Internal Audit

Internal Audit Performance

Internal Audit Performance

Internal audit performance is how an auditor evaluates the operations and functions of the respective company and provides various criteria for evaluating the performance of various functions and operations. This internal audit performance can be either conducted by the company’s internal audit teams or by engaging an audit professional, ensuring it adds value to the organization’s growth. This internal audit performance includes evaluating the compliance standards, code of ethics, risk management, control processes, etc.

Internal audit performance plays a very important role in governing and operating the organization’s functions. A company shall be able to identify the risk and complexity through internal auditing, helping the company to achieve its objectives or goals. Whether the company can meet its goals and objectives can be determined through an internal audit performance measurement conducted by the auditor, checking if the company is equipped with the highest quality practices and standards.

Performance Metrics in Internal Audit: A Critical Evaluation

Internal audit performance is a tool that auditors use to introspect on various internal audit shortfalls and weak that are connected to the operations and functions of the organization’s businesses and suggest corrective measures. The main objective behind the internal audit performance is to check various factors such as the soundness of financial systems, accountability of financial and accounting reports, monitoring of risk factors, etc.

Performance Internal audit services’ main objective is to systematically evaluate the respective company’s internal control and management, determining their performance and how effective it has contributed to the operations and functions of the respective company. With the increasing number of competitors, it is indeed important for a company to have an updated understanding of its efficiencies in its business operations to prevent any legal liabilities and heavy penalties. Therefore, performance internal audit requires skills like an analytical approach, imagination, and flexibility to provide innovative solutions and new ideas to the organizations.

However, internal audit performance is a metric to measure the respective organization or company’s overall strategy or mission, thus helping companies to improve and measure their performances.

What is the basis of Internal Audit performance?

The most common basis of Internal audit performance is the three E’s, such as economy, efficiency, and effectiveness, along with other additional internal audit performances like environment, equity, and ethics.

Economy

Economy internal audit performance is an operation to check the procedure of the respective organization’s formulations on how the economy of a company has obtained the resources for the business operation on a stipulated time and quantity.

Efficiency

Internal audit performance is also meant to check the efficiency of organizations’ goods and services produced and the resources that are responsible for producing them. An efficient operation of the company results in producing the maximum output at any given set of resources and using a smaller number of resources; however, the motive of the organization is to produce more services or goods by minimizing the use of resources.

Effectiveness

Effectiveness results in the key performance of the company’s operations and their respective result or performances. Internal audit performance has to check the overall effectiveness of the company’s operations and functions in achieving their respective goals.

Environment

With the growing technologies and economy, various governments have implemented mandatory regulations on environmental policies or sustainable development. Internal audit performance shall evaluate if the company has addressed environmental policies in their business operations to safeguard the resources for future generations.

Equity

Internal audit performance shall also check if the company is not misappropriated using public funds, which are usually initiated for the development of the public. For example, the procedure for selecting the beneficiaries of funds shall not have an outsider influence and shall be fair.

Ethics

Ethics plays a very important role in a company’s business operations. Thus, internal audit performance shall examine the qualities of ethics followed by the employees and staff while operating the businesses of the respective company and their devotion to their duty in managing public funds.

Thus, whenever a company requests an internal audit performance, it means a company has professional expectations from such auditors, and its value is to strengthen the internal audit management of the business operations.

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Economy Welfare Internal Audit Performance

A company may gain from the internal audit performance depending on the various scope of the audit procedures and improvements conducted by the organizations to fill the gaps in the business operations. Some of the major benefits that are achieved through an internal audit performance are:

  1. Costs reduction by implementing better contract agreements on various company’s business operations.
  2. A company can reduce the cost of business operations by utilizing its resources efficiently.
  3. Internal audit performance also assists organizations in improving their productivity and asset utilization levels.
  4. It also helps the company fix the issue connected to doing things twice and the lack of coordination in the business operations.
  5. Internal audit performance helps organizations determine the company’s needs, clarify objectives and policies, and thus recommend changes in business operations and outputs for better achievements.
  6. Quality of service is also taken care of by the internal audit performance program by shortening the waiting period and response time reductions and improving the accessibility of information such as helping the public, clients, and industry.
  7. A company, through an internal audit performance, can improve the planning, control, and management of the respective company’s business operation overall. New corporate planning is introduced, and clearer definitions are set to prioritize along with a defined target under such internal audit performance program by the respective auditor.
  8. With the rapid growth of the economy, the number of crimes is also increasing rapidly. Thus, internal audit performance shall check if the concerned company has an efficient method to check such fraud before it damages the reputation of the company.

