NEDonBoard had the pleasure of welcoming Kathie Child-Villiers, Iain Cornish and Mary Hardy to discuss the board best practices in the oversight of internal audit by the audit committee and the board. The panel discussion was chaired by Jonathan Hayward from Independent Audit. In this blog post, we outline some of the insights that attendees gained during the evening. A full recording of the panel discussion and the “Audit Committee, Oversight of Internal Audit” Board Best Practice^® publication are available to NEDonBoard members. NEDonBoard takes this opportunity to thank Mazars, our host for the evening.

Internal audit in the UK Corporate Governance Code

Jonathan Hayward introduced the discussion and reminded the audience of the provisions of the UK Corporate Governance Code. He then mentioned the Guidance of Audit Committees. Both the Code and the Guidance offer limited recommendations with regards to internal audit.

How does the audit committee assess the need for internal audit?

Kathie Child-Villiers said that audit committee members need to assess on an ongoing basis the need for internal audit, considering the external environment, the industry and trends to assess whether the risks are changing. Audit committee members should monitor the risk register and ensure that controls grow in line with the business. As internal controls grow and complexify, this is when internal audit needs to be established.

In the absence of internal audit, how can the audit committee receive the assurance it needs to fulfil its obligations?

May Hardy reminded the audience that even when there is an internal audit function, it does not provide assurance on all aspects of the business.

If there is no internal audit function, audit committee members need to spend more time with management. Mary Hardy indicated that external auditors will also come across issues that audit committee members have to consider. For each risk, audit committee members need to consider the assurance they are getting and whether this is sufficient. If this is not sufficient, then internal audit needs to be established.

Deep-dives at the audit committee allow members of the committee to get an in-depth understanding of a specific area.

In small organisations, internal audit may not be busy enough and internal audit comes at a cost. However, there comes a tipping point when businesses need internal audit.

There are a number of models that can be used to resource internal audit services to a company: in-house, co-sourcing and outsourcing.

Iain Cornish said that decision regarding which internal audit model to use are ongoing. As companies grow in size and complexity, the internal audit solution evolves. He highlighted that in-house internal audit has the strength of internal relationships between the internal auditors and areas being audited. But the in-house model is not always cost effective and there may be constrains around specialist skills. Outsourced internal audit provides flexibility in resources, can bring specialist knowledge and allow benchmarking but may be an expensive model. The co-sourcing model is a mix of in-house and outsourced models and is commonly used by companies.

The decision regarding the internal audit model should consider the maturity of the business. Outsourcing may be of tremendous help for young businesses.

Costs are an important consideration in the decision-making. But audit committee members should first consider the risks and whether they receive adequate assurance for the risks. Prioritisation is risk-based.

The panellists then discussed at length the most important characteristics of an effective internal audit function and engaged in a lively Q&A session. Additional information about how audit committee members can support internal audit in being effective is accessible to NEDonBoard members. If you are not yet a member, join today and unlock the resources of our platform: Standard and Event membership. NEDonBoard is a professional body and tax relief can be claimed back on the membership fee.

On behalf of NEDonBoard, Elise Perraud

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