There is a misconception that internal audits are only necessary in larger, more complex organisations and the cost of an internal audit would outweigh its benefits for a smaller entity.
As the internal audit’s purpose is to evaluate and improve the effectiveness of an organisation’s risk management, control and governance, an internal audit is beneficial to all entities regardless of size.
Differences between Internal and External Audit
Often internal audits are confused with external audits. However, there are significant differences between the two engagements. External audits focus on the accuracy of annual reports and historical financial information of a company by way of issuing an opinion on the financial statements.
Internal audits on the other hand, focus on and examine the effectiveness and efficiency of an organisation’s financial and operational functions. Internal audits aim to add value to an organisation by identifying, understanding and managing high risk areas within a company. An internal audit also intends to ensure the reliability and integrity of financial and operating information.
Monitoring the effectiveness of internal controls
Internal controls are adopted by management to enhance the processes and procedures of an organisation to meet its goals and objectives effectively. Internal controls also serve to reduce the risk of fraud and enhance risk management.
The main tasks of an internal audit include:
- Risk assessment – Assisting management to identify and prioritise areas or processes that require attention and audit focus
- Process walkthroughs and documentation – Gaining an understanding of the client’s processes and procedures (especially in respect to IT systems/software)
- Control assessment – Identifying weaknesses against best practice and suggesting improvement opportunity
- Testing – Performing tests of controls to verify whether controls are working as designed
- Reporting – Providing observations and recommendations to improve processes and controls.
Internal audits aim to help improve the control environment of an organisation and increase the reliability and integrity of financial accounts. In improving the operating effectiveness, internal audits can assist in the compliance of laws and statutory regulations of an organisation and ensure standard accounts practices are upheld.
Common internal audits include:
- Compliance audits – Focusing on compliance risk and laws, standards and regulations
- Operational audits – Determining whether operations are functioning effectively in departments such as sales/receivables, invoicing/payables, inventory management and payroll
- Financial audits – Assessing the validity and appropriateness of statements such as budgets, reporting and reconciliations
- Information Technology audits – Maintaining data integrity, cyber security and IT availability and performance.
Although the findings of an internal audit engagement will not ‘fix’ flaws within the organisation, it can identify gaps and provide suggestions for improvement. As a result, it can be a powerful tool to the management of a company.
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