1. Introduction
 As the Chinese economic reform started in 1980s, the demand for a better internal control of enterprises forced the need of a formal internal audit and the development of a complete internal audit system.  While internal audit has been recognized as an important function and procedure for internal control of the firms’ normal operations from the perspective of financial terms, however, different nations, due to their stages of economic developments (developed nations vs. developing nations), unique governmental regulations, and different social and cultural traditions, have implemented different internal audit systems and approaches.  From a historical and comparative view of point, while the internal audit process in China has only started two decades ago and been actually developed during last ten years with many weaknesses and problems to be further addressed and improved, the internal audit in Germany, in comparison, has been evolved and developed over the last hundred years and its internal audit system has been well established and proven to be an effective internal control tool for enterprises in Germany. As such, it is believed that Chinese internal audit professionals can learn important and meaningful lessons from a comparative analysis between the two internal audit systems.  That is the primary motivation for this research.  This paper describes a comparative study exploring some key differences between the internal audit systems in China and its counterpart in Germany.  Specifically, the five key differences will be discussed and examined in the following sections of this paper: (1) the origin and development of internal audit, (2) the structure of internal audit system, (3) the relationship between firms’ internal audit and the government agency, (4) the responsibility and accountability of internal audit, and (5) the quality of internal auditors.  Based on the analysis above, four suggestions are made for future improvement on the internal audit system in China, along with managerial discussions.

2. A Comparative Study
 Five key differences in their internal audit systems between China and Germany are discussed and explored in this section: (1) the origin and development of internal audit, (2) the structure of internal audit system, (3) the relationship between firms’ internal audit and the government agency, (4) the responsibility and accountability of internal audit, and (5) the quality of internal auditors. 

(1) The Origin and Development of Internal Audit:
 In China, the development and establishment and of firms’ internal audit has been pushed by the rapid development and growth of national market economy along with the implementation of government’s administrative policies (Jou 1997). In August 1983, the State Council approved and circulated the Request for Instructions on Several Issues Concerning audit Work by the National Audit Office, requiring the conduct of internal audit through setting up internal audit units within competent departments exercising unified leadership of their subsidiaries or with many subsidiaries, and large- and medium-sized enterprises and undertakings.  In 1987, Chinese Institute of Internal Auditors was established, and it joined International Institute of Internal Auditors in December in the same year. In 1988, The State Council issued People’s Republic of China’s Auditing Standards, in which chapter VI stipulated the establishment and responsibilities of internal audit units, and the relationship between internal audit units and government audit institutions in its internal audit.  In 1994, The State Council issued The Law of Auditing, and it also determined the legal status for internal audit. In 1995, The China National Audit Office published The Regulations on Internal Audit, making more specific rules on internal audit. In 2003, The China National Audit Office implemented The China National Audit Office’s Regulations on Internal Audit (2003), Which improved the regulations issued in 1994. On the other hand, the internal audit professionals have increased dramatically since 1987, and there are more than 10 test centers established up for the qualification examination of CIA (certified Internal Auditor). At the end of 2001, there were about 76,000 internal audit units in China with 193,000 certified professionals.
 In Germany, the establishment and development of internal auditing is the product of rapid development of the market economy and the changing objectives of internal audit (Wang 2003). The first modern internal audit department emerged in Friedrich Krupp Company in 1875. The internal audit developed quickly in Germany in sixty years after the middle of 20th century. At beginning, the objective of internal audit was checking error and protecting malpractices. Along with the development of economy, the structure of business companies becomes complicated, and the need to strengthen internal control and management was intensified. So the objective of internal audit is changed to improving economic benefits of company. The internal auditors are not only the member of management team, but also the protectors of company.  Currently, there are about 50,000 certified professionals in the internal audit units in Germany.

(2) The Structure and Establishment of Internal Audit System:
 Based on the current international practice, there are three different system structures of establishment of internal audit units in a business enterprise. In the first structure, the internal audit unit is established parallel to the Board of Directors and is directed by the leader of the monitoring committee. In comparison, under the second structure, the internal audit unit is established parallel to the other departments in the company and is administered by the Board of Directors. Finally, with the third structure, the internal audit unit is placed inside the finance unit, as internal auditing is one of key functions of the finance department. Under the first structure, the internal auditors can keep independence during the audit process as the internal audit unit can set up and do auditing work without outside interference and any influences from other departments. Under the second structure, the internal auditors’ independence is limited and it is difficult for internal audit unit to audit the other departments at the same level. Under the third structure, it is obvious that the internal auditors can hardly keep independence during the audit process because finance department has financial supervisory function on its subsidiary and other departments and the internal audit is also one function of finance department.
 In China, all internal audit units are structured into the business enterprises according to either the second or the third structures described above. Comparatively, in Germany, all internal audit units are established based on the first structure.  As such, the internal audit units in Germany can keep much more independence during the audit process than their Chinese counterparts in China.

(3) The Relationship between Internal Audit and Government:
  In China, the internal audit units in the government owned companies have a close relationship with the government regulation agency. All business internal audit units are established according to the government’s administrative guidelines. The No. 29 Standards in National Auditing Law regulates the establishment of internal audit units, and the internal audit units in government owned companies must be guided and supervised by local government. This standard clarifies the legal relationship between business internal audit units and government audit agency and does not lay down rigid rules for setting up of internal audit functions allowing for difference between busines