The term ‘Audit’ often incites fear and frustration among the employees and management since this term’s literal meaning is examination and inspection.
But no one will deny that audits are an essential practice, which is required and needed for every organization. For instance, in the case of GST, eligible businesses are even required by law to conduct financial audits.
Govt authorities are empowered to take action against any company if their audit finds irregularities in functioning and operations. However, to avoid such a scenario, an organization can always conduct internal audits and always stay on the safer side.
Note here that audit (both external and internal) doesn’t just cover a company’s finances but can cover every aspect of the business. Be it operations, workflow, monetization, experts, taxes, and more.
In this article, we will cover what is internal audit and what are the types of internal audits for an organization. Will also share the audit process & procedures.
What is Internal Audit?
An internal audit process is the examination and review of an organization’s systems, processes, and operations, conducted by an internal department or a group of employees of that organization.
The reports and findings of an internal audit are shared with the company’s management, including the CEO, Chairman, Board of Directors, and not any external entity.
This is the primary difference between a statutory audit and an internal audit. In a statutory audit, the findings and reports of the audit are shared with the stakeholders of the company, but in an internal audit, only the top-most management is apprised of the findings.
The most crucial aspect of any audit process is that it should be an unbiased and honest review of the company’s work, which holds for an internal audit.
The members of this internal audit committee shouldn’t be involved in any office politics or hold any grudge against any department or persons. This ensures that the internal audit procedures are fair and without any prejudice.
Types of Internal Audits
Internal audit procedures can vary, and the structure is customized based on the organization and its business objectives. But globally, there are some uniformly accepted types of internal audits, which most of the large organizations follow and implement.
1. Compliance Audit
The compliance audit identifies whether the organization is complying with all regulations and laws, as per the Govt mandate and businesses’ rules. Compliance is an essential internal audit since any non-compliance can lead to penalties and fines or even suspension of business activities. For example, if any export-import company is not complying with the Foreign Corrupt Practices Act (FCPA), it can lead to massive fines.
2. Information Technology Audit
The IT Audit examines and reviews the company’s existing information technology framework and structure. The audit will determine how much secured privacy and data are, the state of intellectual properties created and how they are managed, the integrity of data servers, computer systems, etc.
3. Operational Audit
This internal audit process will review the complete operations of the company, department-wise, and report the findings to the top management of the company. In case there is an issue with the operations, it needs to be immediately reported and rectified.
4. Performance Audit
In this audit, the performance of all employees, teams, and departments is reviewed and checked. The audit committee finds out if all the goals and targets are being met or not and whether the employees follow the protocols for improving the existing process.
5. Environmental Audit
An environmental audit is conducted to determine the impact of a company’s operations on the environment. Socially and ethically, periodic environmental audits should take place to protect our environment and society. Besides, for some industries and sectors, the Govt mandates such environmental audits after every few months.
Internal Audit Procedure – An Overview
When it comes to internal audit procedure, then there are 4 phrases, which applies to every organization:
Phase 1: Planning
In the planning phase, the internal audit committee will understand and finalize the audit’s scope and objectives. Audit guidelines related to the existing laws of the Govt, regulations, rules, and industry standards that need to be checked and reviewed are discussed and finalized. The timeline of the audit is also determined, and a detailed plan is prepared for the audit.
Phase 2: Fieldwork
In this phase, the actual audit takes place by interviewing team members, departments, scanning the logbooks, documents, testing the products/features over a period of time, and understanding the existing processes and operations.
Phase 3: Reporting
Once the audit is completed, a report is prepared and shared with the top management for further action. The report needs to be as detailed as possible, with recommendations, suggestions, and observations clearly mentioned. Care should be taken to highlight the course of action because the internal audit makes no sense without a solution.
Phase 4: Follow-up
Once the main report has been submitted, the audit committee should conduct a follow-up with the management and confirm that the next steps are being taken. Since the management is often engaged with other critical activities, the follow-up phase is also an important step in ensuring that the audit makes some difference to the company’s overall outlook.
Do you need more help and assistance in understanding what is internal audit, and its procedures and processes? You have arrived at the right destination!
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