Internal Audit

Definition: Internal Audit indicates an independent assessment of activities inside an organization for the inspection of financial, accounting and other, day- to- day business practices. It subsists of steady and crucial review of operating and financial activities by management and reporting to it and not to stakeholders.

Content: Internal Audit

1. Procedure
2. Fundamentals
3. Objectives
4. Importance
5. Difference between Internal audit and External audit
6. Conclusion

Procedure of Internal Audit

It consists of four stages. They are as follows:

• Planning: In the course of the planning process, the audit team will describe the objectives and scope, evaluates instructions related to audit such as law, policies, procedures, etc.

Analyze the results from past audits, arrange a timetable and the allocation for the audit and then constitutes an audit plans to be performed.

• Field-work: It is a substantial act of internal auditing. During this stage, the audit team will implement the audit procedures by reviewing supporting documents, Interviewing department personnel, recognizing exceptions and identify suggestions for improvement.

And at the end, the audit department furnishes written feedback and disciplinary action plan for their findings.

• Reporting: It is the third stage of the internal audit procedure. The auditor will formulate the internal audit report which sum-up and convey the audit results; then issues a draft report which is discussed with the unit management and after that final report is issued.

The report should be accurate, fair, short and appropriate.

• Follow-up: It is the final and an important stage of internal audit which is generally ignored. In this stage, relevant monitoring with the process-owners desires to achieve suggestions as well as Board surveillance of the company’s comprehensive status in addressing findings determined by internal audit.

If the management break-down the follow-up on the application of recommendations, it is unbelievable that the changes will occur.

Fundamentals of Internal Audit

1. Independent status: The staff should have independent status in the management, and the internal auditor should have an adequately high status in the management.
2. Scope of audit: The opportunity of the department must be stated entirely to the practicable range. In fact, the audit department must have the power to scrutinize the financial activity of an organization.
3. Definite objectives: It must have an explicit and straightforward understanding of the targets on every assignment given to it.
4. Evolution of the department: The organization should be meticulous while selecting the staff of the department, the qualification and size of the team should be adequate with the size of the organization.
5. Internal audit report: A copy of an internal audit report prepared by the internal auditor should be made available to the statutory auditor of an organization.
6. Investigating actions: These must endure a specific procedure to examine the report submitted by the department.

Objectives

The long-term aim of it is to help the management in achieving the most productive policy of the operations of the administration. It consists of:

• Safeguard the interest of the Management

The accomplishment of the objective relies upon the following actions of the internal auditor:

1. Verifying the degree of authenticity of the statistical and accounting data developed within the organization.
2. Verifying the amount to which business assets are accurately accounted for and ensured from all kinds of losses.
3. Verifying the intensity of the compliances with entrenched policies, procedures, and plans.

• Progression of the interests of the Management

The objectives comprise the proposal of changes for the enhancement of different phases of the operations. This objective is accomplished by:

1. Analyzing and evaluating the plans and policies of the management.
2. Analyzing and evaluating internal evidence and procedures.
3. Analyzing and evaluating the performance governing the plans, procedures and policies.

Importance

• Specify target insight: It becomes challenging to find the errors or mistakes in your work. By giving a separate and impartial view, the internal audit function adjoins value to your organization.
• Enhances the efficiency: Internal auditor grants recommendations to enhance the efficiency and strength of your organization’s procedures and policies to reduce the business and financial risks.
• Classify risks and secure assets: An internal audit program facilitates management and shareholders by analyzing and prioritizing risks through a précised assessment.
• Protect compliance with relevant laws and regulations: Acquiring the trust of your client and refraining the disastrous fines and damages, makes internal audit a valuable and beneficial activity for your organization.

Difference between Internal audit and External audit

Basis for differences	Internal Audit	External Audit
Introduction	Internal audit specifies a continuous audit function operated inside an organization by a separate department called internal audit department	External audit is a done for the statutory purposes by the outside personnel or auditor who is not working as an employee of a company
Aspiration	Analyze the conventional activities and provide opinion for the enhancement	The aspiration of the external audit is to evaluate and validate the financial report of the organization
Regulated by	Internal audit is regulated by the employees of the organization	External audit is conducted by the third party, i.e., outside person
Assignation	In an internal audit, the auditor is selected by the management of the organization	In external audit, auditor is selected by the members of the organization
Time period	Internal audit is a continuous process; thus employees regularly work upon it	External audit is conducted once in a year
Report users	The opinion of the management is provided on a report in internal audit	The opinion of the shareholders is provided on a report in external audit
Control	Internal audit controls the operational efficiency of the organization	External audit controls the certainty and soundness of the financial statement of the organization

Conclusion

Internal audit is a separate evaluation function incorporated by the management for providing independent assurance on governance, internal control and risk- management.