Setting smart KPIs (Key Performance Indicators) for internal audit department is one of the most challenging tasks I have recently faced as an Internal Audit professional.
Internal audit department are quick to find weaknesses in business processes, make recommendations for improvement, yet, the profession seem to be struggling to come up with generally acceptable KPIs and Performance measurement tools for internal audit department. I find this very bizarre L.
This article is written to share the experience I recently gained by overseeing and setting up KPIs for Internal Audit Function and managing the whole process of performance measurement of a reputable medium sized organization.
Key Performance Indicators (KPIs) for Internal Auditors
Let us start by refreshing our memories on the definition of Internal Audit as provided by the Institute of Internal Auditors (IIA)
Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes
According to the Institute of Internal Auditor (IIA), “the internal audit activity provides assurance that internal controls in place are adequate to mitigate the risks, governance processes are effective and efficient, and organizational goals and objectives are met”. All that we do are geared towards providing assurances that processes & controls are working as they should and that they are adequate – we make recommendations for improvement where weaknesses are observed.
The very first step in setting up KPIs for Internal Audit function is to clearly state what the responsibilities and objectives of internal audit functions are. Note that this may slightly vary depending on the industry under consideration.
For the purpose of Accountability and Measurability, Internal Audit responsibilities in this article are categorized under the following headings:
The following are areas where we give assurance:
- Pre-Audit of Payroll
- Bank reconciliation
- Pre-audit final entitlement payment
- Review contract documents before they are signed
- Special audits
Risk & Compliance responsibilities
- WHT tax audit
- PAYE audit
- VAT audit
- Other statutory audits
- Financial statement components audit
- Process audit
Insight & Objectivity
- Analysis of available expense data for patterns
Internal controls responsibilities:
- Pre audit of expense authorizing documents
- Petty cash review
- Review of control environment
- Review systems controls
Based on the above, below are KPIs that I used to access the performance of a full fledge internal audit department that I recently worked with.
The above mentioned can be achieved by adopting a risk based approach where yearly Audit plan is prepared using the yearly updated Risk Register (Board approval obtained through Audit & Risk Committee Chairman).
Internal Audit Performance Metrics and KPIs
- Percentage of Audit Plan completed
- Count of issues found and recommendations made
- Percentage of recommendations implemented on time (some requires approval at the Audit & Risk Meeting).
- Number of findings corrected
- Certifications held by Audit Team Members
- Experience of Audit Team Members
- Percentage of Internal Audit assignment delivered on time and within budget