Internal Audit

Illumeo Customer Success's Profile

Internal audit is a department within an organization that evaluates a company’s internal controls, its corporate governance, and accounting processes and provides impartial and independent review to the management. Internal audits also provide detailed information to governing bodies and executives about the organization’s risks, control environment, and operational effectiveness. The internal auditors report to the senior leadership of a company, and they are directed by the board of directors through the audit committee.

The managers are held legally responsible for the accuracy of the company’s financial statements according to the Sarbanes-Oxley Act of 2002. It also required that the internal controls of a company should be documented and reviewed as part of an external audit. Internal controls are set in place by a company to promote accountability, prevent fraud, and ensure the integrity of its financial and accounting information. Internal auditors aim to spot weaknesses within the organization’s processes and controls so that they can be fixed the quickest possible in order to prevent harm to the organization or its stakeholders. An internal audit plan should be designed to examine areas within the organization that present the greatest risk. Some departments within an organization may be audited more frequently than others. Audits may be a surprise or scheduled, in order to give managers time to gather required data or information.

Additionally, internal audits also ensure that a company is complying with laws and regulations and that it is safeguarded against potential fraud, abuse, or waste. Internal auditors provide useful suggestions to the management for improvement of current processes that are not functioning as desired, including IT systems and supply-chain management. Another important area related to internal audits is cybersecurity, which includes the protection of confidential information and data from outside attacks.

Unlike external audits, internal audits are focused on identifying weaknesses within the organization and taking corrective measures to strengthen them and prepare for external audits where results are shared publicly. This allows the company’s Board and management to get more frequent and timely information that they may use to govern and improve the organization. Whereas, the objective of an external audit to ascertain the accuracy of annual financial statements.

Different Types of Internal Audits

Internal audit widely covers internal controls over financial reporting within the organization, but there are many organizations also acknowledge the need for other types of audits outside the accounting or finance. Some of the key areas are discussed below.

Compliance Audits

Law and regulations have a significant impact on a company’s financial health. Failure to comply with some laws, may result in huge fines or prevent a company from doing business in certain dominion. Compliance audits evaluate a company’s compliance with those applicable laws, policies, and procedures. Foreign Corrupt Practices Act (FCPA) or General Data Protection Regulation (GDPR) are some of the laws companies must comply with in order to do business in the U.S and the UK.

Environmental Audits

Environmental audits assess the company’s compliance with environmental law and regulations and also assess the impact of a company’s operations on the environment. Environmental audits play an important role in sustainability and pollution control. It examines the risk and harm that may be posed to the environment by looking at the organization’s activities, procedures, and locations. The information collected from these factors is used to determine the changes that would be required for compliance.

Operational Audits

Operational audits assess the control mechanisms of an organization for overall efficiency and reliability. The goal of an operational audit is to determine whether appropriate controls are in place to enable the efficient and effective execution of the business processes under examination and that the controls implemented by organizations function properly. Fully auditing an organization’s internal control capabilities involves operational, financial, and compliance auditing, respectively. Operational audits often generate quicker production or sales turnaround, better allocation of costs, improved control systems, the location of areas of delay, and overall streamlined workflow.

Performance Audits

Performance audits are performed to assess an entity’s operations or the management systems and procedures of a governmental or non-profit entity to determine if the programs or functions are working as intended to achieve stated goals with a focus on improving efficiency. Performance audits are typically associated with government agencies at all levels as most government bodies receive federal funding. A performance audit may recommend changes in procedures resulting from inefficiencies in existing procedures.

Information Technology (IT) Audits

An Information Technology audit refers to the examination and evaluation of an organization's information technology infrastructure, applications, data use and management, policies, procedures, and operational processes against recognized standards or established policies. The evaluation of the IT audit process determines if the information systems are protecting assets, maintaining data integrity, and operating effectively to achieve the organization’s goals and objectives. Objectives of the IT audit include assuring compliance with legal and regulatory requirements, as well as the confidentiality, integrity, and availability of information systems and data.

The audit report should be written clearly and succinctly by the internal audit team to avoid any misinterpretation. It should accurately state the findings and recommendations that are actionable and lead directly to process improvement. The process of internal audit should include proper follow-up with process owners as well as the Board. If an organization fails to follow-up on the implementation of recommendations, it is unlikely that the changes will be made.

A Certified Internal Auditor (CIA) is a certification offered to accountants who conduct internal audits. It is the only globally recognized internal audit certification to communicate knowledge, skills, and competencies to effectively carry out professional responsibilities for any internal audit, anywhere in the world. To earn CIA certification, a candidate must have at least two years of experience working in the internal auditing field, and this must be documented and verified by the employer. Organizations should provide opportunities to its internal audit team to continuously update themselves with the updated skills and knowledge to effectively deliver services while adapting to transformation within the profession. Internal audit courses and internal audit CPE can help the audit team meet their continuing education requirements.