An internal audit can be defined as an independent evaluation of an organization to add more value to it and improve its operations. An internal audit helps organizations adapt a more sound approach, and fine-tune its progress to increase the effectiveness of corporate governance, control, and risk management. An internal audit makes all this possible by providing suggestions based on the analysis of business data and procedures. Professionals who are qualified for internal auditing are hired by organizations to analyze and refine all the procedures.
Internal auditors hired by organizations are not really independent of the organization, but organizational independence plays a key role in enabling the internal auditor to perform a more unbiased evaluation. An audit committee, which is usually a sub-committee of board of directors, provides the authority and independence to internal auditors and they can only be hired or replaced via an audit committee’s decisions. This allows the internal auditors to perform their role more effectively.
Role Of Internal Auditing
Internal audits are primarily directed at assessing internal control of the organization. The board of
directors, management, and other authoritative personnel are the creators of an organization’s internal control procedures, which is designed to achieve primary objectives for which most organizations aim. Some of the core objectives are:
- Acquiescence with rules, regulations and laws
- Conservation of assets
- Consistency and reporting of financial management
- Efficacy and efficiency of organizational operations
Internal auditors assess whether the following five critical management components are being used effectively to achieve the organizational goals mentioned above:
- Activities to monitor growth and profitability
- Communication and information procedures
- Risk evaluation
- Risk- focused managing activities
- The control environment
Execution Of Internal Audits
A typical and normal internal audit usually consists of the following steps:
- Create and convey the scope and purpose of the audit to the respective management authority
- Develop an understanding of the business under review, these normally include:
- Performance measurement techniques
- Review of all documents regarding organizational procedures and reporting
- Review of all the interviews
- The core transactions of the business
- Identify the major risks being faced by the business
3. Understand the currently used management practices to ensure each of the risk is adequately controlled and supervised. Internal auditors usually form a checklist to identify and evaluate usual risks in the organization or industry being audited
4. Execute a risk-oriented sampling process to evaluate the highly important management controls and that they are working as they should
5. Reporting the problems and challenges concluded to the management and negotiate action plans and procedures
6. Internal audit departments also maintain a follow up database to identify if the reviewed and refined procedures are working effectively
It is not necessary that an internal audit be performed in the same step-wise procedures as described above; therefore, the time and length of the audit depends on the nature of the processes and organization being audited.
Internal Audit Reporting
At the end of an audit, internal auditors usually summarize their findings, suggestions, and any other plans they have for the management. An audit should at least consist of adequate information on the 5 C’s:
The Condition – What are the issues identified?
The Criteria– What was the benchmark that wasn’t met because of the issue?
The Cause – Why did the organization face the issue?
The Consequence – What is negative result of the problem?
The Corrective action plan– What steps should the management adopt towards eliminating the problem at hand?
The recommendations and advice an internal auditor provides at the end of the report are aimed at fine-tuning the organizational processes or the corrective procedures which can be employed to optimize governance and risk control processes. It is important for the auditor to be aware of the organizational goals and objectives, and the approach should be parallel to the company’s.
How To Know If The Audit Report Is Beneficial?
Simplicity– The technical language used and the terms should be expressed in clear, simple, and straight forward words.
Precision– The information used in the audit and the results should be precise and accurate.
Objectivity– The suggestions, opinions, and observations in the audit should be completely impartial and objective.
Deadlines– The audit report should be presented immediately after the auditor successfully analyzes the information, and it should be presented within the time constraints provided.
Concise– The end report should be concise, brief, and to-the-point.
Benefits Of An Internal Audit
An internal auditor can provide an organization with independent assurance on a wide array of tasks. Their abilities aren’t only limited to tuning financial management procedures.
Most importantly, an internal audit can help identify the risks an organization is exposed to due to their existing management procedures. This not only helps strengthen the management processes but enables the organization to achieve its goals and objectives of profitability and other benchmarks more effectively.