Thus, internal audit performance brings an improvement in the business operations by increasing the visibility of procedures and output of the company’s operations.

Internal Audit Metrics

How well the internal management of the company has performed shall be evaluated by the internal audit performance program by assessing the original goals or plans and checking how company management is sticking with them. Plans may change with the company’s requirements. Such changes in the plan shall be updated by constantly monitoring the performance level, as the goal is to complete what we are going to complete.

Internal audit performance helps the company maintain transparency. If the specific audit teams are not able to complete the task within a stipulated time frame, has to explain the same so that trust is built between the customers, stakeholders, and other investors of the respective organizations.

This internal audit performance shall also measure the time frame taken by the auditor to audit the business operations and the time frame to complete the specific projects, and it shall also help track the time taken by the audit team. This also determines the time the auditor takes to audit a project in a year and the workload each member has taken.

It does not make any sense to have a multiple number of auditors not working on a project. Thus, internal audit performance assists the company in measuring the utilization of the auditors and their efficiency.

Another important measurement under the internal control performance is to check if the company is implementing the recommendations given by the internal control management for improving the business operations. Such recommendations are to be traced for various benefits like cost savings, time, double payment, etc. However, internal audit performance must ensure that the internal auditing is done with the perspective of mitigating a risk that is going to damage the reputation of the respective company in the market scenario.

Internal audit Performance benchmarking

Internal audit performance benchmarking also refers to the evaluation of the peer business operations by doing various research and analysis. An auditor shall compare their work in high-priority risk with the other peer industries. Thus, internal audit performance ensures the company appropriately conducts its internal audits.

Before conducting an internal audit, an audit needs to assess the company’s operations, such as regulations, compliances, financial structures, etc. The internal audit performance shall have to address such operations if aligned with the required standards. It is also important to constantly monitor such operations to prevent potential risks, such as cyber security constantly changing due to various technological advancements. Covering these risks under the internal audit performance not only improves the health of an organization but also ensures that an internal audit is engaged efficiently in the respective company.

Steps for Measuring the Internal Audit Performance

The steps for measuring the internal audit performance are stated below:

Primary Responsibility

The responsibility of the internal audit performance by an auditor depends upon the size, laws and regulations, management, and various other factors of an organization. It is indeed the responsibility of an auditor of a company to look into the internal audit functions. However, the key objectives behind this internal audit performance are to monitor the risk, performance, record keeping, etc.

A professional auditor generally conducts internal audit performance to improve the functioning of the respective company’s business operations through a systematic approach designed to combat potential risks within the management, control, and governance processes.

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Internal audit performance examines various potential risks and thus controls the same. With the increasing number of risk profiles, auditors have now adopted a risk-based approach to conducting annual audits.

Unit of Measurement

The key objective of internal audit performance is the measurement of the number of staff, time frame, regulations, and compliance, and such measures shall be in number so that it becomes easier for the company’s upper management and stakeholders to understand the contributions done by the internal auditor in improving the performance of the companies operations. Internal audit performance also assesses the cost of the internal audit staff and the risk level that is to be addressed by the auditor so that an estimated cost is set and potential savings are made from the audit expenditures. Hence, such data are collected through the internal audit performance program, which benefits both internal audit management and various other expectations of the stakeholders.

