internal audit

Internal audit is an independent, objective assurance and consulting activity designed to feature value and improve an organization’s operations. It helps a company accomplish its objectives by bringing a scientific, disciplined approach to appraise and improve the effectiveness of risk management, control, and governance processes.

Why Do Organizations Have Internal Audit?

When the Sarbanes-Oxley Act of 2002 was passed, it made executives of publicly traded companies legally liable for the accuracy of its financial statements and also the internal controls over financial reporting. Internal Audit functions play a critical role in helping executives to achieve their conclusions. Also, Internal Audit efforts to detect breakdowns in internal controls helps safeguard against potential fraud, waste or abuse, and ensure compliance with laws and regulations.

Why it’s important

  • Improves the control environment of a company
  • Identifies redundancies within the operations and provides recommendations for improvement in them
  • Increasing financial reliability and integrity by reducing the chances of fraud
  • Makes the entity process-dependent rather than of person-dependent
  • Increases accountability within the business entity
  • Helps in better planning regarding the short- and long-term policies of the business
  • Secures the business from being non-compliant with the regulatory framework

Types of Internal Audits

Internal auditing has historically been synonymous with the performance of financial audits, which seek to confirm a company is using generally accepted accounting procedures (GAAP)/ International Accounting Standard (IAS) to make and manage financial information through the review of financial statements. Businesses also recognize the necessity for other varieties of auditing that look beyond ledgers and balance sheets with relevance to legal compliance, IT security, environmental, operational, and performance oversight objectives:

Compliance Audits are accustomed to evaluate an organization’s compliance with applicable laws, regulations, policies, and procedures.

Environmental Audits identify the impact of a company’s activities on the environment and determine whether the corporate is complying with environmental laws and regulations.

Information Technology Audits to judge the systems they are in situ to protect an organization’s information. Specifically, information audits are accustomed to evaluate the organization’s ability to guard their information assets and to accurately communicate information to authorized parties.

Performance Audits assess whether a company is meeting the goals and objectives set forth by the board of directors. If the organization isn’t meeting its stated goals, the internal auditor will identify process shortfalls and make suggestions for improvement to the board of directors.

Operational Audits measure the overall effectiveness and consistency of an organization’s control mechanisms. A necessary component of operational auditing is that the objective review of the way a company allocates resources. If resources don’t seem to be being employed efficiently, the internal auditor will report these findings accompanying recommendations on a way to reduce wasteful or inefficient resource allocation.

What do internal auditors do?

Internal auditors have a knowledgeable duty to deliver an unbiased and objective view. They need to be independent of the operations they evaluate and report back to the uppermost level in an organization: senior managers and governors. Typically, this is often the board of directors or the board of trustees, the accounting officer, or the audit committee.

To be effective, the internal audit activity must have qualified, skilled and experienced folks that can add accordance with the Code of Ethics and also the International Standards.

What activities internal audit conducts?

The role of the internal auditor has expanded in recent years as internal auditors seek to oversee all aspects (not just accounting) of organizations and add value to their employers. The work of the internal auditor remains prescribed by management, but it’s going to cover the subsequent broad areas.

  1. Review of the accounting and control systems. The establishment of adequate accounting and control systems may be a responsibility of management and also the directors. Internal audit is usually assigned specific responsibility for the subsequent tasks.
    1. Reviewing the plan of the systems
    2. Monitoring the effectiveness of the operation of the systems by risk assessment and detailed testing
  • Recommending cost-effective improvements Review will cover both financial and non-financial controls
  1. Examination of financial and operating information. This might include a review of the means accustomed to identify, measure, classify, and report such information and specific inquiry into individual items including detailed testing of transactions, balances, and procedures.
  2. Review of the economy, efficiency, and effectiveness of operations.
  3. Review of compliance with laws, regulations, and other external requirements, with internal policies and directives, and with other requirements including appropriate authorization of transactions.
  4. Review of the safeguarding of assets. Are valuable, portable items like computers or cash secured, is authorization needed for dealing in investments?
  5. Review of the implementation of corporate objectives. This includes a review of the effectiveness of arrangement, the relevance of standards and policies, the organization’s corporate governance procedures, and also the operation of specific procedures like communication of data.
  6. Identification of important business and financial risks, monitoring the organization’s overall risk management policy to confirm it operates effectively and monitoring the risk management strategies to confirm they remain to operate effectively.
  7. Special investigations into particular areas, for instance, suspected fraud.

