Companies frequently conduct an internal audit of their business operations. Accountants perform internal audits to provide company management with an unbiased and objective view of how the company is operating. Some companies dedicate a full-time audit staff to do continuous checks of various operations.
Normally there is a special audit committee, overseen by the company board of directors, or trustees. Internal auditors report directly to this established committee. Moreover, people will often ask them to make financial recommendations. Their guidelines should reach to both the board of directors and upper-level management.
Definition of an Internal Audit
All companies and organizations should do internal audits, at least once per year. They are frequently an ongoing process. It limits the necessity for a more serious, external audit. An internal audit can have a variety of different areas of focus.
Some address operating procedures, while others deal with financial aspects of the company. The primary purpose of audits is establishing criteria for compliance policy for the company.
Audits can be specifically to evaluate internal control standards to improve the efficiency and effectiveness of company operations. In serious cases, internal audits can detect and punish fraud, or unethical business dealings. Internal audits help build company policy, plus identify problems and correct issues before they become severe.
Main Steps of an Internal Audit
Here are the standard steps for an internal audit. One can slightly adjust some of these steps. This way, the process will meet unique situations within the company or organization. Most modifications will pertain to the protection of employee rights to privacy, plus sensitive copyright, patent, or trademark concerns.
#1. Official Notification
Those who conduct internal audits should announce all these procedures. When it comes to an external audit, the company management doesn’t necessarily have to send notifications to all parties involved in the process. External audits are usually to uncover a legal or ethical violation, whereas internal audits primary purpose is to prevent such. Department heads, supervisors and all employees involved usually receive written notification prior to the conducting of an internal audit.
#2. Document Requests
Once the organization, business, and all necessary parties have received official notification, the auditor will make a formal request for all documents stated in an audit preliminary checklist. Most people attach this list requesting documents to the notifications.
It may contain a duplicate of any previous audits, financial statements, receipts, ledgers, production reports, or employee performance evaluations. The auditor may ask for profit/loss projection charts, copies of the board of directors meetings and committee minutes. Internal auditors that are not part of the company staff will also request bylaws, employee rules, and standards, plus any written compliance management policies.
#3. Audit Plan
The auditor will review the information from the documents and coordinate the audit process. All involved parties will receive a detailed schedule when their department or division will need to be available to the auditor for questions.
Before the first official audit process, the company will have the option to hold a risk management workshop. This workshop will welcome input from all persons to part of the audit to help identify possible problems. Frequently, accountants create an audit plan using any pertinent input coming from this risk workshop.
#4. Meeting Scheduling
Upper management and all key administrative personnel will then hold an open meeting. During this session, the auditor or audit staff will present the exact focus of the internal audit. Depending on any underlying reasons behind the audit, the auditor will also present any projections they may have prior to completion.
During the meeting, they will also establish the time frame and schedule for the audit. Some of the main topics will be things such as scheduled vacations, shift assignments, or temporary leaves of absence. Department supervisors will be asked to adjust employee work schedules to make staff available for any interviews required for the internal audit.
#5. Conducting Fieldwork
The auditor, or audit team, will apply the information from the open meeting. Also, they will make adjustments for scheduling conflicts, to write the final internal audit plan. Personal meetings help conduct the fieldwork. These sessions are between staff members and employees.
In each meeting, the internal auditor will review procedures and processes, looking for both positive and negative features. These personal interviews will help establish a foundation for any suggestions to improve the compliance policy. Internal controls help determine if they are adequate. The auditor will report all problems. He/she will request responses in situations that may require immediate attention.
After all the necessary meetings are completed and documents reviewed, the auditor or audit team will produce a written report. The report will account for all mathematical errors and post detailed descriptions of all problems.
There will be an audit summary with a list of concerns that the audit team feels need immediate attention. The chief auditor may include a commentary describing the substance of the report, including any recommended suggestions or solutions.
#7. Closing Meeting
Once the team files all the reports, they must write reviews of the findings. Then, the audit staff will usually request feedback from the board of directors, or upper management. In situations where shareholders have an interest in the information contained in an internal audit, a written summary is made available for inspection.
When they discover problems, it is common for the management to supply a description of any proposed actions to correct the issues, including a projected date that they will be addressed. Most closing meetings are open discussions, where all the parties involved give their opinions on the outcome of the audit. It is during this meeting that one can schedule a future audit to assess the progress of any proposed changes.
Value of an Internal Audit
Internal auditors handle concerns that are critical to the survival and success of any business venture. An external audit primarily assesses financial risks, scrutinizing monetary transactions and statements. An internal one focuses on issues that are more diverse. An organization’s reputation is governed by how it deals with the public, treats its employees and respects environmental concerns.
When a company completes an internal audit, managers, supervisors and the board of directors at large corporations, can see where compliance guidelines and company policy are working properly. They will also be able to analyze audit reports to discover potential problems. With both positive and negative findings equally reported, management can make decisions on how to augment those policy standards that are proving beneficial and alter those that are not.
Internal audits uncover areas of concern before they become detrimental to the company’s reputation. Internal audits help companies expand and redefine policies, designed to build the success of the business. For a business venture to remain profitable, internal audits are crucial.