What is the Process of an Internal Audit?

Mar 2020

The words “internal audit” often invoke a sense of frustration, fear, and time consumption. Even in the best conditions, most would find having someone evaluate their activities intimating or unsettling. For company management, an audit is a great time to reflect and ask the following questions –

  1. Are we making development towards our compliance goals?
  2. Is risk being managed efficiently? Are policies and procedures being applied correctly?
  3. Could they be improved?

What is an Internal Audit?

Internal Audit is a department or an organisation of people within an organisation that is tasked with providing independent, and unbiased reviews of systems, organisation, and processes. The role of an internal audit is to provide senior leaders and governing bodies of an organisation an objective source of information regarding the organisation’s risks, operational effectiveness, control environment, and compliance with applicable laws and guidelines.

Process of an Internal Audit

Although every project of an audit is unique, the process of examination is similar to for most engagements and consists typically of a few simple steps. One of the key objectives of this process is to minimise this time and avoid disrupting ongoing activities. Before that, there are a few audit tools that will be required to perform an internal audit. They are –

Let us now get to the steps of the internal audit process.

1.Identify Areas that Need Auditing

Identify the departments that operate by using policies and guidelines written by the organisation or by regulatory agencies. This can include areas as complicated manufacturing procedure or as simplistic as accounting procedure. Make a list of each region and the functions of the area that needs review.

2.Determine What and When to Audit

Some regions may only need to be audited yearly while some departments may need more frequent audits. For example, – the process of manufacturing may need daily audits for quality control purposes while the HR function may only require a yearly review of records and procedures.

3.Create an Audit Calendar

Forming an audit schedule provides the sections with advanced notice of the forthcoming audit. The program will help them have the essential documentation and records available for review and audit. A structured and systematic method to the auditing process can help ensure the function gets completed.

4.Alert the Departments of Scheduled Audits

It is merely a common courtesy to give the departments notice of an audit so they can have necessary documents and materials ready and available for a reviewer. A surprise audit should only be done if there is a feeling of immoral or illegal activity.

5.Be Ready

The auditor should come ready with an understanding of policies and guidelines and a list of items that will be reviewed. For example, – An HR audit may focus on employee files and 1-9 acquiescence. The more prepared the auditor is the more well-organized the procedure will be, and the less downtime there will be for the area being reviewed.

6.Interview Operators

The auditor should talk to the employees and ask them to explain their work procedure. Compare the process, as the employee told it, to what the written rule says. This step is to gain an understanding of employee capability and identify areas that need added training.

7.Document Reports

Document the results and any difference in practice to how the policies are written, when the procedures are fulfilled with and when they are not. This may also include other information that is collected from the interview procedure. Again, the goal is to recognise gaps in compliance and to figure out a way to bridge that gap.

8.Report the Findings

Create an easy to read audit information. These reports should be revised with senior management, and an upgrading plan should be developed for areas that have gaps in practice compliance. These reports should be reviewed and approved by the department manager / top management.

Organisations are only as successful as their capability to create products and services that meet the requirements of their clientele and to deliver these products and services accurately, seamlessly and without error.

JAXA Chartered Accountants can help you with the internal auditing of your organisation. Contact us today, and we will let you know more.