How to conduct an Internal Audit For Your Business
The importance of auditing for compliance or accountability reasons cannot be overemphasised. Contrary to popular belief, audits are important to all companies, big or small. Entrepreneurs who want to know if their books are in order should check their company’s accounts at least once a year.
What is an Audit?
An audit is an official inspection of an organisation’s account, typically by an independent body. The two major types of audits are:
Internal Audit: This type of audit is usually conducted by an in-house auditor/accountant or a third-party auditor as contracted by the company.
External Audit: This is conducted by a third party auditor who works for an independent accounting firm or a Certified Public Accounting (CPA) firm.
For the purpose of this article, we will be focusing on Internal Audits and why it is important for your business.
Before we begin, let’s take a quick dive into what an internal audit means.
Investopedia defines an internal audit as the process of evaluating a company’s internal controls, including its corporate governance and accounting processes.
Another definition of an internal audit says it reviews and evaluates current processes, looks for areas of risk, and helps you make sure that financial and operational information is accurate and reliable.
Types of Internal Audits
Compliance Audit: This type of audit examines if the company is adhering to the governing laws of the system in which they operate.
Financial Audit: This examines the accounting, recording, and reporting of financial transactions, as well as reviewing the adequacy of internal controls.
Operational Audit: This focuses on the internal controls of key processes, procedures, or systems to improve productivity and efficiency.
Information Technology Audit: This type of audit assess the information technology systems of a company and how these systems are used.
Why an Internal Audit is good for your business
Risk Assessment: By conducting regular internal audits, you increase your chances of identifying and minimising the risk of fraud, theft or resource misuse in your company.
Ensure Compliance: Internal auditing ensures your business stays compliant with the laws, regulations, standards, and ethical practices that apply to your organisation and industry. We published an article that explained a bit as to why audits are a requirement for compliance. Read here.
More Insight: You get more useful insights into your company’s policies/procedures when you conduct internal audits. It also helps identify recurring issues, which will ultimately improve effectiveness and organisational success.
Improves Accountability: Whether it’s to your business board directors, investors or even employees, accountability is a trait every business owner should possess. When you conduct regular audits, you are promoting accountability by ensuring the availability of verifiable information on how the company is being managed.
Internal Audit Process
To conduct a successful internal audit for your business, follow these four step process which we’ve summarised below:
Planning: This is when you determine the scope, objectives and goals of the audit. You do this by reviewing the last audit report, setting a budget and a timeline. It is also at this stage that the audit execution plan is created.
Fieldwork: It is at this stage that the audit execution plan is set in motion and the actual work begins. This includes interviewing key stakeholders to shed more light into the company’s process and controls, reviewing relevant documents and data, testing the controls for a sample over a period of time, documenting the work performed, and identifying risks and providing recommendations.
Report: An internal audit report will be drafted at this stage containing results from the fieldwork. This report should be clearly written to avoid miscommunication or ambiguity and shared with the relevant stakeholders.
Review/Follow-up: This is the final stage of the auditing process and it is to ensure that the recommendations provided in the reporting stage have been implemented.
3 mistakes to avoid during an internal audit process
Lack of proper planning: To conclude a successful audit, you need to properly plan and define your goals. This is to make sure that the team is well prepared for any issues and can respond quickly, and efficiently.
Insufficient amount of data: Always ask questions and get the data you need for your audit. Work with your data team to ensure the data being used is accurate and has not been tampered with.
Poor stakeholder communication: To get the most out of the internal audit process, all stakeholders should be involved early and throughout the process to give more context into organisational processes.
Internal auditing is more than just a compliance requirement. It is required to assist you in anticipating potential problems and identifying possible areas for improvement. Internal auditing is a necessary component of business growth when done correctly.