The development of the concept of international internal auditing standards, can you tell me specifically

(i) From Independence to Objectivity

The old definition of internal auditing by the IIA is reflected in the Statement on the Responsibilities of Internal Auditing (Revised 1990) issued by the Institute of International Internal Auditors (IIA), "Internal auditing is an independent evaluative function established within an organization for the purpose of inspecting and evaluating its activities and serving the organization by providing relevant analysis, evaluation, recommendations, advice and information on inspection activities to assist the members of the organization to perform their duties effectively." By comparing the old and new definitions, it can be noted that in the new definition the IIA places more emphasis on objectivity.

In the traditional view, "independence" is an important feature of internal auditing, and is also considered an important requirement to ensure the effectiveness of internal auditing. However, in essence, objectivity is a more fundamental and broader concept. In drafting the new definition, the Steering Task Force did not initially use the concept of "independence" and did not intend to define it. They considered the broader "objectivity" to be the distinguishing characteristic of the internal audit profession. The requirement of "independence", on the other hand, places unnecessary constraints on internal auditors by limiting who can provide services and what services can be provided. Moreover, the elevation of "independence" over other concepts puts internal audit at a competitive disadvantage in the provision of services relative to external service providers, who are often in a "more independent" position.

Internal audit departments add value to the organization because they are objective in their analysis and recommendations for improving operations and controls. Independence is a means to an end, and objectivity is the ultimate goal. Imagine if the audit activity is independent, but for various reasons do not reflect the objective face of things, then this activity is not efficient and effective, and even cause decision-making errors, very harmful. On the contrary, as long as the objectivity is guaranteed, there is no need to stick to independence. For internal audit, its formal independence is certainly not as good as the external audit, if the internal audit is considered inferior to the external audit, it is very ridiculous.

For a long time, people often confuse the distinction between goals and means. Although the goal and means should be unified, but the means as the goal will inevitably lead to the alienation of the goal, resulting in the ultimate loss of meaning of the means. The most obvious example is the rule-oriented accounting standards model originally advocated by the Financial Accounting Standards Board (FASB) in the U.S. The focus on rules (i.e., the means) ultimately led to a number of companies exploiting the loopholes of the rules, which led to the Enron and WorldCom scandals, among other false accounting scandals. This model caused at least the following problems:

(1) no clear and unambiguous objectives, and a great deal of detail that obscured the intent of the standards;

(2) too many exceptions and bounds tests, which facilitated the financial designers in obtaining the results they needed;

(3) a great deal of detailed guidance, which contained a great deal of conflicting treatment.

The U.S. Securities and Exchange Commission published a study, "A Study of the Adoption of a Principles-Based Accounting System for Financial Reporting in the United States," which argued that the rules-oriented model in the United States and the purely principles-oriented model advocated by the International Accounting Standards Board needed to be abandoned in favor of an objectives-oriented model. This move starkly illustrates that the goal is first and foremost, while rules, and even principles, are merely a means to an end. If the direction is wrong, then the means, even if perfected, will only go further and further down the wrong path, or even deviate more rapidly from the goal; if the direction is right, then all means can be developed as a result. For example, historically, the evolution of the objective of independent auditing, i.e., from the detection of errors and prevention of fraud to the verification of the fairness of the financial statements to the current emphasis on both, has been accompanied by a change in its auditing techniques and audit methodology, or rather, by its development as well. The use of system-based auditing and audit sampling both developed during the stage of validating the fairness of the financial statements. Without this objective, the establishment of these methods and procedures is difficult to imagine.

These research results, successes, and failures of the IIA, therefore, provide good lessons for understanding the nature of internal auditing, and thus for developing China's own internal auditing standards.

It is important to note that the concept of independence is not useless; it should play its role as a tool. "Independence is a variable, the interpretation of which, and the degree to which it is important, depends on a number of factors, such as the type of business, regional and national laws and regulations, and the nature of the service in question. Observance of independence contributes to objectivity. In the AICPA's current study, "independence" is expressed as "the ability to determine the scope of work and complete the work without hindrance," and the Steering Task Force ultimately adopted this understanding, retaining "independence" as "the ability to determine the scope of work and complete the work without hindrance," and considering "independence" as "the ability to determine the scope of work without hindrance. The Steering Task Force finally adopted this understanding, retaining "independence", considering that "the internal audit activity should be free from interference in determining the scope of the internal audit, in performing its work, and in reporting on its results". According to the IIA, independence is for the audit activity and objectivity is for the individual internal auditor. Obviously the audit activity is based on the internal auditor. In order to maintain objectivity, the IIA believes that internal auditors:

(1) should not participate in any activity or relationship that has the potential to compromise, or is presumed to compromise, their unbiased assessment. This includes activities or relationships that may conflict with the interests of the organization.

