In all audit activities, individual project budgets and schedules are essential to planning and conducting engagements. Budgets based on time help the department to use its resources efficiently and focus efforts on the most important areas of the company.
Most internal audit departments base their audit budgets either on the amount of time spent on an audit, or on a calendar date by which to complete the audit. Typically, audit management establishes the department's overall time budget during the annual audit planning process, and the auditors-in-charge and staff auditors are responsible for achieving the budgets for each engagement. Understanding why and how auditors budget their time and following common sense tips for meeting audit budgets can increase both the efficiency and effectiveness of the audit budgeting process.
Like almost every professional, internal auditors budget their time to make sure projects are managed efficiently and deadlines for delivering results are achieved. Because internal audit departments cannot audit every aspect of the company each year, they typically develop a risk-based annual audit plan based on the number of auditors available and the estimated completion time for each engagement. This "manpower reconciliation" shows how and where audit resources will be used for the year. Because organizations typically pay close attention to any deviations from the annual plan, audit management expects auditors-in-charge to do their part by meeting the budget on the audits assigned to them.
Budgets are crucial to an internal audit department's ability to establish priorities and work schedules. Without them, internal auditors would have difficulty determining which audit areas are the most significant and which warrant less attention. The budgeting process enables internal audit departments to track their progress and ensure projects are carried out within resource limitations. Moreover, setting and tracking time against budgets is integral to ongoing reviews of the internal audit activity's performance, as recommended by The IIA's Practice Advisory 1311-1, Internal Assessments. Although IIA standards do not require internal audit departments to budget their time, budgeting represents one of the most commonly used ongoing review techniques.
How Budgets Are Created
There is no magic formula for determining the right budget for a particular audit project. The time required for each project can vary significantly due to factors such as auditor experience, work scope and objectives, project contingencies, client availability, and schedule changes. Plus, any two audit teams will likely have slightly different work styles and testing methods, which impacts time allotments for project work. The amount of time historically spent auditing a particular area or process also can impact the budget for the audit.
While meeting an audit's budget is important, internal auditors need to keep in mind that gathering sufficient, reliable, relevant, and useful information to achieve the engagement's objective — per The IIA's Performance Standard 2310, Identifying Information — is more important than achieving the audit budget.
Sometimes internal audit departments establish a deadline for completing the audit and delivering the audit report, in addition to their time budget for audit work. This deadline presents an additional challenge to the auditor-in-charge by introducing a project-management element to the budgeting process. It also forces internal auditors to practice the same skills that project managers use in every other part of the organization.
Meeting a Budget
In-charge and staff auditors are typically charged with accomplishing an audit within the budget and time schedule established during the audit planning process. Any variations in the actual time spent on an engagement, compared to its budget, directly impacts the annual audit plan. While there is no one-size-fits-all approach to achieving a time budget or delivery deadline, several practices provide a basis for success.
Set Clear, Specific Objectives and Scope When planning an engagement, internal auditors should understand the purpose of the audit and the reasons it was included in the annual audit plan. This information will help auditors focus on the main reasons for scheduling the audit in the first place and give higher priority to those important areas. Auditors should be able to answer questions such as, "Is there a specific request or risk that should be addressed?" "Is the audit related to compliance with a specific policy, internal controls within a department, or financial statement controls?" and "What time period will the audit cover?" An audit as of April 30, 2007, and one for the two years ending April 30, 2007, for instance, represent very different scopes that would yield significantly different time requirements.
Audit managers should provide up-front direction to the auditor-in-charge to help determine the objectives and scope of an audit. If audit management's input arrives too late in the process, audit time may not be spent on the areas that originally prompted the review. Audit objectives should match the reasons for placing the audit on the annual audit plan.
Auditors should avoid vague objectives that lack specificity. Some examples of unclear objectives include: "Evaluate the propriety of transactions," "Improve the client's operations," and "Review the procedures of XYZ department." Well-crafted objectives, on the other hand, are detailed and specific, such as "Evaluate operation of controls in XYZ department at April 30, 2007, as defined by the COSO internal control framework" or "Evaluate the input, processing, and output procedures in the XYZ process for the year ending April 30, 2007, to make sure all transactions are complete, accurate, authorized, timely, and safeguarded." Setting clear objectives will help focus audit resources on the specific areas deemed important so that time can be used efficiently.
Lock Down an Exit Meeting Date One sure method of ensuring the right managers come to the exit meeting is to set the meeting date well in advance. A generous amount of lead time will increase the likelihood of participants' attendance and help make sure audits finish on schedule.
Auditors should establish a firm date for the exit meeting when the audit begins. Once the date has been communicated and agreed upon, audit teams must work efficiently toward meeting that specific date. This time pressure helps auditors stay on track and use their time efficiently.
Report as You Go Issuing the final audit report often represents one of the greatest hurdles audit departments encounter in meeting audit budgets or deadlines. To ensure success, audit reporting needs to be planned and developed from the start of the audit and then completed as the audit progresses — not just left to the end of the engagement.
During the audit process, practitioners should communicate any findings to the client immediately, clearly identifying criteria, condition, and impact. Once these items are discussed, auditors can then agree on the findings' cause and recommend actions. Performing these steps toward the end of the audit, rather than up front, could result in missed budgets or delayed issuance of the audit report.
Automate the Workpaper Process For many internal audit departments, electronic workpaper systems have become integral to project workflows. Using these tools can add efficiency to workpaper processes, beyond the capabilities of typical word processing and spreadsheet applications. One of the greatest advantages of automation is the ability to establish an overall workpaper structure from the start of the audit so that every workpaper can be filed correctly as it's developed. This capability enables the auditor-in-charge to gauge progress on audit work and intervene quickly if necessary, to keep the audit on schedule. Workpaper applications also save time by providing sign-off capabilities and cross-document referencing that are not possible without their built-in infrastructure.
Staying on Track
Audit budgets and deadlines are a way of life for most audit departments. In addition to helping improve efficiency, they add structure to the audit process and ensure members of the department are working from the same page. But as with many projects, meeting the audit budget is less important than the quality of the product or service rendered. For this reason, the audit budget needs to be viewed in the context of auditing's overall goals within the organization, and not as a means unto itself.