The internal audit usually brings a sense of frustration, fear, and time consumption. Regardless of the situation, most people find having another person review their activities quite intimidating or unsettling. But understanding the role of an internal audit, knowing potential pitfalls you can avoid, and knowing what you can expect from an internal audit can assist to put you at ease and even make it a valuable and more pleasant experience. An internal auditor needs to conduct an internal audit of your company to make sure that the compliance issues and processes are working effectively.
An internal auditor is a professional who is trained according to the set standards of the institute of internal auditors. Your organization’s management can hire internal auditors to do internal audits for hospitals or any other entity, but they usually report directly to the board of directors’ audit committee. Ideally, internal auditors are hired to show the management, board, and employees how your organization can operate more effectively. In this article, you will learn about the basics of an internal audit.
Understanding internal audits
An internal audit can evaluate the internal controls of your company, such as accounting and corporate governance processes. They offer the audit committee and management unbiased assurance about the operation and design of your organization’s risk, governance, and compliance program. Also, it can provide whether or not the program is functioning properly throughout your business.
You need to do internal audits because they can identify and correct issues before these problems are discovered when doing an external audit. Unfortunately, this can be the time when it can be more expensive to fix the problems. Regular internal audits can also help your company to evaluate and enhance the effectiveness of risk management, governance, and control processes.
You should establish an integrated and disciplined approach to policies, regulations, controls, risks, and issues so that your company can show that it has a good grasp on its regulatory compliance regulations as well as provide transparency into the whole business risks.
Keep in mind that an internal audit can be an organization or internal department within your company that is responsible for offering independent and unbiased reviews of systems, processes, and business organizations. The internal audit department can offer senior management and governing body of your organization objective sources of information regarding the organization’s risks, compliance with relevant laws and regulations, operational effectiveness, and control environment. It’s worth mentioning that your company can also outsource internal audit services.
Because internal audit reports to senior management, its activities need to be managed by the board of directors via its audit committee or the CEO. Members of the internal audit committee need to be independent of internal politics as well as unbiased so that they can offer the leadership an objective source of information. Internal audits with the direction of the audit committee can work with management to review control activities of critical processes and systems.
The reviews that are done by the internal audit are usually known as internal audits. Therefore, an internal audit can be utilized to assess your company’s performance or even the execution of a certain process against several policies, standards, regulations, and metrics.
These metrics can include checking internal controls of your business associated with corporate governance, financial reporting, accounting, and IT general controls. An internal audit can also involve evaluating the efficiency or effectiveness of critical operations of your business operations like supply chain management. The people who work in internal audit are known as internal auditors and they can cover most areas of your company or specialize depending on their skill sets.
Simply put, the purpose of an internal audit is to identify some weaknesses in your company’s processes so that they can be remedied right away to prevent harming your stakeholders or your business. Therefore, an internal audit plan for your company needs to consider the risk. In other words, it should be designed to check the areas that pose the greatest risk to your company. Also, the internal audit should have a strategic need for your company. Likewise, each internal audit purpose has to be aligned with your audit plan.
You should note that there is a difference between external and internal audits. An internal audit can be done by employees of an organization. But your company can also decide to outsource this activity to an external entity, especially if you don’t have the manpower or the competency of doing it. On the other hand, an external audit is usually done by an auditing firm with external auditors. The auditing firm needs to be independent of your company to maintain objectivity. Internal audits usually report to members of management or the board of directors while external audits report to members outside of the company and shareholders.
As explained earlier, an internal audit focuses on internal controls associated with governance, compliance, process improvement, and risk management. An external audit looks at financial reports as well as internal controls associated with financial reporting.
Internal auditors report
Internal auditors can generate a report that summarizes the audits done and the associated outcome as they are completed. In most cases, there is usually no standard location where you can store these audit reports. But internal audit can often report internal audit results to senior management who have oversight responsibilities as the audit is completed. Remember that internal audits can also report their activities, such as significant findings to an audit committee.
With external auditors, they usually submit their reports at the end of an external audit and they don’t have to formally present the results in person. But if they have to submit the results of their evaluation, they can do it in the audit committee meeting of your company.
There is a huge difference between an external and an internal audit. Both of them check whether the company is performing some activities or controls appropriately. But internal audit results are often reported in-house and external audit results are reported to some people both outside and inside of your company. It makes sense for your company to utilize the internal audit results to identify its weaknesses and strengthen or correct them before the external audit where the results can be shared with the public.
Considerations when doing an internal audit
Several circumstances can demand an internal audit to be done. For instance, your business may need to create a solution to a specific problem area or wants to verify that a crucial business process is performing as it should. Also, you may just want to understand why and how an activity operates or happens.
There are many benefits of an internal audit. You can define the scope of the internal audit yourself instead of having an outside party tell you the scope for you. And, internal audit reports can also come directly to you instead of the regulators or some people outside your company. An internal audit acts as an early warning system and recommends the required steps to improve the effectiveness or efficiency of your procedures before doing an external audit.
Many large companies usually do internal audits regularly. Small or private businesses can also establish an internal audit to improve organizational governance, though it’s not mandatory.
Compliance is usually referred to as the process that requires your company to adhere to obligations derived from applicable regulations, laws, industry and organization standards, values, corporate commitments, sanctions, corporate policies and procedures, and ethics.
The compliance function is designed to make sure that your company complies with these requirements, but the internal audit function is supposed to monitor and evaluate the company’s internal control environment as well as check its efficiency, adequacy, and effectiveness.
Internal auditing and compliance need to work together so that your senior management can understand how much your company is or is not meeting the required performance expectations. This understanding can help to drive good use of resources, lower undesirable outcomes, and offer the business a better chance to meet the business objectives.
Internal auditing and compliance can be more effective when you use them together. This includes tasks like joint coordination and planning of risk assessment efforts and shared involvement in compliance-related task forces, committees, and other working groups.
Remember that the compliance function often depends on internal audits to do regulatory audits. But compliance risks are just part of the risk that an internal auditor can monitor to check the effectiveness of your company’s risk management process. Your compliance officer can recommend an internal audit plan, but compliance should be a management function that also has to be audited by an internal auditor.
Each function can play a crucial role when it comes to the risk management activities of your company. And, risk assessment is an important analytical tool you can utilize to identify and assess the chances of potential danger.
Hence, compliance and internal audit should work together. Both of them must be guided by overarching principles and you need to execute them via repeatable processes. Besides, they also must consider governance issues so that they can be a component of your company’s governance structure.
