the auditors' reports submitted to the board of directors. In 61 per cent of these units, the reports were submitted to the director-general. He also found that in 86 per cent of the divisions with internal auditing, the head of the audited division was required to respond within a fixed period of time. In U.K., the Comptroller and Auditor General noted that the reports were generally submitted to the heads of the divisions audited, and in most cases swiftly. He noted that the auditors' reports received excellent responses. The Comptroller General of United States noted that most reports do not receive responses from the government.
According to the Israeli Civil Service Regulations, each internal auditor must monitor rectification of the defects observed by him. In 1982, the Comptroller noted only a few of the ministries were aware of the importance of rectification of defects observed by the internal auditor. The Australian survey indicated that from among 75 -85 per cent of the recommendations of the auditors, only some 26 per cent were implemented and only 9 per cent of the recommendations were implemented in their entirety. The U.K. Comptroller and Auditor General was satisfied with the monitoring of the rectification of defects. The Canadian Auditor General indicated that recommendations of the auditors were not being implemented, and demanded improvement in the system of monitoring of rectification of defects noticed during internal audits.
In Israel, monitoring the correction of defects was conducted by the ministry's management through audit committees. The Australian survey indicated that in 64 per cent of the divisions having internal audit, the senior management of the organization had responded. The Comptroller and Auditor General in U.K. was satisfied with the swift and substantive response of the ministries' management.
In 1980, the Israeli government decided that each government ministry should establish a committee to monitor the rectification of defects found during the course of internal audits. The State Comptroller found that in 1981, monitoring committees had been established but few were active. The same state of affairs was observed in 1985. In addition, those committees which acted, did so in a limited manner. The Australian survey indicated that in 41 per cent of the cases, the internal auditors' reports were provided to the audit committee of the organization. The Canadian Auditor General noted that all the divisions had audit committees. But several of the committees were not active, and there were instances in which some of the members were not present at meetings. Some of the committees were too large to work efficiently.
The above analysis shows that there is a great deal of uniformity among the findings of State auditors with regard to the effectiveness of internal audits. Even though there are laws and regulations and the government ministries proclaim their desire to use internal auditing to improve their manner of functioning, in practice the management of the ministries prefer not to overly develop these tools. The state auditors emphasized the inadequate qualifications possessed by internal audit staff, which affected the quality of work resulting in their inability to handle the necessary range of subjects and implement the planned assignments as scheduled, as also their lack of proficiency, especially in the area of audit of computerized systems. This is also closely linked to the salary structure of internal auditors ; relatively low remuneration makes it difficult to recruit qualified personnel, and also leads to a high rate of turnover of experienced personnel.