Internal Audit - Definition & Advantages of Internal Audit | What is Internal Audit?

Internal audit means an independent examination of a company's internal controls, their risk management processes to understand whether they are effective and sufficient to mitigate risks

Internal audit also verifies whether the company complies with all regulatory and legal compliances that apply to it.

The internal audit examines a company's ability to manage its accounting procedures and maintain operational efficiency while abiding by its established policies and guidelines. Regular audits ensure that businesses are rigorous enough to adhere to administrative best practices and a maximum accuracy rate in financial reporting.

Internal Audit Types

1. Compliance Audit

Compliance audit verifies compliance with laws, regulations, policies, and procedures. The purpose of compliance audit is to ensure that the organization is adhering to the applicable legal and regulatory requirements. Compliance audit covers areas such as labor laws, tax laws, environmental regulations, safety regulations, and data protection laws. 

2. Financial Audit

Financial audit is the most commonly performed internal audit. Financial audit examines the accuracy, reliability, and completeness of an organization's financial statements, transactions, and records. This audit also ensures compliance with accounting standards, laws, and regulations, and covers areas such as cash management, revenue and expense recognition, inventory management, and fixed assets. It involves independent evaluation of financial data. Public firms must carry out specific degrees of external financial auditing when an impartial third party renders an opinion on the company's financial records.

3. Environmental Audit

In the Environment audit, some businesses examine their operations impact on the environment.

4. An IT/technology audit

The Information Technology (IT) audit assess the technology infrastructure and assess IT processing & its accuracy such as data management, system security, and IT infrastructure to identify potential IT-related risks and vulnerabilities. By doing so, it helps maintain the confidentiality, integrity, and availability of organizational data.

5. Performance Evaluation

An internal audit with a performance focus is more concerned with the outcome than the processes. The business will probably have established performance benchmarks or metrics that could be connected to bonuses or other incentives.

6. Investigation Audit

Investigation Audit is conducted when there is suspicion of fraud, embezzlement, or other irregularities. This process involves a detailed investigation of the suspected activity.

7. Operational Audit

An Operational Audit examines an organization's operational procedures like production, marketing, and human resources. It helps in identifying operational inefficiencies and areas of improvement, such as reducing costs, improving productivity, and enhancing customer satisfaction. When key staff members depart, or new management takes over an organisation, an operational audit is most likely to happen. The business may wish to examine its processes to see if resources are being used more effectively. 

What Do the Five Cs of Internal Audit Mean?

Internal audit reports the 5 C’s i.e. criteria, condition, cause, consequence, and corrective action. These five elements detail the reasons for the audit, the events that led to it, the audit's methodology, the auditor's objectives, and the actions that will be taken after the findings are disclosed.

Process of internal auditing

1. Planning 

The internal auditors frequently begin by creating the audit plan and defining the scope and objectives before starting any audit operations.

2. Performing or Fieldwork

Different types of audit procedures will be performed in this phase.Throughout this process, the audit plan will be followed and executed by the audit team. 

3. Reporting

Internal audit reporting often consists of a formal report and an interim report in the form of a memo.

4. Observation

An internal audit may specify that additional actions to be taken after a specified period to confirm that the necessary post-close audit modifications were made.

The significance of internal audits

1. Management can be more effective in identifying the areas to be explored.

2. Companies may save money by conducting internal audits.

3. The business improves its control environment 

4. Internal audits may increase business productivity.

5. Reports from internal audits give management a head start on fixing problems.

6. Increased oversight may be required for some agencies.