Topic 2: Conduct a Preliminary Survey of the Area of Engagement

During engagement planning process, preliminary surveys are one of the most important tools internal auditors can employ. They help an internal auditor to accumulate relevant information about the operation to be audited - the objectives, the people, the processes and the systems involved.

Realistic outcomes from a preliminary survey include clarification of the:

• Purpose of the internal audit
• Engagement objectives, scope and timing
• Processes to be audited
• Area objectives, related risks, and controls
• Internal audit resources to be used
• Relevant standards

Analytical reviews examine relationships among information. In particular, examining relationships among information that is often overlooked can provide valuable insights. The goal of an analytical review is to identify discrepancies in information.

Unexpected deviations or the lack of expected changes may result from any of the following factors, alone or in combination:

• Errors or omissions by the organization, operations or the internal auditors
• Non-compliance
• Illegal acts
• Unusual events or transactions
• The accounting method used.

Types of Analytical reviews:

• Variance analysis - analysis on the factors that have caused a difference between a planned or standard amount and the actual results.
• Trend analysis - The charting of historical financial or operational data over time to identify a tendency or direction. 
• Ratio analysis - Mathematical relationships among several numbers often stated in the form of percentages, time or days.

Benchmarking is another activity that can help to refine an engagement plan during the planning phase. Levels of benchmarking:

• Internal benchmarking - Comparing similar information within an entity. 
• Competitive benchmarking - Comparing measures with similar measures of direct competitors, locally, nationally or worldwide.
• Functional benchmarking - Comparing processes to those of organizations with similar processes in the same function but in a different industry.
• Generic benchmarking - Comparing measures with those of organizations that are best in class. 

During the engagement planning process, interviews are often conducted to:

• Facilitate a high-level client discussion about the planned internal audit
• Secure the perspective of management responsible for the activity being examined.
• Clarify information about the area to be audited
• Collect additional necessary information
• Provide an observation of the activities in the organization to be audited.

Interview Techniques and Tips

• Preparation - Be prepared and organized 
• Introductions - Take time for appropriate introductions
• Opening - Explain the purpose of the interview and timing
• Rapport - Build rapport
• Questioning - Ask appropriate questions
• Listening/talking - Listen carefully and then speak
• Note-taking - Take notes unobtrusively and minimize extensive silences and pauses while writing
• Non-verbal communication - Use non-verbal signs sparingly
• Closing - Bring the interview to a formal close

4 Cs' of effective communication - Clear, Concise, Complete & Correct

Permanent files is a record of consistent, rarely changing documents

Review of prior audit documentation is important because it:

• Provides familiarity with the area to be audited
• Overviews what to expect on the activity being audited
• Shows how other internal auditors approached the assignment
• Identifies specific problems found previously and areas likely to have continuing or repeat problems
• Reveals the status of promises or actions taken to correct any non-conformance
• Reveals strengths that were previously identified that should be verified to ensure that they have been sustained. 
• May identify additional activities for evaluation during the audit

Flowcharting a process helps to provide a complete picture of what is happening in the process from beginning to end, including the control points. A flowchart eliminates abstractions about how work flows through a system. During the planning phase of an engagement, internal auditors may review existing flowcharts or they may prepare new flowcharts. 

Alternative to flowchart are narratives, internal control questionnaires and block diagrams.

Narratives are step-by-step picture of a process in a single documents without the use of detailed symbols or keys. Narrative are flexible and facilitate open-ended questioning. However, there is no inherent discipline or standardization in how to prepare a narrative. 

An internal control questionnaires is a pre-constructed array of questions used to elicit key information about internal control.ICQs are efficient and easy to administer. Basic constraints is that they are limited to questions with yes/no answers about procedures and do not provide for in-depth investigation. 

A block diagram is a pictorial presentation of a process or activity, typically including a series of boxes and connecting lines to indicate association and direction/order. 

A checklist is a tool internal auditors use to establish and maintain order during the audit engagement. They allow an internal auditor to work in an organized and efficient manner. Checklists are developed during the planning phase, typically at the end of the preliminary survey. " Checklists may be considered a reminder list".