Arguably, the functions of internal auditing have gained a lot of emphasis in private and public organizations. As a matter of fact, various organizations in the recent past emphasize on internal auditing because of embezzlement of funds and frauds. One of the main sectors that have focused on internal auditing is banking. The requirements of the banking system are tremendously increasing; this has led to the shifting of responsibilities and roles of internal auditing. Internal audit endeavors in providing an opinion that is independent, especially in the objective attainability within an organization. In general perspective, internal auditing is crucial in the banking sector since it focuses on risk reduction and the attainment of corporate objectives. Companies employ various internal auditing approaches that are aligning with the current banking trends.
Internal audit Banks and Base II requirements
The banking system in one way or another was affected by Basel II requirement. These requirements influenced the banking regulation, adjustment of reports, prudential supervision, as well as validation of internal rating. Basel II requirements required the bank to update and adjust to its internal audit approach (Stanciu, 2008). For example, the Romanian banking system had to adjust and implement roles of internal audit within the bank. Due to regulatory and professional adjustment, internal audit adds value to the bank, as well as influencing the entire functions of the bank.
Maximization of market value through internal audit
In the modern world, there are various importance and roles of internal audit in banks. The financial, regulatory, and economic environment could present the bank with opportunities and risks, which could enhance or erode the bank value. Every bank focuses on maximizing its value in the market place through the setting of strategic management system, objectives and reduction of risk. Banks prosper and survive by taking on risks and accepting them; this is one of the main principal characteristic in terms of economy (Danescu et al, 2010). For prosperity, banks should be in a position of managing risk effectively. In the banking sector, there are changing trends in risk management that should be adopted in the bank.
The risks are very complex to manage and may result in loss in the bank. In this case, maintenance of internal controls will enable the bank to manage and identify risks in the banking organization. The role of internal audit is to identify important changes that occurred in the previous financial year. The assimilation on IIAS (International Internal Audit Standards) is very crucial in dealing with risks. Internal audit is a potential tool for adding value in the bank. In the banking organization, internal audit is viewed to be value adding, risk oriented, as well as an avenue for training future managers (Stanciu, 2008). Certainly, internal audit provides reasonable assurance to the board and management in the banking system. In this case, internal audit focuses on assurance of internal control system and risk management. There is a need to shift from traditional internal auditing techniques due to the emerging trends of risk management and corporate governance within the banking sector.
Relationship between auditing and risk section
The modern approach that banks use is the risk based approach. This approach begins with planning and ends on the internal audit report, whereby internal auditors focus on risk items in the bank. The internal audit plans base its engagement on the assessment of risk. Evidently, internal auditors in the bank understand the business process and operations. This is why an internal auditor is crucial in controls assessment and mapping banking processes. Internal auditors assert a lot of attention on operational risks, since it strengthens the mapping process and internal operations (Koutoupis & Tsamis, 2009). Before undertaking an audit in the bank, there should be an audit plan. Perhaps, great attention should be focused on non-working events. The completion of internal auditing depends on how the audit plan was developed. Audit planning is therefore, an important prerequisite to the auditing process and identification of risks.
In most organizations, risk management has been established, but its nature is enormous. The nature of risk in an organization is potentially eliminated by use of internal auditors. In such a scenario, internal audit in banks is focused in the center of excellence by managing risks, embracing the development of the risk management process, provision of training of issues pertaining risks, as well as co-ordinating the entire risk reports (Koutoupis & Tsamis, 2009). Most banking organizations have defined roles of internal audit in risk identification and offers assurance on management of risks. In some organizations, the relationship between audit and risk can be complicated; this is because some activities carried out in risk management could completely duplicate the traditional functions of internal audit.
