An internal audit is a type of internal control process designed to examine and evaluate the effectiveness of other controls within an organisation. Its main objective is to safeguard the organisation’s assets and properties from loss, waste as well as fraud.
An internal auditor takes place within a company, as the name implies working only for the company. As a result, the company’s accounting records, financial activities, and operations will be reviewed by an independent internal auditor or team of auditors who are usually the employees of the company. There are also cases where the internal audit function is outsourced to a professional firm.
Here, we will discuss the detail of the scope and objective of internal audit activities as well as it reporting line.
What is the scope of internal audit?
The internal audit’s scope includes examining and evaluating the system of internal control’s sufficiency and dependability. Internal audit’s work is to ensure that relevant internal controls are in place throughout all of the company’s activities. The internal auditor’s work will cover the following areas:
1) Review of policies and procedures for compliance
The operation of the commercial firm is influenced by the systems and processes that it implements. The internal auditors’ work scope includes evaluating and reporting on the efficacy and impact of such systems.
2) Verify the accuracy and consistency of information
The internal auditor should verify the accuracy and consistency of information used in finance and operations. The verification also needs to include an assessment of the methods for identifying, recording, classifying, estimating, measuring, and reporting such data.
3) Confirm the company resources have been properly used
Assessing how effectively and efficiently the resources are being used is also within the scope of an internal audit. Moreover, during this step, factors that hinder efficient resource utilisation should also be identified by the internal auditors.
4) Check if the company met its objectives
An examination of the company’s activities or programs is also be performed by an internal auditor to see if the outcomes are in line with the company’s defined goals and objectives. The auditor will also check to see if such activities or programs are being performed as planned.
5) Validate if the assets are well-protected
The internal auditor should examine the current system for protecting assets and, if necessary, confirm their existence.
Here are some examples of tasks that internal auditors will carry out during an internal audit:
- Setting audit objectives so that progress toward them can be tracked.
- Recognising, analysing and providing recommendations for effective handling of the company’s significant risks.
- Evaluating whether controls are in place to protect the company’s assets against losses that may be caused by waste, inefficiency, economically unsound activities and fraud.
- Assess if the information systems used by the management are secure and be relied on.
- Review the operations to see if the company’s policies and control processes are followed when they are carried out.
- Assess the company’s operations to ensure they are conducted efficiently, effectively and cost-effectively.
- Evaluate whether the company complies with all applicable laws, rules and regulations.
- Review the new systems implemented by the company to ensure that they are being monitored and adequate internal controls are in place and that they are in line with the company’s needs.
- Assess whether the company apply good governance across its operations.
- Evaluate whether the company’s goals have been met.
What are the main objectives of an internal audit?
1) To analyse the operations
Systems, procedures, and sufficient staffing are required by a company so that it can meet its objectives and handle important resources. Therefore, internal auditors must collaborate closely with department managers to understand the company’s operations.
After the internal auditors gain a good understanding of the company’s strategic objectives and the industry in which they operate, they will be able to see how the activities of a particular component of the organisation fit into the broader picture and perform a good analysis of the company’s operations.
2) To review the risks identified by management
It is the responsibility of management to identify the risks that the company faces and to understand how they will hinder the company from meeting its objectives if they are not properly handled. Managers must determine the company’s risk appetite and put in place sufficient controls and other measures to manage the risks.
Some businesses will be more willing to take more risks to ensure it stays relevant in rapidly moving trends and business/economic situations. As a result, internal auditing procedures have evolved to become more proactive and risk-based so that the internal auditor will be able to foresee potential future opportunities and risks as well as give assurance, guidance, and insight before any issues actually arise.
3) To evaluate the risk management ability
Internal auditing is primarily focused on assessing how well a company manages its risks. To evaluate that, the internal auditor will assess the quality of internal control systems, risk management processes, and corporate governance.
The risks assessed include health and safety risks, market failure risks, supply chain risks, cybersecurity risks and financial risks, to mention a few. The ability to manage risks effectively or more effectively than rivals and as effectively as stakeholders expect is critical to a company’s success.
4) To review controls
Internal audit has an objective in assessing the internal controls as these controls affect every single individual in the company.
The internal auditor will need to review those controls by checking if they are adequately designed to handle the risks, properly carried out by those involved and whether any additional controls need to be implemented to fill any gap in the risk management process.
5) To help management improve internal controls
An internal auditor’s understanding of risk management also makes him or she qualified to serve as a consultant. They can offer recommendations and catalyse change in a company’s procedures.
Working with the internal auditor might assist in improving the controls and identifying changes if the management is worried about a specific risk area. Alternatively, if a large new project is being conducted, the internal auditor may assist in ensuring that project risks are properly recognised and analysed, with appropriate management action taken.