Role of Internal Auditors in Transition to IFRS

Among recent significant developments in the Corporate World are the Adoption/ Convergence to the International Financial Reporting Standards (IFRS). Although due to Recession, the senior management’s focus was temporarily diverted, but gradually with the revival of economy, this issue has again come to have top priority. Besides the attention and work of the senior management, it also requires thoughtful oversight by Audit Committees and Boards. This article provides Internal Auditors with an overview of the IFRS, its impact on organisations and the role Internal Auditors may play.

Impact of IFRS on the Organisation

The transition to the IFRS, more than a technical exercise, is a business transformation process that goes beyond debit and credit of transactions. Besides its effect on financials and disclosures, it will have a substantial impact on every aspect of the organisation including its Systems and Processes, Business Practices, Internal Controls, IT and Human Resource Management.

Increased disclosure requirements could result in a significant amount of changes to the existing framework and documentations. Revenue Recognition, Leases, Consolidations, and Pensions are among the areas where companies may need to rethink certain Business Operations, Strategies, and agreements as a result of Transition.

Impact on Internal Audit Department

Though the transition to the IFRS and the responsibility of making appropriate Accounting treatments and necessary disclosures comes within the purview of Accounts department, Internal Auditors do play an important role in the entire process. Though accounts department is well-placed to understand the impact of the IFRS convergence, Internal Auditors should be there to assist them, challenge the process and make sure the companies are doing everything they should do.

internal audit Role of Internal Auditors in Transition to IFRSTo move forward with such a significant project, companies and their Internal Auditors should together need a clear understanding of applicability, end requirements and implications of the IFRS on the systems and processes and the emergence of any critical business issues. They can begin by conducting a high-level review to assess how major accounting changes would affect a company, its financials, its processes and internal control structure.

They can review those processes which need re-engineering to assess the extent of necessary changes and whether Internal Controls are redesigned effectively and efficiently to address new risks associated with the new process. Here, the Internal Auditors can play an important role in working towards a smooth and efficient transition. They should make sure to let all factors and impacts, including necessary accounting and IT changes be considered.

Responsibility of Internal Auditors in the IFRS Transition

Entire conversion process is a large-scale project and its success depends on the implementation of a strong project management. It requires developing a conversion plan which includes defining the project goals and objectives, identifying tasks and methods, quantifying the resources needed, involving all key players for critical decision making and determining budgets and timelines for completion. This will also include managing the implementation of the project and suggesting recovery actions wherever required.

While the IFRS project will live in the Accounting area, Internal Audit must be a key player because of its pervasive impact on the organization’s internal control environment. Here are the ways internal auditors should seek to get involved in their organisations

IFRS implementation project:

Sans audit checklist Role of Internal Auditors in Transition to IFRS

1. During the Pre-Implementation Phase:

The first action step for internal auditors is to ensure whether the organisation has a comprehensive and well-defined action plan for the conversion. The plan should cover all key elements like Scope, Objective, Staffing, Timeline, Cost, Risk Factors and Critical Success Criteria. The Internal Auditors should thoroughly review the plan and its key elements to ensure their company is appropriately prepared to undertake the project.

They should check if the plan answers the following important questions:

  1. Have all critical areas to be impacted by the IFRS convergence been identified such that appropriate analysis, time and resources are allocated to those areas?
  2. Will the project be managed with existing staff resources or should the entity employ external consulting services to manage the project? How many dedicated resources are required?
  3. How does the capability building of the team should be made?
  4. What is the total cost of the convergence?
  5. How often and in what manner will the senior management, the audit committee and the board of directors be updated on the progress of the IFRS convergence project such that progress may be assessed and issues dealt with on a timely basis?
  6. Has the authorities and responsibilities been clearly identified and defined?

Review procedures to be carried out by the internal auditors include:

  1. Ensuring proper controls are in place
  2. Reviewing management’s budget to ensure necessary expenditures are included
  3. Reviewing schedules and timeline set to ensure timely completion
  4. Performing readiness testing
  5. Testing the adequacy of change management programme
  6. Review that the plan is managed effectively and efficiently

2. During the Implementation Phase:

Internal Auditors have an important role to play in the implementation phase. Internal auditors should join the implementation team in debating the applicability of the IFRS to ensure that the IFRS has been correctly interpreted. Internal auditors should closely monitor the implementation of the IFRS and identify processes, systems and controls impacted by it.

They need to understand the changes that have been carried out in the system and process flows and update these changes in the process and system document. Further, the internal auditors need to test the new design and implementation of internal controls to ensure that controls are working effectively in the changed environment.

3. During the Post-Implementation Phase:

After the implementation phase, Internal Auditors should re-evaluate the entire process flow of all activities right from its initiation till its inclusion in the IFRS Financial Statements. It should test the internal control structure in order to provide assurance to the management that the revised internal control structure works properly and yields accurate financial reports.

Previous post:

Next post: