What Does an Internal Audit Mean?

Internal audit looks at the internal controls of a business, such as its accounts and corporate governance. These kinds of audits help ensure that rules and laws are followed and that financial reports and data collection are done correctly and on time. People are hired by businesses to do work for their management teams as internal inspectors. These audits also give management the tools to make operations more efficient by finding and fixing problems before an outside auditor finds them.

How to Understand Internal Audits

Internal audits are critical to running and managing a business, especially since the Sarbanes-Oxley Act of 2002 makes managers legally responsible for the accuracy of their company’s financial records. As part of the external audit, SOX also said that a company had to write down and look over its internal controls.1

Furthermore, internal audits help handle risks and protect against fraud, waste, or abuse while ensuring that a company follows all laws and rules. After an internal audit, management is given ideas on how to fix processes that aren’t working as they should. These processes could include IT systems and supply chain management.

Internal checks can happen every day, every week, every month, or every year. Some areas may be checked out more often than others. Regarding quality control, a manufacturing process might be checked daily, but the human resources area might only be checked once a year.

Audits can be planned ahead of time so that managers have time to get the necessary paperwork and papers ready, or they can come as a surprise, especially if someone thinks that illegal or unethical behavior is occurring.

Types of Audits and Internal

Check for Compliance

A business might have to follow local laws, safety requirements, government rules, outside policies, or other rules. To show that they are following these rules, a business may ask an internal audit group to review the situation, gather the necessary information, and give their opinion.

Internal Audit of the Financials

Public companies have to do certain levels of external financial auditing when a third party not connected with the business gives its opinion on its financial records. Before an external audit, companies may want to learn more about the audit results or do their internal financial audit. There may be some tests that are the same for both internal and external auditors. The main difference between the two types of audits for financial audits is the level of freedom.

Audit of the Environment

Companies are becoming more aware of their impact on the world, and some are taking steps to look at these effects. As a result, an internal audit looks at how a company gets its raw materials safely, uses eco-friendly distribution methods, lowers energy use, and limits greenhouse gas emissions while making things. Companies that use triple-bottom-line reporting may do internal environmental audits as part of their yearly reporting.

IT or technology audit

There may be more than one goal for an IT audit. The internal audit could be because of a case from outside the company, a complaint from inside the company, or a goal to improve efficiency. An internal audit focusing on technology checks the systems’ controls, hardware, software, security, documents, and backup and recovery. The goal is probably to test the general accuracy and working power of IT.

Check of Performance

When an internal audit focuses on performance, it looks at the result more than the steps to get there. The company may have set goals or metrics for performance that may be linked to bonuses or other rewards. So, an internal auditor looks at how well a goal was met, which might not be easy to measure.

For instance, a business may want to use more diverse suppliers. It will be the job of the internal auditor to look at how the company’s spending habits have changed since this goal was set, regardless of the purchasing process.

Audit of Operations

An operating audit will likely happen when essential employees leave, or a new group takes over. The company might want to look at how things are done and see if they can be done better with the tools they have. During an operational internal audit, the auditor will check to see if the company’s mission statement, values, and goals are being met by its present staff and processes.

Construction Check

growth, operating, real estate, or construction companies can do construction audits to make sure that both the physical growth of a building and the billing for the project are done correctly throughout the project’s life. This mostly means following the terms of the deal with the main contractor, subcontractors, or other vendors who may be needed.

This could also mean ensuring the company has sent and received the correct payments and that the internal project reports about the project’s completion are correct.

Investigations of sorts

Many of the above checks may be done every year. Sometimes, it might make sense for an internal audit group to look into a unique situation that will only happen once. This could mean getting a report on how well a recent merger worked, hiring a key employee, or hearing from staff about a problem. A company needs to be extra careful when choosing people for the special investigation audit to ensure they have the right skills and are independent.

The board of directors or top management may be in charge of the internal audit, depending on how the company is set up.

Choice Between Internal and External Audit

The goal of both internal and external audits is the same. In both types of audits, a specific part of a business is looked at to form an opinion. This is not the only difference between the two types of surveys, though.

During an internal audit, the business usually picks its audit team. So, the team looks out for the interests of the company’s management team. This could be helpful if you want to put people with exceptional experience on the team. In an external audit, the company usually chooses the external audit business. However, the company usually doesn’t get to choose which employees do the external audit.

Depending on the audit, there may be some rules about the staff who do the external audit. In the case of an outside financial audit, the financial records must be signed off on by a Certified Public Accountant (CPA). No rule says everyone on the audit team has to be a CPA during an internal audit.

An audit report is what both of them are meant to produce, but they are used for very different things. An internal audit report is often used by the people working it to improve the company’s operations, methods, or policies. Most of the time, an external audit report is needed for reasons outside the company and is mainly used by people outside the company.

Last but not least, the interaction will be very different. During an internal audit, employees of a company may freely give advice, talk to the company about things that aren’t connected to the audit, or have a very flexible consulting agreement. Sometimes, there is an apparent scope set for an external audit, and the inspector will be meticulous not to go beyond what is allowed by the audit.

Audits of the inside

• Often, a company can pick its internal audit lead and team members.
• The people on the audit team don’t always need to have specific licenses or titles.
• Internal management mainly uses audit reports to make the business run better.
• Internal audits may be less formal and have a less clear framework because the auditor gives general advice.

Outside audits

Usually, the company or board can choose the audit business, but not those on the audit team.

As part of the audit deal, audit team members may need specific titles or licenses.

Audit records are used mainly by outside parties to meet reporting requirements.

External audits are usually more official, with clear limits on what services are allowed and not allowed.

How to Do an Internal Audit

Internal auditors usually pick a department, learn about the current internal control process, test it in the field, follow up with department staff about problems they found, write an official audit report, go over it with management, and then check in with management and the board of directors as needed to make sure the suggestions have been put into action.

Step 1: Make a plan

Auditors inside a company usually start by making an audit plan before they do any auditing. This tells everyone on the audit team what their duties are and what the audit’s standards and goals are. The auditors may look at previous audits to determine what the management wants regarding data collection and display.

There is often a checklist in the audit plan to ensure everyone on the team follows the general rules. The internal audit team may also plan to meet with management during the audit to let them know how things are going and if there are any problems. A kick-off meeting usually comes at the end of the planning stage and gives everyone the first information they need for the audit.

Step 2: Checking in

Many of the things that internal auditors do are the same as external auditors. Some businesses may use ongoing audits to ensure their methods are always being watched. Assessment tools ensure that an internal auditor fully understands the internal control procedures and checks to see if workers follow the internal control instructions.

So they don’t get in the way of people’s daily work, auditors start by doing indirect assessments, like looking at flowcharts, instructions, departmental control policies, or other paperwork that is already there.

In auditing, tasks like matching transactions, physical inventory counts, audit trail calculations, and account reconciliation are required by law. Analysis methods can be used to test random data or target specific data if an auditor thinks an internal control process needs to be improved.

At the start, there may have been a clear goal and scope for the internal audit, but as the team gets and analyzes data, the goals and scope may need to be changed. This includes reviewing the original schedule or the resources set aside for the audit.

Step 3: Writing a report

Reporting on internal audits can include an official report and an interim report written in the style of a memo. The auditor thinks the board of directors needs to know about secret or significant results immediately, so they put them in an interim report. Like an interim financial statement, an interim audit gives you some information you can use to prepare for the rest of the report.

Often, a business will give management a written copy of the final audit report and hold an internal audit meeting before the end of the audit. This could allow management to respond with arguments against the audit findings, new information that could change the results, or comments on their feedback about the audit findings.

The final report outlines the steps and methods used to carry out the audit, a summary of the audit’s findings, and ideas for improving internal controls and control procedures. The final report could also include information about what needs to be changed, how it will be monitored, and what will be covered in future reviews.

4. Keep an eye on things

An internal audit may ask for follow-up steps after a certain amount of time to ensure that the right changes were made after closing the audit. At the time of the final audit, the details and steps for tracking and review are often agreed upon.

For instance, an internal audit of the finances might find significant problems with the internal controls that the internal auditor thinks would not pass an external audit. The people in charge decided to make changes in the next six weeks. The internal auditor may be asked to do a limited or small-scope review of the problem again in six weeks to see if it is still there.

In a technical sense, an internal audit’s tracking step is unnecessary. There is a chance that management or the board will choose not to follow the changes suggested in the audit report.

The 5 C’s of Internal Audit Reports

People often say that internal audit reports follow the 5 C’s of reporting. A complete and adequate internal audit usually ends with a brief report that tells you the answers to the following questions:

Criteria: What problem was found, and why did the company need an internal audit? Is the internal audit a warm-up for an upcoming external audit? What party asked for the report, and why did they ask?

Condition: What does the problem involve a company goal or expectation? Does the business have a rule that wasn’t followed, a goal that wasn’t reached, or some other condition that wasn’t met? Is the company sure there isn’t a problem, or do they think there is one?

Cause: What caused the problem? Who was at fault, what steps were missing, and how could the problem have been avoided?

Consequence: What does the problem lead to? Are the problems only internal, or are there chances that they could spread to other places? What effects does the problem have on money?

Actions to Take: What can the business do to fix the issue? What specific steps will management take to fix the problem? What kind of tracking or review will happen to ensure the fix is in place after the solutions have been implemented?

Why internal audits are important

A few people might believe that internal audits are less helpful than external audits. Ultimately, a business can choose its internal auditors, even if they are not entirely separate from the business. However, internal audits are helpful for both the company and outsiders in many ways, such as:

The people in charge can be more thoughtful about what to look into. For instance, external financial audits have to check the whole financial system. But if a company is worried that the cash management process is being hacked, they can choose to have all audit methods check the cash management process.

A company might save money by doing an internal audit. If a business has good processes, the external audit process might not take as long or be as intensive. This would lower the external audit fee and the time spent helping external auditors.

The company makes its control setting better. Even if the internal audit doesn’t find anything, workers may know that their work is being looked at and reported on, which may encourage them to follow company policy.

It’s possible that internal checks can help businesses work better. Most of the time, external audits are not meant to improve processes; they are meant to check that processes are correct. Making this distinction is essential because a business may be “just getting by” with systems that aren’t very good but meet the bare minimum.

Management can start fixing things right away after getting an internal audit report. When an outside audit finds a problem, management doesn’t have to rush to fix it. Instead, they can take more time to think of ideas, carefully put them into action, and then check to see if they work.

Some departments might need more control. A company might benefit from focusing on a particular area and officially reviewing its workflow and processes, whether because of a lack of expertise, staff, or a problem with the people they already have.

How do you do different kinds of internal audits?

A business can do an internal audit for almost any reason. This may lead to an internal audit of finances, operations, safety, the environment, IT, or a one-time event.

What Does Internal Audit Do?

An internal audit’s job is to find a problem or prove that something is working well. For instance, a company might do an internal financial audit to make sure that its internal rules over accounts payable align with company policy. Instead, the company could do an internal environmental audit to determine the effect of its eco-friendly changes on the world last year.

What is the process of an internal audit?

The steps in the internal audit process are planning the audit, carrying out the audit methods, writing the audit report, and keeping an eye on changes since the audit. At any point during an audit, management can decide to broaden the scope of the audit results lead them.

In terms of internal audit, what are the 5 C’s?

Internal audit reports often spell out the criteria, condition, reason, consequence, and corrective action. These five sections explain why the audit was done, what led to the audit, how the audit will be done, what the auditor hopes to achieve, and what will happen after the audit results are given.

Conclusion

• An internal audit helps manage risks and checks how well many different parts of the business are working.
• Internal audits can be done for a specific area: compliance, environmental, IT, or financial reasons.
• Internal audits are helpful for management and the board of directors because they find and fix problems in a process outside auditors see the motors.
• Internal audits are done like external audits: planning, auditing, reporting, and tracking.
• Internal audits can make processes more efficient and encourage workers to follow company policy, allowing management to look into certain parts of the business.