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Internal Audit Subordination Principles for Lithuanian Companies

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Author(s): Rima Tamošiūnienė | Olga Savčuk

Journal: Engineering Economics
ISSN 1392-2785

Volume: 5;
Start page: 37;
Date: 2007;
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Keywords: internal audit | audit committee | functional subordination | assurance activities

ABSTRACT
Current business environment has experienced rapidand revolutionary change with far reaching consequencesfor companies worldwide. Management responsesto fierce global competition include improvedquality and risk management initiatives, reengineeredstructures and processes and greater accountability toensure more timely, reliable and relevant information fordecision-making and to secure confidence and trust of theinvestors. Over the last few years the importance to thestrong corporate governance of managing risk has beenincreasingly acknowledged. Companies are under pressureto identify all the business risks they face: social,ethical and environmental as well as financial and operational,and to explain how they manage them to an acceptablelevel. Therefore in order to reach its objectiveseach company has to develop and implement an approachto assessing and managing the uncertainties and opportunitiesit faces in the pursuit of its business strategy,with the intention of maximizing shareholder value andperformance, i.e. meeting the determined objectives.Shareholders are extremely demanding with respect tothe activities of the management wanting an independentand objective assessment of the risk management andgovernance system the management is responsible for. Inthis radically changed business environment internalauditing gained an important role within companies.Over past sixty years internal audit developed from controlfunction responsible for inspection of accounting andfinancial data to a strategic partner for the shareholdersand the management of the company in improving governanceprocesses. In current environment managementof the company more and more rely on the internal auditto evaluate whether controls are sufficient to managerisks and uncertainties. This developing role of the internalauditing is also reflected in its current definition, i.e.internal auditing is an independent, objective assuranceand consulting activity designed to add value and improvecompany’s operations. It helps an organizationaccomplish its objectives by bringing a systematic, disciplinedapproach to evaluate and improve the effectivenessof risk management, control and governance processes.Only independent internal audit can perform itstasks properly.Independence of internal audit is influenced by functionalsubordination level which relates to the assuranceactivities of internal audit. Proper level of functionalsubordination influences independence and objectivity ofinternal audit. This article analyzes theoretical principlesof functional subordination, which determines that internalaudit must be subordinated to audit committee or independent board. However from the ownership structureperspective, which is analyzed in Lithuanian companies,internal audit functionally might be subordinated tothe other management bodies, without hindering its independence.

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