The scope and functions of internal audit vary greatly and depend on the size and formation of the company and the needs of its top management.
Functions of internal audit is an independent, objective assurance and management consultancy activity that adds value and improves the operations of a company. Internal auditing assists an organization in meeting its goals by utilizing a systematic, disciplined approach to improving the effectiveness and efficiency of risk management, control, and governance processes.
Functions of Internal Audit
The functions of internal audit and its role is to verify the existence of assets and recommend appropriate safeguards for their protection. Evaluating the adequacy of the internal control system and recommending control improvements.
In addition, the functions of Internal Audit is to evaluate compliance with policies and procedures, as well as sound business practices. Examine its adherence to state and federal laws, as well as contractual obligations. Examining operations/programs to determine whether results are consistent with established objectives and whether operations/programs are being carried out as planned, as well as investigating reported instances of fraud, embezzlement, theft, waste, and so on. The functions of internal audit to educate management and employees on how to improve business operations and efficiency.
Internal Audit Purpose
Auditing keeps a company – small or large – and all of its employees at the top of their game. Internal audits should be performed on a regular basis by organizations in a variety of industries, including financial institutions and healthcare providers. They are positive business experiences that aim to evaluate performance and identify actionable ways to improve in the future.
Employees should not be intimidated by this process because the auditor is not there to assign blame. When employees are informed about upcoming audits and their scope, the functions of internal audit will be a helpful guide on the process that will provides excellent insight that will help your company strengthen and dominate the market.
Internal Audit Operations
Functions of internal audit typically includes one or more of the following operations:
- Operations include monitoring internal control. The management needs to be reassured that the internal controls are functioning adequately. In a large organization, they do not have the time to carry out this task personally such as through observation. Monitoring controls, and making sure that the controls are working properly, needs attention continuously. An internal audit department is usually given the specific responsibility of reviewing controls, monitoring their operation, and recommending improvements.
- Operations include examination of financial and operating information. An internal audit department might be given the task of comprehensive review of financial and operating information — its reliability and usefulness. Internal auditors might also investigate how the information is identified, measured, classified, and reported, recommending improvements where appropriate. The audit work might include investigations into specific components of the information including the detailed testing of transactions, balances, and procedures.
- Review of the economy, efficiency, and effectiveness of operations, including nonfinancial controls of an entity is an internal audit operation. Audits of economy, efficiency, and effectiveness can be carried out on any aspect of operations and are usually called value for money (VFM) audits.
- Review of compliance is another function of internal audit. Senior management may ask the internal auditors to check that operational departments are complying properly with certain laws, regulations, and other external requirements or with management policies, directives, and other internal requirements. These investigations are often called compliance audits.
Internal Audit Advantages
The functions of internal audit have advantages and that is the following:
- Management Efficiency – It enables a company’s management to manage it more effectively. An internal auditor can identify any flaws in the company’s internal controls and operations. It provides useful insights to management that are critical for achieving the company’s objectives.
- Concurrent Review – It provides a one-of-a-kind opportunity to conduct a pre-performance self-review. They are not required to wait until the end of the year to evaluate the company’s performance. It enables them to change/improve their processes and correct their errors, better preparing them for the external audit towards the end of the year
- Resource Optimization – It assists management in identifying areas where resources are not being used to their full potential. It helps to keep the company’s costs and expenses under control. As a result, it is also beneficial to an organization’s financial position.
- Division of Labor – Taking resource optimization a step further, the practice of internal audit monitors and observes the activities of all departments and their employees. It accomplishes this by promoting the most efficient division of labor throughout the organization.
Internal Audit Disadvantages
If the functions of internal audit have its advantages, there are also disadvantages. Below is the following disadvantages:
- Accounting Process Dependence – As stated in the dictionary, accounting always comes before auditing. The start of an internal audit is dependent on the completion of accounting. As a result, a delay in the accounting process causes a delay in the audit process as well.
- Management’s Ignorant Attitude – Because internal audit findings are not made available to all, management frequently dismisses them. The findings are not shared with anyone outside of management, so it is up to them whether or not they take the necessary corrective actions.
- Availability of Qualified Personnel – To properly conduct any type of audit (internal or external), years of experience are required. As a result, it is frequently difficult to find sufficiently qualified personnel within the company to conduct an internal audit. And you can’t just hire an inexperienced auditor because that will do more harm than good to your company.
Qualifications of Internal Auditor
To perform the functions of internal audit well, an internal auditor should be knowledgeable in the following areas:
- Financial and accounting controls, for example, required specialized knowledge to evaluate the management control system.
- Accounting and financial knowledge are required for him to carry out his responsibilities.
- Capability to assess operational and non-monetary operational controls
- Understanding of technology, commerce, laws, taxation, and cost accounting
- Economics, Quantitative Methods, and EDP Systems
- Professional integrity and detachment;
- One should be able to assure management that such information will be kept confidential.
Functions of Internal Auditor
- Internal Controls Monitoring – Management should maintain internal control. An internal auditor may be appointed to monitor whether or not internal controls are in place. In addition, any measures to achieve the improvements should be proposed.
- Examining Financial and Operating Data – They may examine the methods used to measure financial and other data. The auditor may conduct inquiries regarding transaction balances and other specific matters.
- Operating Activity Review – They must conduct an operational activity review.
- Examination of an organization’s departments, such as purchasing, production, and human resources, to determine whether these departments are efficient, effective, and economical.
Internal audit is an essential component of any organization. It not only improves employee performance but also allows management to determine whether or not the organization is in compliance with laws and regulations.