Internal audit and internal control systems
In the banking system, there is a relationship between internal audit and internal control. This sort of relationship is very intimate and complex, and is always generated by legislative demands in the banking field. Banks set up the audit function as a component of internal control system. The post-Communist era in Romania shows that there is a tremendous regulatory framework on issues pertaining internal banking audit and control. In the past, the banking system had not identified banking rules and regulations. Therefore, banks organized its internal audit and controls according to their own rules and regulations. As time went by, clear rules and regulations came up that gave a distinctive definition between internal audit and control (Socol, 2011). Internal audit within the banking organization was considered consultancy, independent, as well as an objective assurance activity that is designed to improve organization's operations and add value. With general perspective, internal audit helps the banking organization achieve its objectives by assimilating a discipline, and systematic approach meant to control, manage and govern risks (Koutoupis & Tsamis, 2009).
Studies carried out on Spanish banks on elaborated on financial reporting and internal audit functions. This relation has practical impacts because of the new rules and regulations on integrity, quality and transparency. Internal audit functions play a crucial role in corporate governance of banking systems. Recent financial crisis, accounting scandals, and legislation issues highlighted the functions of internal audit. The management team in the banking system continues to emphasize on internal audit so as to ensure reliability and accuracy of financial audits. On the other hand, investors and supervisors need to demand more involvement in the Internal Audit Function, especially in reviewing financial function (Gras-Gil et al, 2012). Corporate governance in the banking system contributes tremendously to financial information quality. The facts on corporate governance and financial quality support the theoretical framework. Therefore, internal audit of the banking system is essential means of corporate governance, which influence the quality of financial reporting.
Internal audit and fraud prevention
The banking system has in the past been involved in fraud prevention. The study asserts that internal audit in the bank is very effective in the prevention of fraud. For example, in the Jordan Banking Industry, managers assert that in-house internal audit is more effective in fraud prevention as compared to outsourced internal auditors. Moreover, in-house internal auditors are conversant with the banks culture and have knowledge on the operations going on in the bank making them very effective (Rafat, 2011). One of the objectives of banks is to minimize cost and maximize profit; this is achieved by using internal auditors. Apart from using internal audit on fraud prevention, banks need to be conscious of the significance of developing effective policies to prevent fraud. In general perspective, internal audit is very crucial in the banking system. The banking organizations should always be ready to adjust its operation due to modern changing trends.
In conclusion, there are various functions of internal audit in the bank. Internal auditing is crucial in the banking sector since it focuses on risk reduction and the attainment of corporate objectives. For prosperity, banks should be in a position of managing risk effectively. In the banking sector, there are changing trends in risk management that should be adopted in the bank.The internal controls and audit will enable the bank to manage and identify risks in the banking organization. The relationship between internal audit and internal control strengthens the banks operation. Banks set up the audit function as a component of internal control system. Managers assert that in-house internal audit is more effective in fraud prevention as compared to outsourced internal auditors. Perhaps, internal audit is very crucial in the banking system; the banking organizations should always be ready to adjust its operation due to modern changing trends. Internal audit will help in risk reduction, elimination of fraud, proper internal control system, maximization of profit, as well as achievement of banking goals.
Danescu, T., Anca, O & Sandru, R. (2010). Risk Based Internal Audit: Persepctives Offered to Corporations and Banks. Annales Universitatis Apulensis Series Oeconomica, 12(1), 2010
Ester Gras-Gil, Salvador Marin-Hernandez, Domingo Garcia-Perez de Lema, (2012),"Internal audit and financial reporting in the Spanish banking industry", Managerial Auditing Journal, Vol. 27 Iss: 8 pp. 728 – 753
Koutoupis, A & Tsamis, A. (2009). Risk Based Auditing Within Greek Banks: A Case Study Approach. J Manag Gov (2009) 13:101–130 DOI 10.1007/s10997-008-9072-7
Rafat Salameh; Ghazi Al-Weshah; Marwan Al-Nsour; Ahmad Al-Hiyari/Canadian Social Science Vol.7 No.3, 2011
Socol, A. (2011). Internal Banking Control and Audit: A Comparative Approach in the Romanian Banking Sector. Annales Universitatis Apulensis Series Oeconomica, 13(2), 2011
Stanciu, V. (2008). Internal Audit Appraoch in Banks. Faculty of Accounting and managemen t Information Systems