An internal audit is an objective evaluation of an organization’s/function’s efficiency and effectiveness. It is an appraisal system established by management for the review of the accounting and internal control systems as a service to the entity.
What is Internal Audit?
The Internal Audit is a service provided by an independent party to evaluate an organization’s internal controls, corporate practices, processes, and methods. An internal audit aids in ensuring compliance with the various laws that apply to a company. An organization can prepare its accounts and records in accordance with the applicable legal requirements and reporting requirements.
Simple Audit Definition
So what is internal audit? Simply put, internal auditing is an independent, objective assurance and consulting activity designed to add value to and improve an organization’s operations. Internal auditing helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
Key Points of Internal Audit
Typically, there are several aspects to internal audit, including the following five key points:
- Internal auditing is an appraisal system.
- It is established by management as a service to the entity.
- It involves the review of accounting systems.
- It involves the review of internal control systems (which are systems for financial controls, operational controls, and compliance controls).
- Internal auditing is a separate and distinct branch of the accounting profession. The role of internal auditing has become more significant in larger entities and is now seen as an important management tool.
Overview of Exemplary Evaluation Activities
The evaluation (i.e., the internal audit) typically involves an analysis of the following exemplary activities:
- Are they fulfilling their desired roles?
- Are functions efficient and practical?
- Are best practices being followed?
- Is there room for improvement?
- Are functions being carried out as written in the organization’s policies and standard operating procedures?
Reasons for the Development of Internal Auditing
The main reasons for the development of internal audit function are as follows:
Internal audit helps management monitor the controls within their entity. As entities increase in size and complexity and become global, the task of monitoring controls becomes more difficult. An internal audit function helps management monitor these controls.
Similarly, as markets become increasingly competitive, entities must be very competitive themselves. This means using resources efficiently and effectively. An internal audit function can be used to monitor the efficiency of operations.
In many countries, there is a large amount of statutory and accounting regulation, including corporate governance regulation. An internal audit function can be used by management to check compliance with laws and regulations.
Many entities use complex IT systems. Specialist internal auditors can help management review the effectiveness of controls within IT systems (using IT audits).
For companies that operate over multiple sites, an internal audit may be an essential tool for effective management. Senior management can use an internal audit department to carry out ‘external’ checks on its operational departments. Random visits or surprise visits by internal auditors may be used to confirm that all locations are applying internal controls properly and are complying with relevant laws and regulations. The largest locations, or locations where there is a high risk of control failure, may be visited more frequently by the internal auditors.
The increasing cost of the external auditor’s services means that it may be cheaper to use internal auditors to perform audit tasks whenever possible. (The reliance of external auditors on work done by internal auditors is considered later. However, an internal audit department may be used for work not related to the external audit that might otherwise be given to an external firm of accountants as non-audit work.)
Even though in some industries there is no legal requirement for an entity to establish an internal audit function, the fact that many organizations do so indicates that there are significant benefits.
An internal audit can ensure that a company complies with the law and regulations on time. The audit provides a level of security and aids in the management of risk arising from fraud, abuse of power, or any other scenario. An internal auditor provides management with an objective evaluation of the processes and accounts. Using the services of an internal auditor, management can improve their operational and financial performance.