An internal audit is an essential part of any business, regardless of its size or industry. It involves a systematic review and evaluation process to ensure internal processes are being followed correctly and that the company is meeting its goals in terms of efficiency, cost-effectiveness, risk management, regulatory compliance and more. Internal audits have many benefits as they can identify weaknesses and threats that the company may be facing. They are conducted by entities as they are objective and can be applied to more than one area of operation.

Overview of internal audits

Internal auditing can be beneficial for both small businesses as well as large corporations alike by allowing them to identify areas for improvement and make necessary changes in order to maximise their potential. They are performed on a regular basis, usually twice per year or once every year. Process audits however are usually performed on a more regular basis. Depending on the business, an internal audit may be mandatory. Through internal audits, organisations can reach their goals more effectively and gain a better reputation among their customers and clients as the likelihood of issues arising declines.

Benefits of internal audits

Every successful business has at some point in its lifetime conducted an audit. The size of the audit can vary. It can be something as small as looking at a process with the aim to improve it. While on the surface it may look like a minor action, it carries a lot of significance for the future of the entity. But why are they important? Internal audits have many benefits including:

  • Enhancement in business operations
  • Improved efficiency and decreased cost
  • Fraud detection
  • Controlled risk management
  • Increased regulatory compliance

Enhancement in business operations

Business operations can be greatly enhanced by internal audits as they help protect companies from potential financial, operational, and compliance issues. An internal audit provides an independent and objective assessment of an organisation’s internal control structure. It allows internal auditors to review processes and internal controls in order to identify gaps and weaknesses, as well as opportunities for improvement. Better controls, policies and procedures lead to a well-operated business with fewer disruptions. 

Improved efficiency and decreased costs

By taking a proactive approach to internal auditing, organisations can quickly identify areas of inefficiency that could lead to costly mistakes in the future. Through internal auditing, companies are able to ensure their processes are operating as efficiently and effectively as possible, while also reducing unnecessary expenses. An audit can reinforce the responsibilities of employees and highlight potential tasks that need to be changed or modified. This will increase the overall efficiency of the processes as it is clear what needs to be done and by who. This not only relates to daily tasks but recommendations given by the auditor as well.

Fraud and misconduct detection

Fraud detection is an important part of internal audits. Through internal auditing, organisations can detect potential fraudulent activity that may exist within their systems or processes. Internal auditors should use analytical reviews to identify trends in accounting records that could indicate fraud such as misstatements in accounts receivable or inventory accounts. They should also use interviews with employees to uncover any unethical behaviour or improper incentives that could lead to acts of fraud. Other techniques internal auditors may use include data analytics, document analysis and forensic testing in order to uncover any fraudulent activity that may have been committed.

Fraud can be committed by an individual or a team of individuals. An analysis of employee theft showed that employees were involved in 90% of fraud-associated business losses. By using internal audits, that number can decrease significantly as staff is aware of the strategies in place to combat unethical practices. 

Controlled risk management

Controlled risk management is an essential part of internal auditing and can provide organisations with the insight they need to proactively reduce their risks. It involves the identification and evaluation of potential risks and internal controls, as well as the implementation of strategies that aim to reduce or prevent any potential losses. This can help a company assess its internal environment, identify and measure risk levels, and develop a plan for mitigating those risks.

One key element of internal auditing is the assessment of internal controls such as policies, procedures and processes that are designed to protect a business from risks. Through internal audits, organisations can evaluate these internal controls to ensure that they are effective in limiting exposure to relevant risks, such as cybercrime. Once weaknesses in internal controls have been identified, corrective action plans can be implemented such as additional training or improved policies. Additionally, internal audits can serve as a useful tool for monitoring changes and providing feedback on how well strategies are working over time. 

In addition to assessing internal controls, internal auditors should also consider external factors that may impact an organisation’s risk profile such as changes in the economy or industry trends. Auditors should review information about external threats that could affect the company’s operations and finances in order to develop risk management strategies specific to each situation. These strategies should include ways that the business can prepare for any potential scenarios as well as measures for responding quickly if a risk does become a reality.

Increased regulatory compliance

An internal audit is useful in helping organisations comply with regulatory requirements related to specific industries or countries where they operate. Internal audit teams should be aware of relevant regulations so that they can ensure the company is adhering to them throughout its operations. If any violations occur, internal auditors can help develop solutions for getting back into compliance while minimising any effects on business objectives or corporate reputation. If an internal audit improves the overall compliance of the company, then it is likely that the company will get better results in an external audit.

risk strategy internal audit

How to conduct an internal audit

Conducting internal audits is a key part of ensuring that an organisation runs smoothly and remains compliant. In order to ensure accuracy and better results when performing internal audits, there are a few steps that should be taken in the preparation and execution stages.

Internal auditors should review the internal control framework and processes that have been put into place. This includes identifying any existing gaps or weaknesses within the internal control system and determining how these can be addressed. Internal auditors should also have an understanding of the company’s organisational structure, operations, processes and internal policies. Once all of this information has been collected and reviewed, internal auditors can then create an audit plan for their internal audit.

The audit plan should include both the scope of work to be conducted during the audit as well as a timeline for the completion of those tasks. It is important to note that internal auditors need to take into consideration the size, complexity and industry of the business when creating the audit plan in order to ensure that results are more accurate and applicable to the company.

When conducting internal audits, internal auditors should assess whether risks are being managed effectively by reviewing financial statements as well as other documents/records related to transactions within the business. Auditors may also use interviews with key staff members in order to gain further insight into any risks or issues associated with operations within the organisation. In addition to reviewing records and documents and conducting interviews with employees, it may also be beneficial for internal auditors to observe activities within different departments or areas within a company in order to identify potential issues or areas of improvement that need addressing.

Internal audits should also include testing various controls that are in place within an organisation such as assessing compliance with established policies or procedures through transaction tests or examining specific accounts for accuracy through analytical reviews. Once all testing has been completed, any issues or discrepancies identified during internal audits need to be documented thoroughly so they can be fully addressed by management in a timely manner. It is also important for companies to review findings on a regular basis so they can continually improve their processes accordingly.

Once an audit is completed, an audit report can be used to conclude the process. This article gives a great outline of what needs to be included in a comprehensive audit report. However, keep in mind that audit reports usually follow after formal procedures. While the process may seem onerous, an audit is generally performed by anyone doing process improvement or occupation health and safety checks.

A formal audit does not aim to add a lot of paperwork to the steps of improving compliance and processes. It is there to ensure that the audits are systematic, repeatable and recorded which will give better results than ad hoc reviews noted only in our memory. Compliance does not need to be a complicated process with rigid steps to follow. As long as a company develops a strategy that assist in keeping it on track, any size of audit has been successfully.

A few things to note

Conducting internal audits can help organisations ensure they are meeting their objectives while reducing risk exposure at the same time. They are an important part of ensuring that businesses stay compliant with regulations while making their operations more efficient. By taking necessary steps during preparation and execution stages including reviewing existing systems/policies, creating an audit plan, and documenting findings – organisations will be able to get more value out of their internal audit program while building trust between management and employees. Continuous monitoring is crucial so they can keep track of changes and make modifications when required.

At Polonious we undergo regular ISO audits and we are ISO 27001 and ISO 9001 certified to ensure that we are providing our customers with the best possible service. We help our clients fill out audit reports online and add action items to their audits automatically. Audit reports can be easily exported so your business will spend less time on audit-related paperwork and more time on its core responsibilities. If you want to learn more about our system, request a demo!