(2) Should not accept anything that could compromise, or is presumed to compromise, their professional judgment.

(3) Should disclose all material facts of which they are aware, so long as failure to do so would distort the report on the activity under review.

(2) Expanding the Vision Outside the Organization

Internal auditing, as commonly understood, is as if it must be conducted by people and institutions within the organization. However, this is a misconception. In the new definition of internal auditing by the Institute of Internal Auditors (IIA), the word "internal" has been discarded. Internal auditing is the practice of auditing within an organization and is a scoping concept, as opposed to the subjective concept of "the practice of auditing by internal auditors". While the concept of "internal" is considered by some to be the most important attribute of the internal audit profession, retaining it in theory is flawed. This wording attempts to monopolize the internal audit profession in performing all relevant services and functions, and tries to prevent outsiders from competing for internal audit services. Moreover, as the range of services expands, it becomes uneconomical to have all the required skills in-house, which has resulted in many enterprises purchasing services externally, the so-called externalization of internal auditing. The only value in the concept of "in-house" is that internal audit services should still be managed in-house and not be completely decentralized to the outside.

Part or all of the internal audit business to expand to the outside, its obvious advantages are reflected in:

1. Get economies of scale. External audit organizations are economical not only in terms of organizational size, but also in terms of operational scale. The high cost of service fees can be compensated or spread over a large number of clients, thus enabling the realization of the lowest cost for equivalent services, or more efficient services at the same cost. Most of the auditing work is to be done by human beings, but some parts of it have to use computational assistive technology and management analysis technology, and the cost of hardware and software in these technologies is not something that the average organization is willing to bear or able to bear, but the first-class accounting firms are able and willing to bear it because these fixed costs can be spread over a large number of clients.

2. Reduce total cost. Organizations that set up an internal audit department of their own need to pay for staff salaries, training fees and overheads. Externalizing internal audit saves these costs and allows companies to hire only as needed to maintain flexibility in expenditure control. That is, the fixed costs required to set up an internal audit department are converted into variable costs, and uncontrollable costs are turned into controllable costs for management. At the same time, if an external auditor undertakes the internal audit work, the internal audit methodology and procedures can be kept highly consistent with those of the external auditor, which means that the external auditor can rely more on the internal audit work, and the company can benefit from paying less for the audit.

3. Maintain an appropriate organizational size. Almost every business can benefit from an internal audit function, but for small and medium-sized companies, setting up an internal audit department with just one or two people can make it difficult to recruit top talent and build up an adequate database of expert opinions. Accounting firms, on the other hand, can effectively analyze risks and offer a menu of professional services to meet the different needs of their clients at different times.

4. Keeping management focused on core competencies. Daily audits by internal audit departments are often inefficient and may also distract management. By externalizing internal audit, companies can free up management time and resources so that management can focus on core competencies and concentrate on pursuing more strategic goals, rather than spending a lot of energy on low-return day-to-day management.

5. The organization takes the initiative in outsourcing internal audit services. When an organization decides to outsource its internal audit services, it can take the initiative to a large extent by selecting different accounting firms according to the specific conditions of the enterprise and combining the advantages of different accounting firms. In the process of accepting the service, through the board of directors and the audit committee to supervise the internal audit work, it can assess the service quality of the external auditor and determine the fulfillment of the contract. If they are not satisfied with their services, since there are other external personnel available in the market to provide internal audit services, the enterprise can sign a long-term price agreement with the hirer or consider reintroducing an internal audit organization.

6. External audit organizations have advanced auditing techniques, rich auditing experience, and some of the top accounting firms have unique quality control and assurance systems.

Therefore, with the development of internal audit and the external requirements of internal audit continue to improve, the externalization of internal audit will be a trend. It should follow the trend and break the stereotypes in order to enhance the value of the organization and help the organization to achieve its goals.

(3) The ultimate goal of internal auditing is to increase the value of the organization

The traditional theory of internal auditing believes that internal auditing has the functions of economic supervision, economic management, economic evaluation and economic forensics. This understanding is also reflected in the old definition of internal auditing. And the Institute of Internal Auditors in the latest "Definition of Internal Auditing" that: "Internal auditing is an independent, objective assurance and consulting service, the goal of which is to add value and improve the organization's operations." This is completely different from the traditional theory of "independent evaluation function".

