Managing the Effectiveness of the Audit Process Essay

Excerpt from Essay :

Managing the Effectiveness of the Audit Process

Mission and Objectives of the International Audit Department

Stakeholders

The IAD stakeholder power-interest grid

The Audit Process

Objectives, Scope and Approach of the Research

Purpose and Mandate

Resourcing

Competency Development

Sustaining People Excellence

Tools and Technology

Knowledge Management

Operations

Quality

Governance

People

Infrastructure and Operations

Japan Tobacco International (JTI) is an international tobacco business that is operated by Japan Tobacco Inc. Japan Tobacco Inc. is the third largest player in the international tobacco industry with a market capitalization of 32 billion USD and a market share of 11%. JTI was established in the year 1999 when Japan Tobacco Inc. purchased the operations of United States multinational R.J. Reynolds, for 8 billion USD.

The Internal Audit Department (IAD) of the organization is accountable to the board of directors. The department is headed by the Global Internal Audit Vice President. He took his position in the year 2009.

The basic object of this research is to analyze the operational ability and effectiveness of the internal audit department of JTI. The research would analyze three primary areas of the IAD, including governance, people and infrastructure and operations. The nine dimensions of the internal audit operating model were analyzed under this research, this model has been adapted from Anthony's triangle.

It was analyzed that the issues in the operations were not related to basic flaws. Instead, in-depth analysis was required to analyze the weaknesses of the department. The Anthony's triangle supported the research very well and was the corner stone of the research.

Managing the Effectiveness of the Audit Process

1. Introduction

Japan Tobacco International (JTI) is an international tobacco business that is operated by Japan Tobacco Inc. Japan Tobacco Inc. is the third largest player in the international tobacco industry with a market capitalization of 32 billion USD and a market share of 11%. JTI was established in the year 1999 when Japan Tobacco Inc. purchased the operations of United States multinational R.J. Reynolds, for 8 billion USD.

The Internal Audit Department (IAD) of the organization is accountable to the board of directors. The department is headed by the Global Internal Audit Vice President. He took his position in the year 2009. The figure below demonstrates the position of IAD within the organization:

The internal audit function currently employs 34 audit professionals who work at seven different locations including Geneva, Hilversum, Weybridge, Manchester, Vienna and Moscow in Europe and in Tokyo as well.

1.1. Mission and Objectives of the International Audit Department

The internal audit department aims at providing the JTI group of companies with independent advisory and objective assurance services. Furthermore, the department also aims at adding value to operations and enhanced the internal control systems. The IAD aims at achieving these aims through the development of systemic approach for effective risk management, control, governance and compliance practices.

1.2. Stakeholders

The department aims at the identification, prioritization and fulfilment of the expectations of the stakeholders. The staff of department is appropriately aware of the political skills and abilities that are required for the effective performance of this task. In order to manage stakeholders appropriately, it is necessary that the department first identify their needs accurately. In order to demonstrate the way in which the organization performs this task it can be helpful to use the 'stakeholder power-interest grid', which has been described in the book 'Operations and Process Management' by Nigel Slack. This tool enables the organization to map the position of the stakeholders effectively and devise strategies that would enable it to manage these stakeholders appropriately. The figure below represents the stakeholder power-interest grid:

The organization is required to manage various stakeholders differently according to their power and interest in the organization:

High-power / high interest: these stakeholders shall be engaged completely in important processes and shall be satisfied to the fullest.

High power / low interest: these stakeholders shall be satisfied effectively but the organization shall not pressurize them exceedingly.

Low power / high interest: the organization is required to provide these stakeholders with sufficient levels of information.

Low power and interest: these stakeholders shall be monitored through infrequent interim communications.

1.3. The IAD stakeholder power-interest grid

As evident from the above mentioned figure the most important stakeholder of the department is the finance department or the global CFO. This is because the finance department is most significantly impacted by the audit reports. In addition, a major portion of the audit reports is related to finance department.

The members of Board and Excom also have an influential impact on the IAD. This is because these members play an important role in developing the audit planning cycle. These members, however, are included in the reporting process at the final stage.

The local entities are also influenced by the audit reports as these reports provide a true picture of the effectiveness of local management. They, however, incur low influence during the process. Finally the legal and compliance authorities are informed only in case of a fraud or flaw in governance practices.

1.4. The Audit Process

According to Slack et al. -- 2009, 'All processes have inputs of transforming and transformed resources that they use to create product and services.' The audit process is not excluded from this definition. This the IAD has inputs that are transformed through audit process, which include annual strategic plan, fraud risk assessment, financial reports. Furthermore, certain inputs in the process, including auditors, data analysis software, SAP, which help the department in the transformation process. The audit process, both offsite and onsite, which enable the department to transform inputs into outputs is demonstrated by the following figure:

1.5. Objectives, Scope and Approach of the Research

The basic object of this research is to analyze the operational ability and effectiveness of the internal audit department of JTI. The research would analyze three primary areas of the IAD, including governance, people and infrastructure and operations. The following figure demonstrates the nine dimensions of the internal audit operating model, this model has been adapted from Anthony's triangle.

Anthony's triangle can help the IAD to divide the operations in the above mentioned three levels. According to the theory proposed by Robert Anthony (1965), the base of the triangle is the operational level, which is associated with day-to-day or routine operations. Above the operational level is the tactical level, this level is associated with medium term decisions. These decisions are generally associated with the effective implementation of the overall strategy. The apex of triangle demonstrates the strategic level, which is associated with long-term strategic decisions. This level sets out the direction for the department and formulates the overall strategy.

The approach used in the research begins with the analysis of the current leading practices of the internal audit department. It then identifies the current strengths of these practices and highlights the challenges that the department confronts. On the basis of this analysis, the research proposes recommendations for the improvement of operational ability of the internal audit department.

The above mentioned model is based on the maturity model, demonstrated by the following figure. The leading practices, strengths and challenges are identified on the basis of secondary data, whereas, recommendations are made on the basis of thorough data analysis. The recommendations are given in relation to the three major operation dimensions of the internal audit department, namely governance, people and infrastructure and operations.

2. Analysis

2.1. Purpose and Mandate

Leading Practices

The strategies of the department are developed in a manner that aligns effectively with the overall strategies of the organization.

The department holds quarterly structured with the board members and the executive management. These meetings are held to monitor and update the expectations from the departments.

Risk assessment operations are conducted in a systematic and routine manner. Furthermore, the department plays an active role in managing overall organizational risks as well as the factors that might enhance this risk.

Current Strengths

Routine interaction with the board members and executive management.

Effective and active assessment and management of risks.

IAD is regarded as an important and independent function of the organization and is respected as an advisory unit.

Current Challenges

The staff does not clearly understand the expectations of the board members from IDA.

The mission of the department is not appropriately shared and understood throughout the organization.

The risk assessment activities of the department are not aligned in a focused and systematic manner.

There is no formal enterprise risk management model that can be deployed as an input in the risk assessment and management process of IDA.

2.2. Resourcing

Leading Practices

This function utilizes a formal people model to demonstrate the level of skills of the employees and then aligns these skills with stakeholder expectations.

The function employ resources in a proactive manner, which is in alignment with the people's model of the function.

This function involves retooling, rotating and effective planning in relation to important resources. All these tasks are performed both internally and externally.

Current Strengths

There has been an increase in the resources of…

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