In 2004, a ALGA task force surveyed organizational members to find out what auditing standards member organizations were following and whether members were interested in expanding our existing peer review program to also conduct reviews for compliance with International Standards for the Professional Practice of Internal Auditing (red book), adopted by the Institute of Internal Auditors (IIA).
While the response rate to our survey was disappointing – we received 60 responses from 317 surveys – the results were interesting.
- Most respondents follow yellow book, but about half follow red book standards either exclusively or in tandem with the yellow book. All organizations responding to the survey indicated that they follow some form of auditing standards. While 51% said they follow yellow book exclusively and said they 27% follow red book standards exclusively, 22% follow both. About 30% of respondents were required by charter or statute to follow one or both sets of standards, but the majority of organizations followed either or both sets of standards as a matter of policy set by the audit organization’s management, the entity’s management, or an oversight body.
- Respondents following the yellow book were more likely to have had peer reviews and most were conducted by ALGA About two-thirds of organizations that follow yellow book said that they had undergone peer review compared to about one-quarter of organizations that follow red book. While ALGA conducted most of the yellow book peer reviews, none of the organizations following the red book had peer reviews conducted by the IIA.
- Most respondents believed ALGA should offer red book peer reviews. Of the 60 respondents to the survey, 39 said ALGA should sponsor a peer review program based on red book standards. Those respondents following the red book overwhelmingly (26 of 29 respondents) believed ALGA should offer red book peer reviews. The 31 respondents exclusively following the yellow book lean slightly against ALGA offering a red book peer review program:16 respondents indicated “no”, 13 respondents indicated “yes” and 2 respondents did not answer the question.
Based upon these results we, concluded that there was an unmet need for red book peer reviews among our members. The peer review committee then analyzed both sets of standards to identify direct contradictions or differences in the scopes of review or reviewer qualifications that would impede expanding our peer review program. We particularly compared red book provisions relating to consulting services and yellow book restrictions on nonaudit services. We concluded that while the standards differ in several respects, they are compatible. Following one set of standards does not preclude an audit organization from following the other set of standards. (Nor do the sets of standards wholly overlap – be aware that following one set does not necessarily ensure that an organization is meeting the other set. The yellow book applies to audits of government programs, while the red book applies to internal audit organizations. Therefore, the yellow book has more specific requirements relating to engagements while the red book has more standards covering the organization’s management and body of work as a whole).
We presented our findings to the Board and recommended that we proceed with expanding the peer review program to better serve members. The Board approved our recommendation in January 2005.
The peer review committee drafted a guide for conducting peer reviews for member organizations that follow International Standards for the Professional Practice of Internal Auditing. We have asked IIA staff to review the guide and have scheduled a pilot review in Tallahassee, Florida, in March 2006. This is similar to the process we followed in drafting and revising the peer review guide for Government Auditing Standards reviews where we asked GAO staff for input and tested forms with one or more member organizations. Once we’ve tested the guide and received and considered the IIA’s comments, we will revise the guide as necessary before making it available on ALGA’s website.
We plan to follow the same administrative processes for coordinating and conducting red book reviews as we currently do for yellow book reviews. Member organizations should get in touch with their regional coordinator to schedule a review. The coordinator will recruit a peer review team and ensure that the team meets independence and qualifications requirements. The organization will arrange and pay for travel and expenses but will not pay for reviewers’ time and will instead agree to make qualified staff available to participate on reviews of other member organizations. The organization undergoing review will complete a description of its quality control system prior to the peer review. The team will review the description and interview staff and review supporting documents on site to test whether the system was suitably designed and working effectively. Our approach is intended to be consistent with IIA’s practice advisory 1312-2, except that we’re not asking the organization to conduct its own tests and draft a report. We do not plan to offer broad scope assessments described in IIA’s practice advisory 1312-1.
We recognize that some members are concerned that expanding the peer review program represents a step away from the high quality engendered by following Government Auditing Standards. We want to reassure members that we remain committed to Government Auditing Standards. The GAO is coordinating with other standards-setting bodies to promote consistency and is proposing guidance in its upcoming exposure draft to outline that other standards may be used in conjunction with the yellow book. We will continue to encourage members to follow Government Auditing Standards but will support members in following other professional standards as well.
Amanda Noble is Amanda Noble is an Audit Manager with the Kansas City Auditor's Office.
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Peer Review