1. Proposition Internal auditing was first recognized in the process of the certified public accountant's audit, and the fundamental characteristics of internal auditing was framed through the relationships which the internal auditing maintained with the management. This study is intended to review ...
1. Proposition Internal auditing was first recognized in the process of the certified public accountant's audit, and the fundamental characteristics of internal auditing was framed through the relationships which the internal auditing maintained with the management. This study is intended to review the process of how the fundamental characteristics of internal auditing were formed and to provide some stepping stones toward the development of the internal auditing in Korea. 2. Process of the Growth of Internal Auditing Internal auditing had its budding in the 1930s when the external auditing was at its full bloom. Internal auditing witnessed an epoch-making turn for a development through the book "Internal Auditing" authored by V.Z. Brink in the aspect of theory and through the establishment of "The Institute of Internal Auditors, Inc." in the aspect of practice research. Internal auditing which had its budding in accounting audit has developed into an operational audit function. Further, it may be said that it has now become an appraisal activity rather than a inspection function. As a result, internal auditing means operational audit or management audit. 3. Internal Control and Internal Auditing Internal control in its narrow meaning indicates an organic combination of internal check and internal auditing. The internal check is nothing further than establishing accounting procedures and book keeping system which have a self-verification capacity in accordance with the principle of equilibrium between the debitor and the creditor and the principle of diamond. However, because frauds which were committed before making the primitive recordings could not be detected through an internal check system as noted above, it was necessitated to develop an internal check system in its modern concept encompassing controls surrounding various operational activities. As a result, the scope of internal audit, which had earlier been limited to accounting audit, has been expanded to include the operational audit or the management audit, supplementing any management shortcomings or defects. It requires a lot of expenses and manpower to install internal check systems in all aspects of operations. Consequently, it was necessary to organically combine internal checks which are continual controls and internal auditing which is a non-continual control. However, internal auditing has its limitations in the employer control, hence, supplementation by external auditing was necessitated. 4. Internal auditing and other kinds of audits First, internal auditing is carried out by personnel inside the enterprise, who measure according to established yardsticks and for the management, the effectiveness of operating activities including accounting and finance.These internal auditors evaluate from an independent view point what they measured in the above manner. Certified public accountant audit is carried out by external auditors who, for those having interests with the enterprise, verify whether the financial statements of the enterprise are fairly stated. To review the relationship between internal auditing and certified public accountant audit, it may be stated that, while certified public accountant audit reviews what has happened and is according to a set pateern, internal auditing is a forward-looking and operational audit which looks into the inside. AS earlier stated, the internal auditing has its limitations in the control of the employer, and the certified public accountant audit has limitations with regard to time, efforts, and expenses in attempting to carry out the accounting audit as the scope and organization of the enterprise grew bigger and more complicating. Therefore, these two types of audits supplement each other in their common ground of accounting audit. Second, to review the ralationship between the internal auditing and the audit conducted by the officer-auditor as provided by the Commercial Code, while the scope of the officer-auditors' duties is defined by the law and he is accountable to shareholders for his stated opinion on the fairness of financial statements at the year end, the scope of the duties of internal auditors is determined by the management and the internal auditors are accountable to the management. However the abovenoted two types of audits have many common areas as far as the accounting audit is concerned, and, in a broader sense, the officer-auditor is an internal auditor in that his position is an internal auditing organizaiont. In the wake of separation of the investment and the management and according to division of the functional shareholders and the non-functional shareholders, the internal auditing and the officer-auditors' audit have many areas in which they should coordinate with each other in auditing. Coordination is attained by some enterprises which put the internal auditing organization right under the officer-auditor or which put employees on assiting level for the officer auditor. The existing auditing system of government-invested enterprises will prevail as a symbol of management renovation if such a system is operated in an efficient manner. 5. Internal auditing and other management divisions When internal auditors conduct operational auditing, managerial accounting plays an important role. Therefoer, the internal auditing organization can be placed under the comptroller. However, the comptroller places emphasis upon the management promotion according to accounting control, and the internal auditing places emphasis upon the inspection and evaluation of all the members of organizaion who have authority and responsibilities. Cost accounting, especially the standard cost accounting system, and the responsibility budget compilation that is based on the responsibility centers should be aligned under the proposition of internal auditing so that inspection of responsibilities and evaluation of performance may be facilitated. The footing of the internal auditing organization in the company organization may take various forms depending upon the character and management philosophy of the company to which the internal auditing belongs. However, it is emphasized that the internal auditing organizaion should be footed and organized in such a manner that it can carry out its responsibilities to the full with independence and without any restraint. 