What is an Internal Audit?
It is an independent department. The first and foremost aim of the department is the development of financial management. It provides information to the board of directors regarding financial status, annual audit, operational effectiveness, and internal control reports. One of the primary objectives of the process is Risk management. Risk management is the identification and solution of problems in a company before the external audit.
An internal audit firm stays in touch with the company throughout the year (depending on the scope). By the end of the process, it assesses the project scope and discusses the weakness of the internal control system.
The Function of Internal Audit
- It is either a daily, weekly, monthly, or annual process. The frequency of the process depends on the department of the company.
- On suspecting illegal activities, auditors plan surprising audits.
- The process begins with a general understanding of the department
- Auditors arrange for existing documentation reviews. This indirect assessment avoids the disturbance of workflow.
- If the lack of proper documentation causes deprivation of information, they will arrange for direct discussion.
- After observing the internal control system, they conduct fieldwork tests.
- It consists of the analysis of inventory count, transactions, account reconciliations, and other required data.
- They carry on the process with members of the staff. If they find problems in the fieldwork tests, they will assess the members concerning the reports.
- The process follows up with the official audit report preparation.
- The audit report consists of the procedures they practiced, audit findings, and suggestions for internal control development.
- They produce the final report to the management.
- The management, board of directors, and audit firm discuss the solution and assure the application of changes.
Limitations of Internal Audit
- The process of internal audit causes extra expenses. Hence it seems to be an expensive process by small scale workers.
- On occasions, there will be some disagreement between the internal auditors and the managers.
- Because of the unfamiliarity of the operating system to auditors, the audit report seems to be pointless for managers.
- At times, the entry-level workers, engineers, etc., follow another methodology than what is documented by the managers.
- As the management can modify data, the accuracy of documentation is low.
- In small industries, auditors have to audit and submit reports to the same person. Hence auditors need an objective mindset and independent analysis.
- Now and then, the results are hard to accept. If auditors blame the management, they will deny or else direct the responsibility for others.
Importance of Internal Audit
The whole process involves extra expenditure and does not generate money. At the same time, it forms the core of the development process. Internal audit provides enough information to develop the company’s reputation, strategic progress, financial status, operational effectiveness, and the welfare of its workers too.
Internal audit maintains proper accounts, ensures better management, points out the areas of weakness, reviews the growth, protects the assets, and prevent frauds.