INTERNAL AUDIT
Internal
Audit in India: A Proactive Initiative. ... Internal audit is an independent function of
management which entails the continuous and critical appraisal of the
functioning of an entity, with a special focus on possible areas for improvement
and how to strengthen and add value to an entity's governance mechanisms.
Internal audit is a review of operations and records undertaken
within a business by specially assigned staff. It is a post-transaction review
to evaluate the correctness of records and the effectiveness of operations on a
continuous basis in an organization by the paying staffs.
The term 'internal audit' has been defined as
the independent appraisal of activity within an organization for the review of
accounting, financial and other business practices as a protective and
constructive arm of management.
It is a type of control which functions by measuring and evaluating the
effectiveness of other types of controls. Internal audit deals primarily with
accounting and financial matters, but it may also properly deal with matters of
an operating nature.
The work of internal auditor is more or less the same as that of
external or professional auditor. Being the employee of the organization, s/he
has to see that there is no waste and inefficiency in the organization. An
auditor has to ensure that the organization incurs liabilities in respect of
its valid and legitimate activities. S/he has to make efforts to find out the
weakness of the internal control and internal check system followed
in the organization and suggest necessary improvements.
Many large organizations have a system of internal audit within
the organization as a integral part of internal control. Internal auditing is a
staff function rather than a line function and the internal auditor does not
exercise direct authority over other persons in the organization.
Internal
audits help organizations achieve corporate objectives by
keeping a pulse on the consistency of internal business practices.
The
goal of an internal audit is
to ensure organizational policies and procedures are followed and to alert
management of gaps in policy compliance.
The
internal audit process can be done with internal resources or can be outsourced
to an external third party vendor. There are advantages and disadvantages to outsourcing the
function. However, making sure that the audit practice is done consistently can
help organizations manage performance and
product quality.
Performing
an internal audit can be time consuming and resources need to be allocated to
the process. An audit can be done daily, weekly, monthly or annually. Some
departments may need to be audited more often than others.
Objectives Of Internal Audit
The objectives of the internal audit can be summarized as
follows:
1. To verify the correctness, accuracy and
authenticity of the financial accounting and statistical records presented to
the management.
2. To confirm that the liabilities have been incurred by the
organization in respect of its valid and legitimate activities.
3. To comment on the effectiveness of the internal control
system and the internal check system in force and to suggest ways and
means to improve these systems.
4. To facilitate the early detection and prevention of frauds.
5. To examine the protection afforded to company's assets and
use of them for business purpose.
6. To identify the authorities responsible for purchasing assets
and other items as well as disposal of assets.
7. To ensure that the standard accounting practices which have
to be followed by the organization are strictly followed.
8. To undertake special investigation for the management.
9. To assist management in achieving the most efficient
administration of the operation by establishing procedures by complying with
company's operating policies.
Advantages Of Internal Audit
The advantages of internal audit are as follows:
1. Staffs remain alert because their work shall
be checked by the internal auditor. So, accounting remains correct.
2. Internal audit helps to detect errors and frauds and provides
suggestions to improve them which helps the management to take corrective
action.
3. Internal audit detects the misuse of resources in time which
helps to reduce unnecessary expenses.
4. Internal audit checks the efficiency of staffs which helps to
increase the efficiency of them.
5. Internal audit checks the books of accounts, detects errors
and frauds and helps in its correction which makes the act of final
auditor easier.
6. Internal audit increases the morale of honest staff because
evaluation of performance of any staffs will be made at any time.
8 Steps to Performing
an Internal Audit
1.
Identify Areas that Need Auditing
Identify
departments that operate by usingpolicies and procedures written
by the organization or by regulatory agencies. This can include areas as
complex as manufacturing processes or as simplistic as accounting
procedures. Make a list of each area and the functions of the area that require
review.
2.
Determine How Often Auditing Needs to be Done
Some areas
may only need to be audited annually while some departments may require more
frequent audits. For example, a manufacturing process may require daily audits
for quality control purposes
while theHR function may
only require an annual audit of records and processes.
3.
Create Audit Calendar
A
structured and systematic approach to the auditing process can help ensure the
function gets completed. And, like any other lbusiness goal, audits should be
integrated into corporate objectives. Scheduling audits on the business
calendar ensures that it is done consistently.
4.
Alert Departments of Scheduled Audits
It is
simply common courtesy to give departments notice of an audit so they can have
the necessary documents and materials ready and available for the reviewer. A
surprise audit should only be done if there is suspicion of unethical or illegal activity. Department managers should not feel threatened by an auditor but view
them as a valued resource to help them better manage their area.
5.
Be Prepared
The
auditor should come prepared with an understanding of policies and procedures
and a list of items that will be reviewed. For example, an HR audit may
focus on employee files and I-9 compliance. The more prepared the
auditor is the more efficient the process will be and the less down time there
will be for the area being reviewed.
6.
Interview Users
The
auditor should interview employees and ask them to explain their work process.
Compare the process, as the employee explained it, to what the written policy
says. This step is to gain an understanding of employee competence and identify
areas that need additional training.
7.
Document Results
Document
the results and any differences in practice to how the policies are written,
when policies are complied with and when they are not. This may also include
other information that is gathered from the interview process. Again, the goal
is to identify gaps in compliance and to figure out a way to bridge that gap.
8.
Report Findings
Create
an easy to read audit report. These reports should be reviewed with senior
management and an improvement plan should be developed for areas that have gaps
in practice compliance. Using a FOCUS PDCA model
can help facilitate a structured process for implementing this type of
improvement.
Other things to think about
·
When reviewing policies and procedures, it is important to think
about whether they are meeting the needs of customers and adding value to the organization.
·
Policies and procedures should focus on continuous improvement
as it relates to how work is performed.
·
Is there a strong team
environment that supports
compliance with policies and procedures? A dysfunctional team can
impact procedural compliance.
·
Policies and procedures should be reviewed on an annual basis to
ensure policies reflect the changing business environment.
Businesses
are only as successful as their ability to create products and services that
meet the needs of their customers and their ability to deliver these products
and services accurately, seamlessly and without error. Policies and procedures
are how organizations maintain efficient and effective practices that support
quality products and services. Internal audits are one tool that organizations
use to ensure that their products and services are delivered the right way, the
first time and every time.
How
often do you audit your internal business practices?
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