An internal audit is used to determine how well a company is maintaining operational efficiency. Internal audits check how well the company manages its accounting processes. They also help assess compliance with standard rules and regulations. Regular audits ensure that companies continue to follow administrative and accounting fundamentals. Internal audits help ensure companies adhere to best practices in financial reporting and maintaining accuracy.
The primary purpose of an internal audit is to identify weaknesses in a company’s processes so that they can be fixed internally. The reason for fixing processes quickly is to prevent harm to both the company and its stakeholders. Internal audits should be planned so that they cover the strategic needs of the organization.
An internal auditor is appointed to conduct an internal audit. The auditor checks the overall performance of the company with respect to the financial, legal, executive, and administrative standards they are expected to follow. The audit purposefully identifies problems in the internal controls of a business so that it can make improvements to improve efficiency.
What is an Internal Audit?
Internal audits evaluate the internal controls of a business, including its accounting processes and corporate governance. The internal audit’s purpose is to ensure the business or organization complies with applicable laws and regulations as well as help to maintain timely and accurate data collection and financial reporting. Internal audits also provide a company’s management with tools needed to attain operational efficiency since the audit identifies difficulties and lapses that can be corrected before they are discovered during an external audit.
What is the objective of an Internal Audit?
The objective or purpose of internal audits is to keep a check on the operational and financial aspects of a company or organization. Internal audits can be performed at any point in the year. It is useful for discovering mistakes, weaknesses, and strengths of a business. An internal audit is conducted at any time during the fiscal year and allows ongoing review instead of waiting until the end of the year.
What is the Importance of an Internal Audit?
Internal auditing is critical for helping monitor business assets to ensure they are properly secured and safeguarded against threats. An internal audit also helps verify business processes and ensures that these processes are properly reflected in documented procedures and policies. Internal audits are important for many reasons, including providing objective insight, improving operational efficiency, evaluating risks, protecting assets, assessing organizational controls, and ensuring legal compliance.
Who Performs an Internal Audit?
internal auditors perform internal audits. An internal auditor is a trained professional. They are hired by a company to provide an independent and objective evaluation of the company’s financial and operational activities and its corporate governance. Internal auditors are tasked with ensuring that the company complies with applicable regulations and laws, follow proper procedures, and function as efficiently as possible.
How frequently are internal audits conducted?
Internal audits can be conducted as often as a business feels necessary. An internal audit may occur yearly, monthly, weekly, or even on a daily basis, depending on the needs of the business and its circumstances. An audit is a tool used by management to assess the business and each department, so internal audits should be conducted often enough to detect problems and prevent issues pertaining to compliance.
How long does an internal audit take?
The time it takes to conduct an internal audit may vary. The size of the business or department being assessed and the scope of the audit influences the time an internal audit will require. The time frame depends on the relevant systems, personnel access, and records being assessed by the internal auditor. It may take only a few weeks to conduct an internal audit. But for larger companies, it may take up to six months.
What is the internal audit process?
Conducting an internal audit involves several steps, and it can be a time-consuming process. An internal auditor needs resources, and they are dedicated to the process. A company chooses how often to conduct internal audits. Internal auditing involves six steps.
Step 1: Establish the Purpose of the Audit
Before beginning an internal audit, identify the processes targeted for auditing. This step involves setting the scope and objectives of the audit and helps determine an auditing schedule.
Step 2: Create a Schedule
Determining a schedule for an internal audit provides advance notice to the departments affected by the auditing process. They will be able to obtain the necessary documentation and records to be reviewed and audited.
Step 3: Pre-planning Phase
Getting prepared before the audit helps simplify the auditing process. During this pre-planning phase, an internal auditor sets up a plan and sends it to the department or departments being audited. The plan should include information about the scope, objective, and criteria for the audit. Auditors need to be prepared prior to the audit, so they have a clear understanding of the procedures and policies to be reviewed.
Step 4: Conduct the Audit
An internal audit may involve numerous methods that include reviewing documents, interviewing, and observing. The auditor may choose different methodologies or a combination of methods based on the scope and objective. Internal auditors may examine hard copies or electronic records they need for verifying compliance, implementation processes, and internal controls.
Step 5: Recording Findings
An auditor must record their findings as it is a vital component of the auditing process. Documenting audit findings identifies gaps in compliance and helps discover deficits that need fixing. Records include notes from observation and interviews.
Step 6: Reporting Findings
All the findings need to be organized and reported in an audit report. Audit reports provide evidence that the internal audit was completed. The reports need to be reviewed and approved by managers. The report may also include suggestions for corrective actions in areas where deficits were identified by the internal auditor.
What are the types of Internal audits?
Here are the different types of internal audits.
|
Audit Type |
Description |
Uses and Examples |
| Compliance Internal Audit | Compliance audits focus on if the company is in full compliance with applicable procedures, policies, regulations, and laws. Noncompliance can cost a company millions of dollars in fines. | The compliance audit focuses on conformity to laws and regulations. Auditors need to have a good grasp of standards, laws, and regulations. Auditors look at operating controls and financial transactions to assess compliance. |
| Environmental Internal Audit | An environmental internal audit assesses the impact the business operations have on the environment. They may also include assessing how well the company complies with environmental regulations and laws. | Regular internal environmental audits examine the actual operating methods of the business and compare them with those set on in an environmental management system manual. |
| Internal Financial Audit | A financial internal audit evaluates the financial reporting inside the business and how it relates to projects, capital assets, budgets, and the business overall. They may also evaluate the accuracy and validity of expense reimbursements, expenditures, or billing. | A financial internal audit only considers the organization’s financial statements and records. An auditor will need to make sure financial records accurately represent the financial transactions they represent. |
| Operational Audit | An operational internal audit evaluates the control mechanisms of the organization and determines its reliability and efficiency. | During an operational internal audit, an auditor considers the processes, operations, and systems to determine if internal controls are in place to ensure effective operation and mitigation of tasks. The audit helps ensure the objectives and organizational goals are met. |
| Informational Technology Audit | An IT internal audit evaluates information systems as well as underlying infrastructure to ensure processing accuracy and security of customer information and intellectual property. | IT audits assess general IT controls, system operations, change management, and backup and recovery. The auditor assesses automated processing systems and how they are used. |
What are the internal audit professional standards?
An internal audit must operate within the International Standards for the Professional Practice of Internal Auditing. These standards are established by the Institute of Internal Auditors or the IIA. These standards provide internal auditors with a roadmap they can use to plan and perform an internal audit. The standards include two different categories: performance and attribute standards. Attribute standards are related to the organization’s characteristics and the individual performing the internal audit. The Performance standards deal with the nature of the internal audit and the criteria used to evaluate the performance of the audit.
Is internal auditing a viable career path?
Yes, internal auditing is a sustainable and lucrative career path. The demand for qualified internal auditors is rising. The salaries for internal auditors are decent and after a few years of experience, it can pay well. Companies will continue to look for internal auditors who can help protect them from internal fraud.
What is the difference between an internal and an external audit?
There are numerous differences between internal and external audits. Both external and internal audits are important to businesses, and larger organizations will conduct both external and internal audits to ensure records, financial statements, and processes are examined closely. The differences include who conducts the audit. A company employee conducts internal audits; external audits are conducted by outside firms. An external audit must be directed by a CPA. The reports prepared during an internal audit are used by the company’s management. But the reports from an external audit are used by stakeholders. Internal auditors can report their findings using any format, but an external auditor must use specific formats for reporting.
