Internal Audits: What it is, Different types, and the 5CS

Minakshi Bindhani

24 May, 2024

Internal audits play an essential role in a company’s operations and governance. Every Organization has an internal auditor who gives impartial, discrete reviews of an organization’s processes. The Internal audit department is to provide a certification to ensure the employees abide by the law, procedure, and operational efficiency. Internal audits help the management identify any wrongdoing or fraud committed in an organization. Additionally, the financial reports and data collection methods are studied to see if the firms are unbiased in applying different means to achieve their corporate goals.

Purpose

• Internal Audit ensures the Organization’s effectiveness and operational standards. An organization may have rules for operations, like placing orders, accepting deliveries, and making payments. An internal audit also helps determine whether the employees follow the internal operational standards.
• It helps to identify problems or inefficiencies and take necessary corrective steps. Internal audits can identify employee fraud, such as the use of embezzlement funds. The Audit can also verify whether there are deliberate cost overruns or whether a particular vendor is getting preference over other low-cost suppliers.
• Identifying employee rotation between different roles and functions may be necessary. An internal audit can also verify any potential threats or financial losses. The process also regulates the identification and correction of procedures before the statutory Audit Authority.
• An internal audit can be conducted annually, monthly, and quarterly, depending on the need of the Organization. Organizations should mandatory appoint an internal auditor under the statute of the Company’s Act, 2013. As per the Statute, there are different types of assessment or analysis that an internal auditor may adopt for performing an internal audit.

Function

• Internal auditors examine compliance concerns, risk, fraud, and data inaccuracies in a company and analyze records and financial documents. After reviewing all records within, they investigate the problems.
• The Auditors usually monitor internal controls to ensure the effectiveness of accounting processes and whether accuracy is maintained in the released financial reports.
• The Audit Manager checks governance to ensure companies do not compromise their ethical values. They see if the firms adopt fair practices for a growing business.
• Risk management is more accessible as internal audits and the auditors involved in consultancy services, where they identify the loopholes and improve the business standards more efficiently.
• Auditors may review procedures, regulations, or compliance with laws and procedures. They used to means to measure financial services, crises, and other relevant information. The auditors also make inquiries about transaction balances and other specific matters.

Types

Internal Audits are conducted to assess the business based on a wide range of parameters. Such audits are classified into different categories. These include:

1. Compliance Audits

An internal auditor checks whether the company incorporates the rules, regulations, laws, and procedures of its region, state, or country. A compliance audit is an examination of a process or system to policies, plans, procedures, laws, regulations, contracts, or other requirements that govern the conduct of the area, process, or system subject to Audit. As far as the compliance audit is concerned, companies must regulate under Foreign Corrupt Practices Act (FCPA) or General Data Protection Regulation (GDPR). In non-compliance, companies must pay adequate amounts and penalties or other punishments.

2. Information Technology Audits

The IT audits include the assessment and evaluation of the technological infrastructure. This Audit also covers the cyber issues that require immediate attention. The review may be focused exclusively on IT or performed in conjunction with a compliance, operational, or financial Audit.

3. Performance Audits

Generally, the performance Audit is conducted by the auditors to ensure the effectiveness of the companies’ standards and core competencies. The management sets rules,  standards, and procedures for the employees to strengthen their organizational performance in compliance with the standards and regulations.

4. Operational Audit

The operational auditors ensure the effectiveness of the company’s operational infrastructure. A review of an Audit mainly focuses on internal control procedures. The main objective is to improve the operation’s productivity, efficiency, effectiveness, and quality. Moreover, they also provide guidelines to improve the operational procedures to enhance the company’s efficiency.

5. Environmental Audits

The Organization must have an eco-friendly environment. When an Internal auditor conducts an environmental audit, they check that the premises do not violate environmental laws or policies.

5CS in Internal Audit

1. Credibility: The Internal Audit defines ‘value’ as the most essential aspect of an organization. Significantly, ” Value” can be changed based on circumstances. Credibility is the bridge that connects with the unclear values keeping the Internal Audit function relevant.
2. Connectivity: For an organization, seamless connectivity is essential, and the Internal auditors ensure increased connectivity between internal and external risk factors.
3. Competence:  Internal Auditor’s competency is maintaining accurate and timely data collection and financial reporting.
4. Communication: The Internal Auditor must have the skill to comprehend the Organization’s business and advice or ask questions to understand and learn the business more efficiently.
5. Courage: The objective of an Internal Audit function ensures that the company follows all the principles and standards. An Internal Auditor must have the knowledge, skills, and courage to identify and report any occurrence of fraudulent practices.

Conclusion

An internal audit can ensure that an organization can comply with laws and regulations. The Audit gives a degree of safety and helps manage risks from fraud, abuse of power, or other scenarios. They also provide the management with an objective assessment of the processes and accounts. The management can improve their operational and financial performance using the services of an internal auditor.

Read our Article: Roles and Responsibilities of Internal Auditor