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Internal Audit Explained

Internal Audit Explained

Internal audit is an objective assurance, independent and a consultation activity made or designed to add value and improve an organisation’s operations. They help an organisation achieve its objectives. Internal audit brings a systematic and disciplined attempt in evaluating and improving the effectiveness of control, risk management and processes of governance. Internal audit helps achieve this by providing insights and recommendations based on the analyses and assessments of data and business processes. Internal audit provides value to governing bodies and senior management as an objective source of independent advice. The people who conduct these audits are known as internal auditors.

Internal auditing encompasses topics like risk management, organisation governance and management controls regarding effectiveness and efficiency of operations, which may include safeguarding assets and the reliability of management and financial reporting. Internal audit also includes compliance with regulations and laws. Internal auditing is also proactively involved in the identification of fraud and fraudulent acts. Internal auditors participate in fraud investigations and conduct post investigation fraud audits to identify financial losses and control breakdowns.

Internal auditors advise management on how to better execute responsibilities. Therefore, they should have higher educational and professional backgrounds.

Internal auditors can be certified through the Institute of Internal Auditors through a rigorous written examination.

Internal auditors work for government agencies to publicly traded companies and non-profit companies or other industries. Internal audit departments are usually led by a Chief Audit Executive who reports to an Audit Committee of the Board of Directors. The board then has an administrative staff who reports to the Chief Executive Officer or CEO.

Role of an Internal Auditor in Internal Control.

Internal audits are usually directed at assessing or evaluating internal control. The internal control is the process achieved by a business or entity’s board of directors, personnel, and management. They are designed to give reasonable guarantee in trying to achieve core objectives that the business is striving for. These objectives usually include the efficiency and effectiveness of operations, reliability of management and financial reporting, compliance with regulations and laws, and safeguarding assets.

Auditors conduct internal audit to evaluate or assess whether management control is present and is operating effectively. If they do not, they should provide recommendations to improve them.

Role of Internal Auditors in Risk Management

Internal auditors or professionals evaluates the organisation’s risk management activities’ effectiveness. Risk management is the process of identifying, analyses, response, a gathering of information, monitoring of risks that can potentially have an impact on the organisation in its quest to achieve its objectives and mission.

Internal auditors can advise management regarding reporting of forward-looking operating measures, identify emerging risks, evaluate and report whether the stakeholders or board can have reasonable assurance of the organisation’s management team. Internal auditors may evaluate activities of corporate legal counsel and management of risks.

Internal audit services can help organisations address the risk of fraud through fraud risk assessment through fraud deterrence. They may also help create and sustain Enterprise Risk Management processes. These are highly valued because they help establish and implement effective management systems and ensure that quality is maintained and professional standards are met. Internal auditors play an advisory role in the risk assessment team.

Role of an Internal Auditor in Corporate Governance

Internal auditors participate in meetings and discussions with members of the Board of Directors. They are considered as one of the four pillars of corporate governance. The other pillars are the management, external auditor and the Board of Directors.

An internal auditor’s primary role is to help the audit committee of the Board of Directors in performing its responsibilities effectively. Their responsibility includes reporting critical management control issues, coordinating with the external auditor and management, suggesting topics for meeting agendas and make sure that the committee receives effective information. Internal auditors also formally evaluate corporate governance, especially in areas of overseeing enterprise risks, fraud, and corporate ethics.

Execution of an Internal Audit

An internal audit usually involves the process of:

  • Establishing and communicating the objectives and scope of the audit to the proper members of management.
  • Understanding the business under review.
  • Describing the risks faced by business activities within the scope.
  • Identification of management practices.
  • Developing and executing testing and risk-based approach to determine if management controls are operating as they should.
  • Reporting challenges and issues and try to negotiate action plans to address these problems.
  • Follow-up reported findings at the right intervals.

Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit,  and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.

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