Internal audit coming up soon? Here’s what to expect
Internal audits are often met with fear and frustration by business owners, as many consider getting their business activities reviewed in detail is unsettling, to say the least. While this is understandable, internal audits do have a very important purpose and are mandatory to maintain transparency.
An internal audit is performed by either an in-house team or a third-party organization, and its role is to provide business owners with objective information about the risks, operational effectiveness as well as laws and regulations compliance of their business.
If an internal audit is coming soon, and you don’t know what to expect, we put together this guide to help you understand the purpose of an audit and what the process consists of.
Why do companies need to conduct internal audits?
Businesses need to conduct internal audits due to an act that was passed in 2002. The act is called the Sarbanes-Oxley Act of 2002 and prompts executives of publicly traded companies to be responsible for the accuracy of the company’s financial statements and reporting.
While internal audits don’t generate revenue or provide monetary value to a company, its purpose is very important. An internal audit performed correctly should be able to provide business owners with important insight into the operations and growth of their company. By using an audit management software, your audit team can draw out a comprehensive report determining what works and what doesn’t inside your company.
Compared to external audits, which are usually more focused on financial statements and reporting potential risks, internal audits look into broader issues. These include company reputation, operational efficiency, growth, environmental impacts or employee treatment.
In total, there are 5 types of internal audits that are usually performed:
●Compliance Audits: evaluates company’s compliances with current applicable laws, policies, regulations and procedures.
●Environmental Audits: evaluates the impact a company’s operations have on the environment
●Information Technology Audits: evaluates information systems and infrastructures, to ensure customer information and intellectual property protection
●Operational Audits: evaluates the overall efficiency and reliability of a company’s operations
●Performance Audits: evaluates whether the company is meeting the goals and objectives set by management.
What does the process of conducting an internal audit require?
An internal audit is comprised out of four phases – planning, fieldwork, reporting and follow-up. All of these phrases have a set purpose that contributes to the audit results:
●Planning: the internal audit team defines the objectives, review guidance, industry standards and company policies, relevant for the current audit. Through an audit management software, the team can also review results from past audits, set a budget and timeframe for the current audit and draw out a plan.
●Fieldwork: during this phase, the audit team performs the internal audit, which includes interviewing personnel, reviews relevant documents, tests controls and identifies exceptions.
●Reporting: after concluding the audit, the team will have to draft a report, which should present the situation as it was observed during the fieldwork phase. The report needs to be clear and concise, to avoid interpretation, and should also include actionable recommendations to improve business processes.
●Follow-up: last but not least, the follow-up phase ensures the recommendations sent by the audit team are implemented accordingly.