What is an Internal Audit (IA) & How to Conduct?
What Is an Internal Audit?
According to the Institutes of auditors, an internal audit is providing independent assurance on organization governance, internal control, and risk management. Let's take a short look at “governance” - Governance is nothing but a manner of controlling and regulating the action. Governance means how the structures and hierarchies are defined in an organization. Where the structures and the hierarchies are not defined. Then how the organization is working whether the organization is efficiently and effectively accomplishing the determined objectives and goals.
Generally, an organization has people in the department who conduct the internal audit. Those businesses that don’t have an auditors team have to hire the audit firm in Dubai. The internal audit provides the organization risks, how is the operation going? control environment, and applicable rules and regulations. The Audit Committee reports the internal audit report to the CEO or members of the board of directors. They take the action based on reports to make operations more effective and efficient, reduce organization risks, etc. In short internal audit refers to giving a review of the internal environment of the organization, departments of the organization.
The Objective of the internal audit is to find the loophole and weakness inside of the organization. So that they fixed quickly as soon as possible. Fast prevention protects from harm to the organization and its stakeholders. The internal Audit plays a vital role in the organization because organizations have multiple functions and processes. It helps in controlling whether the processes are strong enough to be ensuing with each other. Internal Audit helps to identify opportunities for improvement by reviewing the function of each department they helped to drive continual improvement by identifying better procedures and applying corrective actions.
Objective of Internal Audit.
- Review the System - The purpose of the internal audit is to review and check the accounting system, operational of the business. It finds the weak points, mistakes, eros, business strength, and also determines the advantages and disadvantages of the rules and regulation. It allows businesses to be more effective by taking action on errors and mistakes in the current ongoing year instead of waiting till the end of the year.
- Assets Protection - Evaluation of the assets to consider the value of the assets and also have physical valuation verification. It also covers the sale and purchase of the assets.
- Paper Control - Main object of an internal audit is to keep tight control of overall activities. Management is required authentication correctly recording each financial transaction.
- Perfect Accounting System - To reduce fraud and mistakes. It checks the accounting system of the business and cross-checks each translation with the receipts, documents, etc.
- Keep a Check on Errors - Generally, businesses find mistakes and errors in the accounting at the end of the year then they solve them in the next year. But in internal audits, mistakes and errors are solved immediately.
- Detection of fraud - In this world, every business has an employee who makes frauds with business. Auditors check and keep an eye on every employee’s activities that make the detection of fraud much easier.
How to Conduct an Internal Audit?
- Identify the Area - Organization has many processes and departments. Every department and process is driven by the written rules and regulations. Every department does different work like accounting, production, management, sales, etc. So the auditors need to identify which department is required to first audit. We are not saying that we don’t need to audit the rest of the department. To audit every department is essential but we should start the audit from which we needed most.
- How many times we have to audit? - It is not specified that we have to conduct the audit after a particular time. Some departments need audits annually and some half-yearly and quarterly. Based on the department processes and performance we must conduct the audit.
- Schedule Audit - To efficient and effective results, auditors should make an audit calendar based on the requirement. Consistently audits drive the business towards oriented goals.
- Audit Alert - Give the notice to the department managers so that they can prepare the report and documents and they don’t feel threatened by the auditors.
- Be prepared - Auditors should be prepared themself for auditing before auditing. Auditors should know the organization and government rules and regulations to perform effective audits.
- Interview - Every employee is interviewed by the auditors. Ask them about the work, performance, how much we are away from oriented goals, etc.
- Reporting - Easy readable and understandable reports should be created by the auditors so that management can take action based on the report. If auditors don’t create audit reports clear and easy to understand then management can’t understand the report. So, a report should be clear, clean, and understandable.
Benefits of Internal Audit.
- Strong Control - Internal audit evaluates the internal environment of the organization. It helps in controlling and monitoring the production department, HR department, Sales Department, etc. It ensures that the implementation of work is well designed and work is going towards success.
- Security - Internal audit ensures that people in the organization are performing their job well and No one is doing any fraud and illegal activity.
- Reduce Risk - Internal audit identifies the risk area in the inner side of the organization, So that action is taken in advance to prevent the risk or reduce the risk.
- Improvement in Compliance - With the help of an internal audit report we can be sure that current ongoing policy, rules, and regulation are appropriate. If the organization found any loophole or needs to add a new rule so they can make a policy change or add new.
When does a business need an internal audit?
- Before business investment - If you need investment for business growth, so before asking investors and banks. You should get conducted the internal audit because every investor must ask for financial reports and some exceptional cases other reports as well.
- Identify the Mistakes and Weak Points - If You found any kind of mistake, errors, etc. Then internal audits must take place in the organization so that we can find the root of mistakes and errors and rectify them. Via internal audit, you can take everything on track and make your business performance more effective.
- Cast Flow Statement problem - If a business is generating sales but you don’t have enough money to pay bills. It means that your business has Inefficiency that needs to be corrected. The internal audit is one an only fixes the inefficiency.
- Audit Schedule - According to business rules and accounting principles, there is no defined time for a business audit. If you found any problem and error in business it means that the business needs an audit. Well, Based on the business size and daily, weekly and monthly transactions internal audits take place in the business annually, half-yearly and quarterly.
Responsibilities and duties of the Internal Auditors.
- Identify the weak points and errors.
- Monitor and evaluate each department effectively.
- Should have to know the company policy before the audit.
- Analyze and monitor the control and risk.
- Recommendation for more efficient and effective work and control.
- Monitor and evaluate each compliance.