The introduction of "adding value and improving operations" has energized the profession as never before. Traditionally, internal auditing was largely designed to reduce agency costs, with little concern for its contribution to business operations, which was often intangible. In today's highly competitive and cost-allergic marketplace, companies are dividing their business processes into value-added and non-value-added processes, and then compressing the non-value-added processes as much as possible, with the expectation that everyone in the organization is creating value for them. In the final analysis, an organization can only exist if it has value, otherwise it has no place in society. Therefore, any activity can only be valued by the organization and exist if it creates or increases value for the enterprise. Internal audit can only be eliminated from the game if it still sticks to its past position. The new role position requires internal audit to actively participate in value creation activities so that it can fight for its continued existence. Internal auditing that does not aim to add value to the organization will not be tolerated by the organization. While participating in value creation, internal audit has to make its contribution to the value creation process known to the world and make the company's management, board of directors and other stakeholders aware of the necessity and importance of its presence so that it can maintain and enhance its professional status. However, it is important to note that the performance of internal audit should not be measured in terms of cost reductions or efficiency gains, as this would weaken the objectivity of its work. Because the contribution of internal audit work to value creation is often indirect.

At the same time, the activities that internal audit focuses on are therefore elevated to the level of the organization as a whole, rather than the activities of an individual or a department. Its objectives are centered on helping an organization to achieve its strategic goals, i.e., to add value, and it also links internal auditing to the organization's core business processes and critical success factors. This elevated level of focus shifts internal auditing from "functional thinking" about a localized function to considering issues and proposing solutions from the overall value chain, taking a holistic, long-term view, and facilitating effective collaboration across all departments and aspects. This has essentially expanded the functions of internal auditing, and requires that this aspect be taken into account in the recruitment, training, and team-building activities of internal auditors.

(4) Putting Risk Management on the Front Burner

In the field of auditing, the word "risk" seems to be more often associated with independent auditing. The traditional internal audit also focuses on the internal control system and business mechanism. However, due to the uncertainty of the internal and external environments faced by enterprises in the market economy, the risks of enterprises have generally increased, such as the lack of internal financial and operational information, failure to implement policies, plans and standards, loss of assets, waste of resources and ineffective use, etc., and external changes in consumer preferences, national macro-policy adjustments, and the turbulence of the international financial markets and so on. Therefore, enterprises urgently need internal auditing to evaluate and improve the effectiveness of risk management and control and governance processes through a set of systematic and standardized methods. In response to this requirement, risk management has also been added to the new definition. The overall management control mechanism of an enterprise generally prefers to link the management control system to the long-term objectives of the organization, as well as the risk of failing to meet those objectives. In order to help the business reach its goals, risk management must be emphasized. The new definition suggests that controls are no longer abstract and implicit, but can actually help an organization to manage risk and develop effective management processes, and that there are multiple "right" ways to do this for each situation. The risk control system obliges internal auditors to continuously improve controls in response to changes in the global marketplace and the nature of competition, the creation of new forms of assets, and changes in the tools for obtaining information. The phrase "one control for all" and the generic control model no longer exists.

Risk control systems also dictate that assurance and advisory services create value for the organization. There is no lack of successful examples in this regard. Such as a foreign trade group of companies under more than 10 subsidiaries, the group's internal auditors of these subsidiaries in the second half of 2002 business contracts signed and implementation of the audit, found that more than 10 million yuan in large amounts of imported commodities contracts in only one of the commodities accounted for 16% of the soybean meal, involving an amount of 500 million yuan. In accordance with international practice, the purchase of soybean meal must be six months in advance to sign a futures contract. Subsidiaries coincidentally imported soybean meal, for the entire group accounted for too much money in a commodity, is bound to increase business risks. The internal auditor immediately suggested to the group management, soybean meal imports must do hedging to avoid the price drop caused by the business risk. Sure enough, in 2002, South America had a bumper harvest of soybean meal, and the international market price of soybean meal fell sharply. The internal auditor's recommendation enabled the group to avoid a loss of nearly 200 million yuan.

With the integration of the international economy and China's accession to the World Trade Organization, the competition among enterprises will become increasingly fierce. Internal auditing has an irreplaceable advantage in helping enterprises realize their goals, and is therefore increasingly valued by management. However, China's internal auditing needs to be improved in both theory and practice. How to seize the opportunity to develop the profession of internal auditing while improving the competitiveness of enterprises is a major issue for every internal auditor.