Internal Audit Meaning Process Types Functions Certification

Internal Audit Meaning

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An internal auditor is appointed to check the overall performance of different companies with respect to the administrative, executive, financial, and legal standards they follow. The audit effectively identifies corporate frauds while assessing the internal controls to ensure a business’ efficiency.

Understanding Internal Audit Process

An internal audit is conducted to properly check whether a company follows the internal protocols, regulations, and standards. Every organization has a specific set of rules to follow. The companies, therefore, have an auditor acquiring internal audit certification to ensure the employees and top officials abide by all of them for legal and operational efficiency.

Key Takeaways

Internal audit is a process through which the companies get to know the loopholes in the system and improve the respective aspects for making businesses more efficient.Companies recruit auditors to acquire certification from a popular internal audit institute to check its different business activities and offer consultancy services.Compliance, IT, Performance, Operational, and Environmental audits would be a few commonly found internal audits.It is different from external audits in which auditors validate the accuracy of the financial documents and send reports to stakeholders and other external members associated with the organization.

Conducting audits internally helps the management identify if anything wrong in an organization. The financial reports and data collection methods are studied to see if the firms are impartial in applying different means to achieve their corporate goals.

These audits have become more significant, especially after the Sarbanes-Oxley (SOX) Act of 2002Sarbanes-Oxley (SOX) Act Of 2002The Sarbanes-Oxley Act (Sox) of 2002 was enacted by the US Federal Law for increased corporate governance, strengthening the financial and capital markets at its core and boost the confidence of general users of financial reporting information and protect investors from scandals like that of Enron, WorldCom, and Tyco.read more, which holds managers responsible for the rights and wrongs in a company’s financial statementFinancial StatementFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. Once the audits go smooth, the management prepares accordingly for the external audit.

In India, the Institute of Chartered Accountants of India (ICAI) has a separate Committee for Internal Audit, which assesses the required compliance as made mandatory under Section 138 of the Companies Act, 2013.

Types of Internal Audit

Audits conducted internally assess firms based on a wide range of parameters. Depending on these determinants, such audits are classified into different categories. These include:

#1 – Compliance Audits

An internal auditor checks whether the company complies with the rules, regulations, and laws of the region, state, or country it operates. In case of non-compliance, firms are subject to payment of fines and penalties or other punishments. As far as the compliance auditCompliance AuditCompliance Audit is a detailed review of organization’s compliance towards statutory laws, local laws, internal rules, and decisions of the organization as applicable.read more is concerned, companies must stick to Foreign Corrupt Practices Act (FCPA) or General Data Protection Regulation (GDPR).

#2 – IT Audits

The Information Technology audits include the assessment and evaluation of the technological infrastructure. The auditor, in this case, checks if the hardware and software equipment is processing requests and operating properly. This audit covers the cyber issues that might require immediate attention. In addition, the professional examines the general IT controls, system operation, and backup-recovery processes.

#3 – Performance Audits

While conducting this type of audit, the auditor ensures that the companies’ standards and core competenciesCore CompetenciesThe core competencies in business refer to its resources and unique fundamental capabilities that distinguish it from market competitors. It is an essential component of marketing strategy leading to brand recognition and business growth. The concept serves to be useful for companies focusing on multiple product lines and operating more than one business unit at a time. read more are efficiently met. The management sets these standards, expecting employees and the overall workforce to strengthen their performance while remaining compliant with the standards and regulations.

#4 – Operational Audits

The operational auditors are accountable for issues with the company’s operational infrastructure. They check how efficiently a business works to achieve its set output. Starting from quality control, accounting controlsAccounting ControlsAccounting controls comprise the methods and procedures a company adopts for verifying the accuracy, validity and transparency of its financial statements. An organization takes this measure to ensure its business operations’ efficiency; it has nothing to do with the legal compliance and regulations.read more to human resources function, they assess every aspect of the company. In addition, they also offer advice and guidelines to improve the operational procedures to enhance the company’s efficiency and effectiveness.

#5 – Environmental Audits

Having an eco-friendly environment is a must for any company. When an auditor is asked to conduct environmental audits, they see that the premises do not violate any environmental laws or policies.

Internal Audit Functions

These audits can be conducted daily, monthly, quarterly, or annually, given how frequently the directors want the companies to be inspected and supervised. The main motives behind conducting the audits internally are:

Through this audit, auditors monitor internal controlsInternal ControlsInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company.read more to ensure that the accounting processesAccounting ProcessesThe accounting process is the series of steps followed by the business entity to record the business financial transactions, which includes steps for collecting, identifying, classifying, summarizing, and recording of the business transactions in the company’s books of accounts so that the entity’s financial statements can be prepared and the profits and financial position of the business can be known at regular intervals of time.read more are effectively conducted and the accuracy is maintained in the released financial reports.The internal audit manager checks governance to ensure companies do not compromise their ethical values. They see if the firms in question adopt fair practices for a growing business.Risk management is easier as the audits conducted internally also involve auditors’ consultancy services whereby they identify the loopholes and let the businesses improve their standards and become more efficient.Auditors review the activities, be it human resources procedures or operating activitiesOperating ActivitiesOperating activities generate the majority of the company’s cash flows since they are directly linked to the company’s core business activities such as sales, distribution, and production.read more, or compliance with laws and regulations. They examine the means used to measure the financial and other information. The auditor may make inquiries about transaction balances and other specific matters.

Example

Company A presents its financial report to the board of directorsBoard Of DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. read more for the current year. Stella, the finance director, raises concerns over the discrepancies in the invoices. She notices the mismatch between invoices and puts a lot of questions. As it was an internal audit, the company gets a chance to improve the system to ensure it passes through the next audits successfully.

Internal Audit vs External Audit

While internal audits are conducted to examine and improve the efficiency of businesses, external auditsExternal AuditsExternal Audit is defined as the audit of the financial records of the company in which independent auditors perform the task of examining validity of financial records of the company carefully in order to find out if there is any misstatement in the records due to fraud, error or embezzlement and then reporting the same to the stakeholders of the company.read more validate and assure the accuracy of the financial reports. Besides this, there are other differences too that have been listed below: