An Internal Audit Charter serves as the contract between the Internal Audit Function in the Organisation and the Organisation, and serves as the formal document that regulates the relationship between Internal Audit and its clients.
It defines the role and responsibilities of Internal Audit, the scope of its activities and the authority that would allow IA to fulfil the roles and responsibilities.

In a public sector organization in particular, IA Charters are necessary to ensure that the activities of IA are not hindered by the claim of confidentiality of documents or need to provide services to the public in a fast way to avoid IA fulfilling their duty by granting them authority of unhindered access to all records of the organization as in:
Authority is granted for full, free, and unrestricted access to any and all records of the organisation, physical properties, and personnel relevant to any function under review. All employees are requested to assist Internal Auditing in fulfilling their staff function.

The IA Charter will also define the position of IA in the Organizational Structure by stating that IA reports administratively to the CEO of the organization but functionally (that in its internal audit reporting duties) to the Audit Committee, the sub-committee of the Board of Directors charged with oversight responsibly for all Audit related matters.

• The Managing Director of the Public Organisation is an Executive Director and should not be a member of the Audit Committee as he will be in a conflict of interest position if the Audit Committee has to discuss an internal audit report on any area in the organization since he is ultimately responsible for everything that happens in the organization. Institute of Internal Auditors (IIA) recommends that no executive director should be part of an Audit Committee.
• IIA also recommends that an Audit Committee must also have at least one member that is financially literate or can understand and interpret financial statements. The two other members described in the passage do not appear to be person who fit this description and so the composition of the Audit Committee does not, in this respect, satisfy the IIA recommendation.

One of the most important aspects of IA is to ensure that Internal Auditors remain independent of the functions they audit. To ensure this the IIA makes many recommendations especially for IA since the staff in the IA function are also employees of the same organization they audit.

To promote the independence of IA the IIA makes the following recommendations:

• The IIA recommends that the Chief Audit Executive or the Head of Internal Audit must be appointed and can only be dismissed by the Audit Committee, a sub-committee of the Board of Directors charged with oversight responsibly for all Audit related matters and not by the management of the organization.
• IA reports administratively to the CEO of the organization but functionally (that in its reporting duties) to Audit Committee.
• The IIA also recommends that IA must occupy a position in the Organisational Structure that ensures that the CAE is next to the Board of Directors and above all others on the organization, as shown below:

• The IIA also recommends that internal audit activities shall remain free of influence by any element in the organization, including matters of audit selection, scope, procedures, frequency, timing, or report content; and
• Internal Auditors shall have no direct operational responsibility or authority over any of the activities in the organisation. Accordingly, they shall not develop or install systems or procedures, prepare records, or engage in any other activity which would normally be audited (this is to avoid self-review) and so remain independent of all operational issues in the organisation.

The appropriate form of communicating to a superior in an organisation is through a Memorandum. The answer should therefore be set out in a Memorandum form.

MEMORANDUM
To:             Municipal Chief Executive
From:        Internal Auditor
Subject:     Functions of the Internal Audit Agency
Date:         15th September, 2015
___________________________________________________________________________
As requested during our interaction on your familiarisation tour of the Internal Audit Department, the functions of the Internal Audit Agency (IAA) are detailed below.

The IAA is required to ensure that:
1) The financial activities and operating information reported internally and externally is accurate, reliable and timely.
2) The financial activities of MDAs and MMDAs are in compliance with laws, policies, plans, standards and procedures.
3) National resources are adequately safeguarded.
4) National resources are used economically, effectively and efficiently.
5) Plans, goals and objectives of MDAs and MMDAs are achieved.
6) Risks are adequately managed in the MDAs and MMDAs.

In addition to these, the IAA must:
7) Promote economy, efficiency and effectiveness in the administration of government programmes and operations.
8) Prepare plans to be approved by the Board for the development and maintenance of an efficient internal audit for the MDAs and MMDAs.
9) Facilitate the prevention and detection of fraud.
10) Provide a means for keeping the MDAs and MMDAs fully and currently informed about problems and deficiencies related to the administration of their programmes and operations and the necessity for appropriate corrective action.

Finally, the IAA is required to monitor, undertake inspections and evaluate the internal auditing of the MDAs and MMDAs. I shall be available for any further discussion when necessary.

Thank you.
Signed.
Internal Auditor

1. The Institute of Internal Auditors (IIA) recommends that the appointment of the Internal Auditor (IA) be done by the Board of Directors or the Audit Committee (in this case the Audit and Finance Sub-Committee of the District Assembly) acting for the Board and not by Executive Management (the DCE in this case)
2. Her Educational Qualification and level of experience appears in appropriate for the responsibility she is expected to shoulder. It appears the DCE wants someone he can easily manipulate in the position.
3. The fact that she comes from the same village as the DCE could support the point made in 2 above and suggest the position was not advertised to open it up to competition and this will make the IA believe she must return the favour done her by the DCE and she will not be able to report objectively.
4. The IIA recommends that the IA should report functionally to the Board Audit Committee and administratively to the Chief Executive, placing her both administratively and functionally under the District Finance Officer is inappropriate and hinder her independence in reporing on financial issues.
(2 marks for discussion of any of the issues to maximum of 5 marks)

The IA will discuss the following issues from the the IIA’s International Professional Practices Framework (IPPF).
The IIA’s definition of Internal Auditing and to explain the need for ensuring the independence of the IA even though the IA is an employee by making sure the appointment of the IA is done by the Board or its Audit Committee and the IA also reports functionally (by sending his/her Internal Audit reports) to the Audit Committee and not the DCE or District Finance Office (DFO).

• The IA should also discuss objectivity as a requirement for the IA to be free from any bias.
• The IA should discuss the need for the Internal Audit function to adopt an Internal Audit Charter that is consistent with the Definition of Internal Auditing, the Code of Ethics, and the International Standards for the Practice of Internal Auditing (the Standards) of the IIA that will define the purpose, authority, and responsibility of the Internal Audit activity.
• The Charter must be in compliance with the recommendation of the IIA and approved by the Board prior to its adoption.
• The IA will discuss briefly the Code of Ethics and the International Standards for the Practice of Internal Auditing (the Standards) recommended by the IIA and their importance to the IA.
• The Internal Audit function must adopt a version of the Code of Ethics recommended by the IIA that is appropriate for the entity
• All the reports of the IA must mention that the Internal Audit assignment was performed in compliance with the Standards and any significant non-compliance must be disclosed in the report.
• The IA should mention how she personally will ensure that the Internal Audit activity at the District Assembly (DA) functions to add value to the activities of the DA and;
• ensure it achieves its objectives in a more efficient, effective and economic (3 E’s) manner and that she will comply with the Code of Ethics that will be adopted and deal fairly with all stakeholders of the DA.

All activities an auditor performs will be either an assurance or a consulting assignment depending on the type of report that will be issued as a result of the assignment and whether or not the activity may be performed on the basis of a contingent fee (that is a fee based on the outcome or results of the assignment). The differences are:

(2 marks for each difference and 1 mark for showing presentation, table or other visual display of the differences, maximum 5 marks)