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A local government establishes a position of internal auditor – what is the next step?

A local government has the obligation to organize internal audit activities. This can be done by outsourcing internal auditor services or by hiring an internal auditor. In the latter case, the requirements in laws and professional standards for internal auditors must be considered.

The means of establishing the position of internal auditor and the work procedures are governed by the Local Government Organization Act.

In addition, the provisions of the Auditors Activities Act must be followed when organizing the professional activities of an internal auditor in a local government unit. According to that act, an internal auditor must comply with the professional standards of an internal auditor. The standards call for detailed requirements for the internal audit statutes, the location of the internal auditor in the organizational structure (to ensure independence of the internal auditor), planning of work, reporting of results and much more.

Thus, hiring an internal auditor for a company may not be easy for a local government with no previous experience with the topic and such a unit should seek out an experienced internal auditor who can orientate among the requirements of standards and legislation without significant trouble. I hope the following will bring some clarity to the topic.

How to ensure that the internal auditor is independent from the local government?

When creating a position or structural unit, the statutes must set out the general work procedures for internal auditing and changes must be made to the local government unit’s structure and makeup of the service positions.

According to international internal audit standards, the purpose, rights and responsibilities and liability of internal audit must be defined in the internal audit statutes. These must be in conformity with the mission of internal audit and the compulsory elements of international professional practices principles (general principles of professional internal audit activities, code of ethics, standards and definition of internal audit). Thus, either the local government statutes or some other document must define these aspects.

In addition, the internal audit statutes must set out the nature of the assurance and advisory services provided to the local government and the scope of the internal auditor’s activity. The purpose of assurance services is to state opinions or conclusions about the object of the audit. The nature and scope of assurance work are defined by the internal auditor. Advisory services are essentially consultation and they are provided in general at the specific request of the customer – in other words, their nature is agreed upon with the customer. In providing advisory services, the internal auditor must remain objective and does not take liability for managerial activities.

Internal auditors must be independent and objective. Upon creating the position of internal auditor, there must be certainty that the head of internal audit reports directly to a level in the organization that makes it possible for the internal auditors to perform their duties. When outsourcing internal audit service, there is generally no problem with the internal auditor’s independence and objectivity as he or she is not part of the organization.

In order to ensure that the internal auditors are independent from the fields they are auditing, the internal auditors will refrain from evaluation of activities for which they were previously responsible for (e.g. if the internal auditor is recruited from within the organization). For example, objectivity is considered compromised in a situation where the internal auditor audits a field for which he or she was responsible during the previous year.

Appointment of internal auditor and internal audit activity plan

The internal auditor is appointed and released from duties by the municipality’s or city’s mayor with consent from the city/municipality council. The mayor presents the candidate to the city or municipality government for approval, and the government in turn presents them to the council for obtaining consent for the appointment. If the city council does not consent to the approximant, the government nominates a new candidate.

When appointing a candidate, it should be considered that under the Auditors Activities Act, only a public sector unit internal auditor or certified internal auditor may be engaged in professional activities as an internal auditor.

The activity plan is to be approved by the municipality council

The appointed official or the head of the relevant structural unit (internal auditor) prepares an internal auditor activity plan for the budgetary year. The municipality or city government approves the activity plan and presents it to the council for approval. The council hears out the position of the audit committee and approves the plan as of the day on which the municipality/city’s budget is approved.

While the formal part of the preparation of the activity plan is governed by law, the principles for its preparation are governed by standards. Namely, the standards stipulate that the internal audit activity plan must be risk-based. This ensures that the internal auditor’s priorities align with the organization’s goals and that the internal auditor will focus on important topics. In preparing the work plan, the proposals of the senior executives and council are to be considered.

The internal auditor shall submit the internal auditor’s report to the municipality/city government before the approval of the annual report. The municipality/city government submits the report accompanied by the annual report to the council and it is posted on the local government unit’s website.