Optimal Strategies for Organizing Public Internal Audit Departments

The planning activity in public internal audit includes the auditing resources represented mainly by the number of auditors and other aspects of the audit organization itself (entity or hierarchical entity level). The proper organization can be mainly analyzed based on the associated risks, the assessment of their impact and their probability, but also on taking into account other relevant elements, too. Often, this analysis, besides being very elaborate, does not capture all important aspects, namely those that derive from the assessment of information asymmetry. The study aims to create a model for preliminary analysis of the optimal decision to organize public internal audit either at the level of the public entity or at the level of a higher entity that can be quickly used by decision-makers. The paper addresses the issue of the internal audit in the context of a mandate contract with the head of the public entity on the one hand and with the state itself on the other hand and complying with the requirements of an optimal mechanism. The objective of the study is the preliminary design of a mechanism to ensure optimal mandate contracts that the audit has with both the head of the unit and the state, obviously in imperfect information conditions. Thus, the quantitative model used aims to aggregate in a scorecard the optimality requisites specific to the theory of mechanism design in a tool for rapid and formal analysis decisions to exercise public internal audit at the level of the hierarchically superior entity. Furthermore, the research provides a formal preliminary tool for analyzing the decision in the public sector internal audit and offers the possibility of identifying some directions of action that provide the basis for the decision to perform the audit from the hierarchical entity level, which also takes into account the information asymmetry theory and mechanism design.