Data Types

In general, KPI, or a key Performance indicator, is based on the collection of qualitative data and quantitative data or combinations of both. Quantitative data refers to data that can be counted and measured, such as several tools that are used for testing financial transactions; on the other hand, qualitative data is based on descriptive measures that can be observed but not possible to measure, unlike quantitative data. Some examples of qualitative data are surveys on stakeholders’ satisfactory levels of engagement.

KPI is one of the primary elements of internal audit performance; this KPI is based on qualitative data, where the auditor is responsible for explaining the sources from where the information has been collected so that no misrepresentations are circulated, thus avoiding potential ambiguities. For example, during the satisfaction survey, one should have clarity on the respondents and how feedback from various other individuals is combined and converted the same into an objective opinion.

What are the Guidelines for an Internal Audit Team?

Given below are the guidelines for organizations to conduct internal audits for seamless performance of the company operations and to meet the goals and motives of the respective company. These guidelines help the company to have a robust internal audit by the auditing team of a company:

  1. Define Internal Audit effectiveness
  2. Determine the key internal and external stakeholders
  3. Develop measurement of internal audit effectiveness.
  4. Monitor and report results.

The following guidelines also include both qualitative and quantitative measurements of the company’s internal audit performance. It has also provided a balance on the performance of a measure and various other illustrative examples of metrics connected to the effectiveness of internal audit and efficiency along with categories such as basic measures, service to stakeholders, technical development, knowledge of budget organization and public sector, people development, etc.

What are the benefits of Internal Audit Performance?

There are many benefits of internal audit performance for a company. Some of the common benefits are:

  1. Specific data is made available to the respective company through a self-evaluation and benchmarking program so that an improvement can be initiated for the smooth functioning of the business operations.
  2. It also helps the business operation to function and operate efficiently for an effective outcome for a company.
  3.   It also helps the company to have accountability on its internal audit, thus gaining credibility and objectivity.

What are the Key Performance Indicators?

There are several key performance indicators that are used by the company for measuring the internal audit of their respective company. Given below are some examples of key performance indicators that are grouped into various categories:

External Indicators

External indicators are the category of measure that are indirectly affecting the internal audit program, such as the requesting of reviews on time spent on management respective to the overall internal audit plans, survey results on management satisfaction, head of internal audit, and senior management numbers of meetings.

Planning Indicators

This measures the overall impact of the internal auditors connected to the internal audit plans, such as the total number of audits or evaluations completed under the audit operations, the amount of time spent by an internal auditor on various compliance audits, performance audits, IT audits, and consulting engagements, percentage of key risks audited per annum.

Budget indicators

Inside this category of budget indicators, resources that are used for internal auditing are measured, such as the kinds of resources that are used by internal auditing.

Staffing indicators

A measurement of the staffing resources of the internal audit department of a respective company on their performance and quality is what staffing indicators are all about, such as the number of internal audit staff, experience of the internal audit team, total number of hours spent in training of the internal audit staff, etc.

Impact and quality indicators

This checks or measures the internal audit performance in contributing towards the growth of the organizations. However, these internal audit indicators measure the impact and effectiveness of the internal audit performance. Some examples of indicators under this category are several recommendations that are implemented, external assessment scores, etc.

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Why do organizations need to measure internal audit performance?

Organizations need to measure internal audit performance for two important reasons: one, to demonstrate that the internal audit team is working for the upliftment of the respective organisation, and second, to maintain the standard of the market trends.

Demonstrating Value

Conducting an internal audit performance measurement requires a heavy cost that is to be incurred by the respective organization. Internal audit performance may not be mandatory for all organizations, but the banking industry must conduct internal audit performance since their day-to-day business deals with cash transactions. It is indeed important for the internal audit team to demonstrate and show to their respective stakeholders that their service is valuable for an organization’s growth.

Some of the valuable insights that an internal audit may show to the company’s stakeholders are recommendations on the right things, trust, and assurance of the services provided by the said internal auditors, etc.

Standards

Organizational independence has to be maintained by the internal audit team by appointing a chief audit executive audit on the board. A chief audit executive should be the medium of communication between the organization’s management and the internal audit team, sending information ions on various internal audit activities and their performance connected to plans and other various matters. Internal assessment must include constant monitoring of the ongoing performance of the internal audit of the respective company.