6. Status of internal auditing in two of the major enterprises in Korea. In the outset, the internal auditing function of Korea Oil Corporation was started by two employees as an office on the level of assisting the officer-auditor of which the major function was to assist him on a rather secretarial capacity. In October 1970, the above-noted small internal auditing organization grew up into an auditing department of 19 employees. In the wake of the transfer of the management right of Korea Oil Corporation to the Gulf Oil Corporation of the United States, the Internal Auditing Department reported administratively to the Vice President-Finance and Service and was put under the functional direction of two officer-auditors, one nominated by the Korea Development Bank and the other nominated by Gulf Oil Corporation. Since October 1970, the Internal Auditing Department of Korea Oil Corporation has performed a combination of the year-round operating audits and the year end accounting audit, which is considered an ideal auditing. In the Samsung Group, six specialists performing the auditing function belong to the Board Chairman's Secretariat, and, these specialists perform the audit examination of the 15 companies of the Samsung Group. The auditing function was firmly established in 1967. Initially, the auditing function was performed by a group of selected employees and outside professionals whose objectives were to induce a scientific management throughout the Group. Since February 1972, the audit thrust was placed upon special audits intended to help solve major problem areas, and the management philosophy of the Group turned from "Management by objectives" to "management for performance", strengthening the internal control in respective compaines. Conclusion The characteristics of internal auditing, which were initially of "watch-dog" and "fraud-finding" nature, developed into an operating audit performing a staff function through assuming the internal control system. Because of its added function of evaluaing, the internal auditing function provided services so that the management may have self-reflection. In operating the internal auditing system with characteristics as noted above, the following aspects should be emphasized. 1) Internal auditors should eliminate the notion of considering themselves as watch dogs. 2) Internal auditing should become a proper tool of the management. 3) Internal auditing should be audit for direction rather than audit for criticizm. 4) Internal auditing should not be a duplication of other functions and affairs to the extent possible and should not interfere with other functions. 5) For a continued existence of the officer-auditor as provided by the Commercial Code, the officer-auditor should become an internal auditor, who is given the rank of a director in charge of auditing. 6) Qualities of internal auditors should be enhanced on a continual basis.
1. Proposition Internal auditing was first recognized in the process of the certified public accountant's audit, and the fundamental characteristics of internal auditing was framed through the relationships which the internal auditing maintained with the management. This study is intended to review the process of how the fundamental characteristics of internal auditing were formed and to provide some stepping stones toward the development of the internal auditing in Korea. 2. Process of the Growth of Internal Auditing Internal auditing had its budding in the 1930s when the external auditing was at its full bloom. Internal auditing witnessed an epoch-making turn for a development through the book "Internal Auditing" authored by V.Z. Brink in the aspect of theory and through the establishment of "The Institute of Internal Auditors, Inc." in the aspect of practice research. Internal auditing which had its budding in accounting audit has developed into an operational audit function. Further, it may be said that it has now become an appraisal activity rather than a inspection function. As a result, internal auditing means operational audit or management audit. 3. Internal Control and Internal Auditing Internal control in its narrow meaning indicates an organic combination of internal check and internal auditing. The internal check is nothing further than establishing accounting procedures and book keeping system which have a self-verification capacity in accordance with the principle of equilibrium between the debitor and the creditor and the principle of diamond. However, because frauds which were committed before making the primitive recordings could not be detected through an internal check system as noted above, it was necessitated to develop an internal check system in its modern concept encompassing controls surrounding various operational activities. As a result, the scope of internal audit, which had earlier been limited to accounting audit, has been expanded to include the operational audit or the management audit, supplementing any management shortcomings or defects. It requires a lot of expenses and manpower to install internal check systems in all aspects of operations. Consequently, it was necessary to organically combine internal checks which are continual controls and internal auditing which is a non-continual control. However, internal auditing has its limitations in the employer control, hence, supplementation by external auditing was necessitated. 