5 Proven Importance of Internal Audit
The business environment today is becoming more competitive, increasingly complex and hugely exposed to risk. As the risk landscape expands, adopting new ways to deliver more value to differentiate your business becomes important.
A 2016 study revealed that 62% of organizations believe auditors will become ‘trusted advisers’ in the coming years.”
Internal audit is a key pillar of good governance. It provides all the stakeholders with an independent view on whether the organisation has an appropriate risk and control environment, whilst also acting as a catalyst for a strong risk and compliance culture within an organisation.
“Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”
Source: The International Standards for the Professional Practice of Internal Auditing issued by the Institute of Internal Auditors
Here’s why –
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- Internal audit plays a key role in improving risk management, management controls, and an organization’s governance by providing intelligent insights and recommendations to the business after going through an in-depth assessment and analysis of the business data.
- Internal audit can safeguard a business from loss by identifying potential frauds, operational inefficiencies, non-compliance with laws and unforeseen conditions like theft.
Objectives of Internal Audit
So, here is what can you expect from internal audit-
- Risk Assessment – To evaluate risks, internal auditors scrutinize the organization’s risk management processes, internal controls, and governance processes. After a detailed evaluation, auditors share the report with the senior management.
- Monitoring emerging risks – After consulting with the management, auditors understand the amount of risk the company is ready to take. This helps auditors in predicting future concerns and then provide solutions accordingly.
- Achievement of business objectives – Internal auditing ensures that the company achieves excellence in its operations by complying with standard operating policies.
- Cost control management – Auditing practices facilitate the detection of frauds, losses, and prevention of the same. Auditing also checks the validity and authenticity of a company’s accounting and statistical records.
Hence, failure of conducting a regular internal audit can increase business exposure to unpredictable risks and potential deterrent.
Internal audit executes a systematic and objective approach to examine the books of accounts, statutory records, documents and the current financial situation of an organization. Internal auditing takes place with an aim to ascertain if the financial and non-financial disclosure of the company meets the true and fair view.
Internal audit can take place daily, weekly, monthly or annually.
“Internal auditors are the scrutineers of the company, be sure you are not deaf and blind”
Given below are 5 reasons indicating the importance of Internal auditing:
1. Organization receives key insight
Internal auditing is a constant process of investigating business events. However, as a business owner, you cannot audit your own work with a critical eye.
A separate team, free from operational responsibilities can objectively undertake the process of auditing internal records of an organization.
Internal auditing helps in identifying errors and redundancies in operational and control procedures. With an independent and unbiased view, internal auditors provide recommendations to improve the procedure to boost the efficiency and effectiveness of the business and as a result add value to the organization.
2. The overall efficiency of operations is improved
A constant and objective review of policies and procedures ensures that they are being executed as mentioned in the company’s documents. Hence, the organization is assured that the policies are being followed. It eliminates the risks that are foreseen.
A regular audit includes a continuous monitoring and analysis of procedure which can enable a quick identification of control recommendations to increase the efficiency of the procedures.
Thus enabling everyone to rely more on systems instead of individuals.
3. Risk assessment and evaluation
Internal audit, through an effective risk assessment, enables an early identification of risks which helps the management and stakeholders to understand the gap areas and develop an action plan to mitigate the same. A structured audit plan can distinguish any changes in the environment.
The audit team can help to establish a company’s defense policy against risks after identifying and documenting the risks.
4. Assesses controls
A regular internal audit examines the policies and procedures of the business and assesses the organization’s efficiency and operating effectiveness. Whenever there is an introduction of a new policy, a company’s internal auditor will check to ensure that the policy is in compliance.
5. Ensure compliance with laws and regulations
It is essential for a business that all its activities are performed in compliance with all the laws and regulations applicable to the industry. A formal internal audit will make you rest assured from any penalty occurring due to non-compliance as well as prepare you for the next external audit.
Moreover, an efficient audit maintains operational efficiency, mitigates risks and wins the trust of clients.
Moreover, internal auditors save organizations from financial loss and issues such as operating inefficiencies, waste, employee theft, fraud, and cases of non-compliance with laws or regulations.
Conclusion
The role of internal audit is becoming more central and strategic one. The scope of internal audit has grown from compliance to financial controls to more strategic decisions. It demands more skills and expertise from internal auditors. In this digital age, having only traditional skills is not sufficient. Moreover, lack of technical skills and incompetencies have become challenges in strengthening internal audit processes.
To balance the insufficiency, companies can either outsource internal auditing or train internal employees to move internal audit in the right direction and make it their core competency.
To stay ahead and demonstrate more value in the organization, companies should ensure using the latest technological tools that improve audit quality while also maintaining cost-effectiveness.
