Internal Audit

Effective Steps of Performing an Internal Audit Successfully

Nowadays, businesses operate in a fast, competitive and ever-changing environment. Their success is based on the ability of adapting to environmental changes, fulfilling organizational objectives and managing risks due to the ever-evolving business landscape. There is an increased interest towards internal audits among companies due to their ability of business risk management and providing assurance regarding the same. The objectivity, perspective, and skills of internal audit can assist stakeholders and provide them valuable insight into the business, which can be achieved only when such an audit is performed in the right manner. The present article discusses the effective steps of performing an internal audit successfully to ensure that the same is performed seamlessly.

What is an Internal Audit?

Internal audit refers to an independent management function involving a continuous and critical appraisal of the functioning of an entity for the purpose of suggesting improvements thereto and adding value to and strengthening the overall governance mechanism of the entity, inclusive of the entity’s strategic risk management and internal control system.

Who conducts an Internal Audit?

An Internal Audit is conducted by an internal Auditor who can be an individual, a partnership firm or a corporate body, a CA or Cost Accountant (whether in practice or not) or another professional appointed by the board for conducting such audit and the functions and activities of the company.

Benefits of Internal Audit

Conducting an internal audit can entail the following benefits to the organisation.

Proper Accounting Systems:

Internal audits introduce an appropriate system of accounting which consists of a chain of activities in a company by which transactions are processed in for maintaining financial records. To achieve desirable results, there is a need for orderly devices that can be achieved through internal auditing.

Better Management:

Such an audit ensures better management of the business in the organization as an auditor does a thorough evaluation and points out the areas of weakness in the management. The business objectives can be easily achieved if there is proper internal control, internal check and internal audit. It is worth noting that the management has the option to rely on internal audits for obtaining the best results.

Review of the Business’s Progress

The business progress can be reviewed through an internal audit by comparing the figures from the previous years with the current year. The performance result of numerous other similar companies can be considered and compared for determining the progress of the entity. This audit also helps the management to review the growth of the entity.

Effective Control

An internal audit is essential for retaining effective control over the activities of the business. Control falls under the functions of management and relates to supervising and directing ongoing operations. The concerned manager can make the required changes as per this audit and remove the difficulties for the smooth functioning of a business.

Protection of Assets

The protection of assets is possible with the help of an internal audit. The management has the option of only using the assets for the benefit of the business rather than private purposes. Internal auditing keeps a check on embezzlement of cash, misappropriate use of stock and misuse of other assets.

Division of Work

An internal audit can be conducted for applying the division of labour^[1], which is essential to monitor the activities of every employee, including the members of the management. The ways and means for the improved performance of the business can be suggested by the auditor.

Prevention of Error and Fraud

Internal audits can be conducted to protect accounting records from errors and fraud. Accounting and auditing in a company be conducted simultaneously, as the latter begins when the former is completed. In such situations, the mistakes and deceptions committed by accounting personnel would be detected and rectified easily.

Fixing Responsibility

Such audits can set the responsibilities of employees with poor performance as the management can establish performance standards, and the evaluation of the same can be done by an internal auditor. This way, the concerned individuals can be held responsible for their work that does not meet the standards of the company, and appropriate changes could be taken.

Helps External Auditing

The internal audit conducted by the internal auditor can help the external auditor in conducting the audit due to the similar nature of both audits. However, an external auditor would be responsible for an external audit even despite choosing to examine the internal audit report.

Improved Performance of Business

An internal auditor can help in improving the performance of the organization. The budget of the company can be prepared based on its achievements in the previous year through the income statements and balance sheets. Therefore, an internal audit improves the performance of a business and its employees.

Proper Use of Resources

The maintenance and the appropriate use of resources are possible through an internal audit. The misuse of resources would undoubtedly lead to higher costs for the organization. The optimum use of resources in a company could be determined with the control of the cost of output. Internal audits can be considered as a tool to use the resources of a company in the best interests of the business.

Investigation

Investigation of various matters of the business is also facilitated by an internal audit. In doubtful situations, the internal auditor can be given the responsibility of examining the facts and figures to confirm the relevant information. Such investigations can be carried on at the request of the management of the company.

What are the effective steps to perform an Internal Audit Successfully?

The above-mentioned benefits can only be experienced only if the internal audit is conducted successfully, which can be done by following the below-mentioned steps.

Identification of the Areas that require Internal Audit

The first step towards successfully performing this audit is identifying the areas, i.e. the operational departments, which require such audit with the help of policies and procedures as written by the organization or regulatory agencies. These can include activities as complex as manufacturing processes or as simple as accounting procedures. A list of all the activities and functions that require review must be prepared to facilitate the same.

Determination of the frequency of Auditing

After identifying the key areas, it is essential to determine the frequency of conducting such audits, depending upon the areas, as some of them may require an audit every few years, while other departments might require audits annually or even more frequently. For instance, the HR function might only need an annual audit of records and processes, whereas a manufacturing process might require daily audits for quality control purposes.

Creation of an Audit Calendar

Creating an audit calendar can provide a structured and systematic approach to the auditing process, thereby assuring that the function lives up to its full potential. Internal Audits should be integrated into corporate objectives, like any other business goal, and the creation of an audit calendar can ensure consistency.

Notifying the Departments of Scheduled Audits

The departments must be notified of an audit well in advance to provide the required time for the preparation of the required documents and materials for the auditor. A surprise audit should be conducted only if there is a suspicion of unethical or illegal activity, and department managers shouldn’t feel threatened by an auditor.

Thorough Preparation

An auditor must come prepared with an understanding of policies and procedures along with a list of items for review, as a well-prepared auditor can facilitate an efficient audit.

Interviewing the Employees

The auditor must interview employees and ask them to explain their work process as compared to written policy. This step will in establishing an understanding of employee competence and identifies employees who require additional training.

Documentation of Results

It is important to record the results and any differences in the practice of writing the policies, as well as when guidelines are followed and when they are not, including other information gathered from the interview process. The goal is the identification of gaps in compliance and finding a way to bridge those gaps.

Reporting the Findings

An easily comprehendible audit report must be created to be reviewed with senior management, along with the development of an improvement plan for areas with any gaps in compliance.

Certain additional considerations must be kept in mind while conducting an internal audit, such as –

• While reviewing the policies and procedures, the auditor must check if the written policies meet the needs of “customers,” i.e. the company’s employees and add value to the organization.
• Focusing on the policies and procedures on continuous improvement regarding how work is performed.
• Ask if the team environment is healthy and supports compliance with policies and procedures, as a dysfunctional team has the potential of harming procedural compliance.
• Review the policies and procedures annually to ensure they reflect the changing business environment.

Conclusion

An internal audit ensures timely compliance with laws and regulations by an organization. The audit provides a degree of safety in the management of risk, prevention of fraud, abuse of power, or any other scenario. An internal auditor provides the management through an objective assessment regarding the processes and accounts, thereby allowing the management for improving their operational and financial performance by using the services of an internal auditor.

Enterslice has a team of experienced professionals having expertise in internal audit and related services to cater to the internal auditing requirements of the organizations.

Read our Article: Internal Control System- Analysis of Benefits & Limitations