The Way Management Is Expected to Act on All Relevant Internal Audit Observations
The internal audit team evaluates the internal workings of a company with a special focus on accounting and corporate governance. The primary purpose of these audits is to ensure that the processes are in line with local as well as international laws and to provide timely financial reports to all interested parties. By definition, internal audits are not official and serve a preemptive correction function so that any errors may be fixed before the external audit arrives (Anderson et al., 2017).
As such, any issues identified by the IA are strongly encouraged to be dealt with, but doing so is not a strict requirement. Whatever problems they may encounter, be they material or immaterial, need to be weighed against the standards of assurance services as well as regulations and laws. Sometimes, a practice, while deficient, may not be breaking any standing rules of conduct, making the requirement to act non-essential. Other times, the number of issues to be fixed may be beyond the organization’s capacity to fix quickly, making it necessary to choose which are to be prioritized.
Implications for Internal Audit When Management Ignores Observations Requiring Corrective Action
There are several implications for the IA if the management team fails to correct the issues identified that require action. First, it may indicate that the identified issue may be critical and beyond the company’s immediate ability to fix (Anderson et al., 2017). Secondly, it may insinuate that the management team is complicit in perpetuating said issues either out of incompetence, willful noncompliance, or orders from company leadership. The final implication could be that the identified problem is, in fact, a non-issue, and the evaluation of the IA team has been erroneous in some way. The latter has to be addressed first in order to make sure that the information provided by the audit is indeed correct and trustworthy.
Reference
Anderson, U. L., Head, M. J., Ramamoorti, S., Riddle, C., Salamasick, M., & Sobel, P. J. (2017). Internal auditing: Assurance & advisory services (4th ed.). The Internal Audit Foundation.