What Is an Internal Audit and What Are Its Primary Objectives?
By Indeed Editorial Team
Published 30 August 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
An internal audit advises upper management on how to best manage an organisation's risks and goals. It can help a company improve business operations and efficiency. Understanding what an internal audit is can help you determine if this career is right for you. In this article, we answer the question, "What is an internal audit?", find out more about the role of an internal audit, learn what its primary objectives are and explore its different types.
What is an internal audit?
An internal audit evaluates an organisation's internal controls, including its accounting processes and corporate governance. These audits can ensure compliance with regulations or laws and can help maintain timely and accurate data collection and financial reporting. An internal audit can also provide a company's management with the tools necessary to achieve operational efficiency by identifying issues and correcting them before an external audit discovers them.
Related: How To Become an Internal Auditor
What is the role of an internal audit?
Internal audit handles issues that are fundamentally important to the growth or survival of any company. Unlike an external audit, an internal audit looks beyond financial statements and risks to consider wider problems, such as the company's growth, reputation, how the company affects the environment and how it treats its employees.
In general, an internal audit helps companies to succeed. Internal auditors do this through a combination of consulting and assurance. The assurance part of their work involves telling managers how well the processes and systems designed to keep the company on track are working. Then, they offer consulting services to improve those processes and systems where necessary.
What are the primary objectives of an internal audit?
Here are the primary objectives of an internal audit:
1. Keep stringent control
One of the primary objectives of an internal audit is to keep rigid control over all the activities of a company. A company's management needs assurance of the veracity and authenticity of the financial documents and the efficiency of the company's operations. An internal audit can help establish both.
2. Improve accounting system
An internal audit thoroughly checks a company's accounting system. It reviews everything from vouchers and the mathematical accuracy to the authority of transactions. It verifies all entries against documents and other pieces of evidence, significantly reducing the chances of fraud or mistakes.
3. Review operations and financial aspects
Another objective of an internal audit is to carefully review the operations and financial aspects of a company. Thus, as the current financial year is ongoing, an internal audit can determine the strengths, weaknesses and mistakes of the company. This allows an ongoing review, rather than waiting until the year ends.
4. Protect assets
During the process of an internal audit, there's always a verification and valuation of assets. There's also a physical verification of the possession and ownership of the assets. In addition, an internal audit verifies the authorisation of special transactions like the purchase, sale or revaluation of the assets. Thus, the company benefits from complete protection of assets.
5. Identify errors
In a financial audit, internal auditors can check if there are any mistakes in the financial records. However, this typically happens at the end of the financial year, and financial auditors correct the mistakes thereafter. In the case of an internal audit, however, internal auditors discover a mistake as soon as it's made and they correct it immediately.
6. Detect fraud
If an organisation has an internal audit in place, it can detect fraud much easier. This is because it checks employees year-round. Employees are less likely to commit fraud in the presence of an internal auditor. An internal audit can reduce or eliminate the time gap between the commitment of fraud and its detection to cover it up, thereby dissuading employees from committing fraud.
Types of internal audits
An internal audit has the fundamental purpose of optimising a company's risk exposure. Risk exposure refers to the degree of risk a company may experience based on the likelihood or probability of any risk event. There are several types of risk that may require different types of internal audits. Here are some of the most common types of internal audits:
An operational audit evaluates a company's operating activities, both on a broader scale and on a day-to-day level. Although other types of internal audits may look only at one department or the organisation's finances, an operational audit delves deeper. It assesses all of the internal processes and departments that make up a company's operations. Whereas a regular audit assesses financial statements, an operational audit evaluates how an organisation conducts its business, with the goal of improving overall effectiveness.
A compliance audit ensures a company's adherence to regulatory guidelines. This type of internal audit assesses the comprehensiveness and strengths of a company's compliance preparations, risk management procedures, user access controls and security policy. Common types of compliance audits include cybersecurity, operation, financial and technical audits.
A management audit, also known as a performance audit, is an internal consulting project. Since an internal audit is an activity independent of a company's management, it's usually a good resource to provide objective and independent insight into the efficiency of business processes. A company's management can request an internal auditor to assess a business strategy or process and the internal auditor doesn't have to worry about backlash from the management. This can be a great advantage for a company's management, as the auditor may be more forthcoming with valuable information.
Examples of management audits may include an evaluation of the inventory management process, such as how a company forecasts, stores and moves inventory. Another common management audit is an evaluation of the organisational structure, such as having an internal auditor check how a company divides administrative work among departments and if there are opportunities to be more efficient.
A social audit is a review of an organisation's procedures, endeavours and code of conduct regarding social responsibility and the organisation's impact on society. It can help a company determine if it's meeting its objectives, which can include measurable benchmarks and goals. A social audit can serve as a way for an organisation to determine if its actions are being negatively or positively received. The results can help them improve their overall public image.
An environmental audit assesses the amount of risk of injury or harm that a company may pose. It also determines the types of pollution a company produces by looking at a broad range of procedures, activities and locations. Here are some of the benefits of an environmental audit:
Waste reduction opportunities
Reduced company penalties and enforcement actions
Improved community image
A performance audit examines the effectiveness of a programme or company. Once internal editors complete a performance audit, they deliver their findings to the management of the specific programme or organisation. The goal is for them to use these findings to implement any changes to enhance or improve processes that can help them attain stated goals. Typically, internal auditors conduct a follow-up performance to assess whether a company's management has implemented any of the audit findings and if there have been any developments or improvements by doing so.
What is the internal audit process?
An internal audit usually has four general phases of activities. These include planning, fieldwork, reporting and follow-up. Here's an overview of each phase:
In this phase, the internal auditors define their objectives. This may involve activities including:
Consulting regulations, industry standards and laws
Setting a budget and timeline for the audit
Reviewing the results from the previous audits
Identifying the process owners to involve
Developing an audit plan
Scheduling a meeting to begin the audit
Fieldwork refers to the actual act of auditing. In this phase, the internal auditors execute the audit plan. This typically includes reviewing relevant documents and interviewing key personnel. It may also involve testing the controls, documenting the work performed and identifying recommendations and exceptions.
During the reporting phase, the internal auditors draft the audit report. They create the report clearly and succinctly to avoid misunderstandings and to encourage the target audience to review the report. The findings usually come with recommendations that are actionable and may result in process improvements. The process of providing an internal audit report typically includes drafting the report, reviewing the draft with management and issuing or distributing the final report.
The follow-up phase is critical to ensure that the company implemented the recommendations an auditor outlined in the report and addressed the findings. This process usually includes appropriate follow-up actions with process owners to ensure they implement the recommendations correctly. It also involves board oversight of the organisation's overall status in addressing findings that the internal audit identified.
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