Internal Audit is the process of evaluating a company’s internal controls, including its accounting processes and corporate governance. The internal audit report ensures that the company complies with state regulations and laws and maintains timely financial reporting. Operational efficiency is possible with Internal Audit as problems are identified and corrected before External Audit discovers them.
What is the Need for an Internal Audit?
The Internal Audit consists of 3 phases:
1. Planning
This is the beginning of the Audit and performed by the Audit Team with the following activities:
- Distribution of Notification of Audit
- Conduct Pre-Audit Meetings
- Interview Department Personnel
- Review Company Policies and Procedures
- Understand and Document the process of Business
- Do Risk Assessment
- Prepare Audit Program
- Prepare Audit Budget
- Select items that will be subjected to Audit
2. Fieldwork
Is the second phase, where the audit team will be physically on-site for the following:
- Review Supporting Documents
- Conduct Interviews with Department Personnel
- Perform analyses, and determine exemptions
- Identify recommendations for improvement
- Prepare the report on the findings
- Department writes a response and plans corrective actions.
3. Reporting
In the 3rd phase, the auditor in charge will write the Audit Report and communicates the Audit Results.
- Issue a draft report before discussing it with the unit management
- Issue factual, clear, and concise Final Report
- Distribution of report to Higher Management, External Auditors, and Audit sub-committee
Importance of Internal Audit to a Company
The Internal Audit is aimed to provide an accurate and intuitive understanding of a company’s culture, policies, and procedures, by demonstrating that internal controls are operating effectively, with risk mitigation control and compliance with relevant laws.
These are the reasons why an Internal Audit is essential to a company:
1. Provide objective insight
This means that the Audit is done objectively, and findings are based on factual evidence, not personal opinions.
2. Improved efficiency of operations
Continuously monitoring and reviewing company policies and processes through Internal Audit assures that the procedures are followed religiously.
3. Evaluate risks and protects assets
Internal Audits can identify risks and help create a strategy to prepare for and lessen the effects of threats faced by an organisation.
4. Assess organisational control
Internal Audit evaluates the process by which the managers direct attention, motivate, and encourage employees to help meet the company’s objectives.
5. Ensure compliance with relevant laws and regulations
It gives you peace of mind knowing that you are ready for your next External Audit.
6. Decide the Extent of Audit
The internal audit report will provide the current effectiveness of various systems in the company which will help the auditor in determining the organization’s status of efficiency of the internal audit. It will also help find the various loopholes and bottlenecks in the business and will provide the management with a way to address these problems.
7. Detection of Frauds
Regular internal audits assess an organization’s controls and help expose evidence of frauds, wastage of resources, or abuse of power in the company. The occurrence of internal audits will depend on the department or procedure being examined. For example – in the manufacturing department, daily audits may be required, while for human resources, an annual review may be sufficient.