4. Internal auditing and other kinds of audits First, internal auditing is carried out by personnel inside the enterprise, who measure according to established yardsticks and for the management, the effectiveness of operating activities including accounting and finance.These internal auditors evaluate from an independent view point what they measured in the above manner. Certified public accountant audit is carried out by external auditors who, for those having interests with the enterprise, verify whether the financial statements of the enterprise are fairly stated. To review the relationship between internal auditing and certified public accountant audit, it may be stated that, while certified public accountant audit reviews what has happened and is according to a set pateern, internal auditing is a forward-looking and operational audit which looks into the inside. AS earlier stated, the internal auditing has its limitations in the control of the employer, and the certified public accountant audit has limitations with regard to time, efforts, and expenses in attempting to carry out the accounting audit as the scope and organization of the enterprise grew bigger and more complicating. Therefore, these two types of audits supplement each other in their common ground of accounting audit. Second, to review the ralationship between the internal auditing and the audit conducted by the officer-auditor as provided by the Commercial Code, while the scope of the officer-auditors' duties is defined by the law and he is accountable to shareholders for his stated opinion on the fairness of financial statements at the year end, the scope of the duties of internal auditors is determined by the management and the internal auditors are accountable to the management. However the abovenoted two types of audits have many common areas as far as the accounting audit is concerned, and, in a broader sense, the officer-auditor is an internal auditor in that his position is an internal auditing organizaiont. In the wake of separation of the investment and the management and according to division of the functional shareholders and the non-functional shareholders, the internal auditing and the officer-auditors' audit have many areas in which they should coordinate with each other in auditing. Coordination is attained by some enterprises which put the internal auditing organization right under the officer-auditor or which put employees on assiting level for the officer auditor. The existing auditing system of government-invested enterprises will prevail as a symbol of management renovation if such a system is operated in an efficient manner. 5. Internal auditing and other management divisions When internal auditors conduct operational auditing, managerial accounting plays an important role. Therefoer, the internal auditing organization can be placed under the comptroller. However, the comptroller places emphasis upon the management promotion according to accounting control, and the internal auditing places emphasis upon the inspection and evaluation of all the members of organizaion who have authority and responsibilities. Cost accounting, especially the standard cost accounting system, and the responsibility budget compilation that is based on the responsibility centers should be aligned under the proposition of internal auditing so that inspection of responsibilities and evaluation of performance may be facilitated. The footing of the internal auditing organization in the company organization may take various forms depending upon the character and management philosophy of the company to which the internal auditing belongs. However, it is emphasized that the internal auditing organizaion should be footed and organized in such a manner that it can carry out its responsibilities to the full with independence and without any restraint. 6. Status of internal auditing in two of the major enterprises in Korea. In the outset, the internal auditing function of Korea Oil Corporation was started by two employees as an office on the level of assisting the officer-auditor of which the major function was to assist him on a rather secretarial capacity. In October 1970, the above-noted small internal auditing organization grew up into an auditing department of 19 employees. In the wake of the transfer of the management right of Korea Oil Corporation to the Gulf Oil Corporation of the United States, the Internal Auditing Department reported administratively to the Vice President-Finance and Service and was put under the functional direction of two officer-auditors, one nominated by the Korea Development Bank and the other nominated by Gulf Oil Corporation. Since October 1970, the Internal Auditing Department of Korea Oil Corporation has performed a combination of the year-round operating audits and the year end accounting audit, which is considered an ideal auditing. In the Samsung Group, six specialists performing the auditing function belong to the Board Chairman's Secretariat, and, these specialists perform the audit examination of the 15 companies of the Samsung Group. The auditing function was firmly established in 1967. Initially, the auditing function was performed by a group of selected employees and outside professionals whose objectives were to induce a scientific management throughout the Group. Since February 1972, the audit thrust was placed upon special audits intended to help solve major problem areas, and the management philosophy of the Group turned from "Management by objectives" to "management for performance", strengthening the internal control in respective compaines. Conclusion The characteristics of internal auditing, which were initially of "watch-dog" and "fraud-finding" nature, developed into an operating audit performing a staff function through assuming the internal control system. Because of its added function of evaluaing, the internal auditing function provided services so that the management may have self-reflection. In operating the internal auditing system with characteristics as noted above, the following aspects should be emphasized. 1) Internal auditors should eliminate the notion of considering themselves as watch dogs. 2) Internal auditing should become a proper tool of the management. 3) Internal auditing should be audit for direction rather than audit for criticizm. 4) Internal auditing should not be a duplication of other functions and affairs to the extent possible and should not interfere with other functions. 5) For a continued existence of the officer-auditor as provided by the Commercial Code, the officer-auditor should become an internal auditor, who is given the rank of a director in charge of auditing. 6) Qualities of internal auditors should be enhanced on a continual basis.
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