Internal Audit- Defination, Objective, Types, Process
What is Internal Audit
Internal Audit is an organisation or department of people within a certain company tasked to provide unbiased, business organisations, independent reviews of system and processes. Internal audit within a company directly performs audit by staying within the management and use the company standards with in-house resources. Internal Audit is quite different than a statutory audit. The purpose of internal audit is to provide an objective source of information to the senior leaders or government bodies. These include the organisation’s risks, operational effectiveness, control environment and compliance with rules and regulations and applicable laws. Each of the individuals working for internal audit is called internal auditors.
Objectives of Internal Audit
Some of the objectives of internal audit are:
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Proper Control: To keep proper control over the organisation is one of the main objectives of internal audit. The authenticity of the financial records and the efficiency of the firm have to be maintained and the management needs proper assurance. The internal audit helps to establish both.
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Perfect Accounting System: The accounting system of the organisation is thoroughly checked by an internal audit. From vouchers to the authority of transactions to accuracy in mathematics all serve the purpose of internal audit. All entries are verified so that chance of mistakes or frauds can be reduced.
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Review of Business: The financial and operational aspects of a business is to be checked by the internal audit. Internal audit process checks out the mistakes, strengths and weaknesses in the business.
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Asset Protection: Internal audit process performs the valuation and verification of an asset. In case of any special transactions like purchase, sale or revaluation of asset, the authorization is audited particularly by internal audit.
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Keeps a Check on Errors: There will be mistakes in financial records and is checked at the end of a financial year. But with internal audit, the mistakes are spotted and rectified immediately.
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Detection of Fraud: This is another main purpose of internal audit. In fact, internal audit is helpful to the organisation because due to its presence, an employee is less likely to do any fraudulence activity. There will be no time in making fraud and how the internal audit process will run and so this will end up committing less fraud in an organisation.
Types of Internal Audit
Some types of internal audit are:
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Operational Audit: The efficiency and effectiveness of a particular department in an organisation is evaluated by the operational audit. Some areas of the operational audit are organizational structure, the accuracy of data, processes and procedures, management and security of staffing, assets and productivity.
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Environmental Audit: The impact of the operations of a company on the environment is assessed by environmental audits. Assessment of company’s compliance with certain environmental laws and regulations is also maintained.
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Compliance Audit: Evaluation of compliance with applicable laws, policies, regulations and procedures. Failure to comply with laws like the Foreign Corrupt Practices Act (FCPA), General Data Protection Regulation (GDPA), may result in fines with a huge amount or may even prevent a company from doing further business.
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Financial Audit: A financial audit is historically oriented and independent evaluation process performed to maintain fairness, accuracy and reliability of financial data. The objective is to ensure that the financial activity of a unit or area or department is accurately reflected in the financial reports.
Internal vs External Audits: How are They Different?
Internal audits and external audits are quite different, both in terms of their objectives and procedures. The main difference is that internal audits are not regulated and can, therefore, be applied more flexibly. Internal audits may be used to highlight information that is helpful to a company seeking ways to increase information security, manage other risks more effectively and guarantee compliance.
Why Do Organizations Have Internal Audit?
When the Sarbanes-Oxley Act of 2002 was passed, it made executives of publicly traded companies legally responsible for the accuracy of its financial statements and the internal controls over financial reporting. Internal Audit functions play a critical role in helping executives to reach their conclusions. Also, Internal Audit efforts to identify breakdowns in internal controls helps safeguard against potential fraud, waste or abuse, and ensure compliance with laws and regulations.
What Value does Internal Audit Provide to an Organization?
Technically, Internal Audit is a cost centre in a company—it does not generate revenue. However, a good internal audit function can be profoundly important to the survival and prosperity of any organization. Unlike external auditors, internal auditors look beyond financial statement reporting risk to consider broader issues such as the organization’s reputation, operational efficiency, strategic growth, its impact on the environment, and the way it treats its employees.
What is the Internal Audit Procedure?
An internal audit should have four general phases of activities—Planning, Fieldwork, Reporting, and Follow-up. The following provides a brief synopsis of each phase.
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Planning – During the planning process, the internal audit team will define the scope and objectives, review guidance relevant to audit (e.g., laws, regulations, industry standards, company policies and procedures, etc.), review the results from previous audits, set a timeline and budget for the audit, create an audit plan to be executed, identify the process owners to involve, and schedule a kick-off meeting to commence the audit.
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Fieldwork – Fieldwork is the actual act of auditing. Throughout this phase, the audit team will execute the audit plan. This usually includes interviewing key personnel to confirm an understanding of the process and controls, reviewing relevant documents and artifacts for an example execution of the controls, testing the controls for a sample over a period of time, documenting the work performed, and identifying exceptions and recommendations.
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Reporting – As you might guess, internal audit will draft the audit report during the reporting phase. The report should be written clearly and succinctly to avoid misinterpretation and to encourage the intended audience to actually read and understand the report. Findings should be accompanied by recommendations that are actionable and lead directly to process improvements. The process of issuing an internal audit report should include drafting the report, review the draft with management to ensure the accuracy of findings, and issuance and distribution of the final report.
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Follow-up – The final stage is an important one that is often overlooked and neglected. Following up is critical to ensure that the recommendations have been implemented to address the findings identified. This process should include appropriate follow-up with process owners needing to implement the recommendations as well as Board oversight of the company’s overall status in addressing findings identified by internal audit. If an organization fails to follow-up on the implementation of recommendations, it is unlikely that the changes will be made.
DISCLAIMER- These materials are public information and have been prepared solely for educational purposes. These materials reflect only the personal views of the author and are not individual legal advice.
It is understood that each case is fact specific and that the appropriate solution in any case will vary. Finally, the owner will not be accountable for any loses injuries or damages from the exposures or usage of this information