How Long Does an Internal Audit Take?

Internal Audit may take up to some weeks, dependent on the scope of the audit and also the size of the corporate, or department, being assessed. Before it’s concluded, an audit includes a consultation with the director or board that hired them to deliberate how their suggestions for improvement can best be implemented.

Quality control and internal auditing

Whatever the criteria accustomed judge effectiveness; quality control procedures are required to observe the professional standards of internal audit. Internal audit departments should establish and monitor quality control policies and procedures designed to make sure that each one audits are conducted in accordance with internal standards.

They should communicate those policies and procedures to their personnel in an exceeding manner designed to deliver reasonable assurance that the policies and procedures are understood and implemented. Quality control policies will vary counting on factors like the following. x the nature and size of the department x Organisation x Geographic dispersion x Cost-benefit considerations Policies and procedures and related documentation will, therefore, vary from company to company.

The Institute of Internal Auditors has suggested that a proper system of quality assurance should be implemented within the internal audit department. This could cover the department’s compliance with appropriate standards, encompassing quality, independence, the scope of work, the performance of audit work, and the management of the internal audit department.

Annual review of internal audit

The board or audit committee should conduct an annual review of the internal auditors’ work

Quality of internal audit report

  • Objectivity – The comments and opinions expressed within the report should be objective and unbiased.
  • Clarity –The language used should be simple and forthright.
  • Accuracy –The data contained within the report should be accurate.
  • Brevity –The report should be concise.
  • Timeliness –The report should be released promptly immediately after the audit is concluded, within a month.

What’s The difference between internal and external audit?

While sharing some characteristics, internal and external audits have very different objectives. These are explained within the table below:

External auditInternal audit
Reports toShareholders or members who are outside the organization’s governance structure.The board and senior management are within the organization’s governance structure.
ObjectivesAdd credibility and reliability to financial reports from the organization to its stakeholders by giving an opinion on the reportEvaluate and improve the effectiveness of governance, risk management, and control processes.  This provides members of the boards and senior management with assurance that helps them fulfill their duties to the organization and its stakeholders.
CoverageFinancial reports, financial reporting risks.All categories of risk, their management, including reporting on them.
Responsibility for improvementNone, however, there’s an obligation to report problems.Improvement is key to the aim of internal auditing. But it’s done by advising, coaching, and facilitating so as to not undermine the responsibility of management.

 

Advantages of Internal Audits

  1. The major advantage of internal audit is that it’ll result in the discovery of errors and thus when the external audit has completed those errors which were discovered during internal audit would have been rectified by then.
  2. Internal audit reduces the probabilities of frauds because top management cannot look after all things and lots of times top management isn’t competent enough to appear into minute details of accounts whereas internal audit is dole out by professionals and that they are able to learn quickly where are the loopholes in company’s accounts and policies.
  3. As an internal audit is a constant procedure where records are checked regularly it ensures that the accounting staff of an organization keep the records up so far and are always vigilant.

Disadvantages of Internal Audits

  1. Internal audits aren’t full proof within the sense that it cannot eliminate or catch all the frauds and thus some chances of fraud happening even after an internal audit is completed are usually there.
  2. Since the internal audit is performed by the professionals who are outsiders’ likelihood is, they have little or zero attachment towards the corporate and hence they’re going do copulate the work for money instead for betterment of the company.
  3. Internal audit reports aren’t accepted by shareholders and thus it’s for only management use and the company should conduct external audit no matter fact whether it regulates internal audit or not, therefore it ends up in additional costs for the corporate for hiring internal auditors.

Outsourcing the internal audit function

In common with other areas of a company’s operations, the administrators may consider that outsourcing the internal audit function represents better value than an in-house provision. Company management and employees are under particular pressure to make sure that every service represent ‘best value’ and this might prompt them to choose to adopt a competitive tender approach

Advantages of outsourcing

  • Greater concentration on the cost and efficiency of the internal audit function.
  • The staff could also be drawn from a broader range of experience
  • The risk of staff turnover is passed to the outsourcing firm.
  • Specialist skills could also be more readily available.
  • Costs of employing permanent staff are avoided.