It is the responsibility of the chief audit executive to report in a periodical method to all the respective company senior management and the board members on the various activities taken under the internal audit program and its compliance with the code of ethics, and the standards are to be followed to stay relevant in the market.

Insights Track Metrics in Your Audit

Companies, by implementing track metrics in their respective audit projects, assist the organizations in fulfilling and meeting their desired goals and illustrate how activities and performance of the internal audit are aligned with the objectives of a company.

Some of the important things that are to be kept in mind by the auditors while tracking the audit metrics:

  1. An auditor must do weekly check-ins with the company’s upper management so that communications on various risks and issues that are detected are communicated.
  2. A target has to be set within a stipulated time; for example, a final report has to be submitted within 30 days of completing the fieldwork.
  3. To satisfy the customer, an auditor must identify the survey returned percentage and scores improving every year.
  4. Analyse the risk percentage audited based on the risk assessment.

Thus, these all are important parts of KPIs or key performance indicators; a company, by executing this KPIs measurement, helps them to maintain a strong and effective internal audit team and ensures them how their activities are contributing towards the audit committee and senior management strategies. KPIs also showcase how internal auditing is adding value to the company’s business operations.

Conclusion

Internal audit operations have gained popularity over the years as they have immensely contributed to improving the growth of various businesses and spreading good governance across the market. Measuring the internal audit is one of the critical aspects of the organization’s overall performance of the company’s business operations. However, stakeholders must know the performing standards of the internal audit team by ensuring that internal audit performance measurements are conducted diligently so that they can have an idea of the level of performance contributed by the internal auditors. With the increasing economy, regulators and investors are demanding a deep analysis of the organization’s business operations, making it more complex for an internal audit team.

FAQs

  1. What is a performance internal audit?

    An internal audit performance is a measurement of how the internal audit contributes to the growth of the business operations of the respective company and checks the level of performance of the said internal auditors.

  2. How do you measure internal audit performance?

    An internal audit performance is measured by considering the compliance regulations, risk management improvements, control, and governance procedures and achieving the company's key goals and objectives, etc.

  3. What are internal audit performance standards?

    Internal audit performance standards relate to the kinds or nature of internal audit activities on the respective company operations and their contributions to the growth of the businesses and various other criteria by which the performance of such internal services can be evaluated.

  4. What are the key performance indicators of internal audit?

    The most common key performance indicators of internal audit are audit sampling, compliance monitoring, percentage of audit plan completed, fraud detection, etc.

  5. What are the 5 components of internal audit?

    The 5 components of an internal audit are internal control framework, environment control, risk assessment, control activities, information and communications, and ongoing monitoring.

  6. What are the 4 Cs of internal audit?

    The famous 4 Cs of internal audit are culture, competitiveness, compliance, and cybersecurity.

  7. What are the 4 stages of an internal audit?

    Depending on the types of business operations, the audit procedures also differ, but the most common internal audit stages that are applicable to the entire industry are planning, fieldwork, audit reports, and follow-up reviews.

  8. What are the 3 types of Internal audits?

    The three types of audits are compliance audits, financial audits, and operational audits.

  9. Who performs internal audits?

    Internal audits are generally done by the internal audit team of the respective companies, who are hired directly by the company to provide management control and education to the management and staff of the organizations on the better functioning of the business operations.

  10. What are the two main types of audits?

    The two main types of audits are external audits and internal audits.

  11. What is audit engagement?

    An audit engagement is a formal agreement between the auditor and the client agreeing to provide an objective opinion on the client's financial statements.

  12. What is an audit strategy?

    An audit strategy is a plan on how to execute and implement the audit of the respective company's business operations by setting the time, scope, and various other directions of the audit.

  13. What is risk auditing?

    Risk auditing is a comprehensive examination of how the company's risk management or assessment can detect and identify the potential risks connected to the business operations of the company.

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