Companies have an internal audit to evaluate their internal controls, like corporate governance and accounting processes.
The main purpose of internal audit is to provide the company with independent assurance that its risk management, corporate governance, and internal control processes are operating effectively.
The internal audit ensures that rules, regulations, and laws are being followed to maintain prompt financial reporting and collection of data for analysis.
It also helps the company find out what’s wrong and improve their efficiency and find out what is wrong before it is discovered in the external audit. This also provides the management and the board time to correct mistakes before the external audit.
Advantages of Internal Audits:
- The biggest advantage of Internal Audit is, as mentioned above; it helps identify errors before the external audit. So by the time an external audit happens, hopefully, the management would have rectified those errors. This also helps reduce the chances of fraud, as the management can’t go over everything so auditors, who are professionals, can easily identify any wrongdoings.
- Internal audit introduces a proper accounting system that has steps and procedures in order to maintain ease of checking and maintain financial records. This makes it easier to achieve goals and results that are desirable.
- Internal audit also helps the management in making decisions and keeps the management in check. The objectives of the business can be achieved if there is proper internal control, internal check, and internal audit. Management also uses the audit reports of the previous year to see how the organization is doing and progressing and then they make effective decisions using this way of comparison. The managers also use the internal audit to make necessary changes for a better functioning company.
- Asset protection is possible with internal audit. The company managers can misuse assets for their private purpose and not for generating income for the business. The internal audit makes sure that the cash, stock or inventory and other assets are being put to proper use and aren’t involved in anything other than business income generation.
- Internal audit can help with fixing the division of labour and responsibilities. During an internal audit, the activities of every employee including the managers are being looked over and where necessary, the auditors can point out the need for separate labour required for a particular task. Hence the division of labour happens. This also helps assign responsibilities to idle employees or people not doing their tasks properly can be assigned a standard or benchmark they have to meet in order to stay employed. Any action can then be taken if found suitable to make individuals accountable.
- Internal audit helps external audits too. The work done by an internal auditor can help the external auditor as it makes it easier for them to conduct an external audit. The processes for both the audits are similar and external auditors do choose to go through the internal audit reports. However, it isn’t appropriate for them to completely rely upon the internal audit reports.
- Previous year’s audit reports can be the basis for making the budgeting decisions for the current year by preparing the income statement and balance sheet. This helps the company improve the performance of their business.
- Like protection of assets, internal audit also makes sure the resources are being used properly or not. Misuse of resources means wastage of resources, which ultimately leads to increased costs for the organization. The company can figure out the optimum usage of resources using the controlled cost of output and internal audit helps with putting the resources to the best use and in the best interest of the business.
- Lastly, internal audits help investigate various aspects of the business properly. Wherever there are doubts arising, the internal auditor can use facts and figures to find out what’s not being done right. The company’s management makes these requests and they ask the auditors to investigate different areas in the organization.
Limitations of Internal Audits:
We’ve talked about many benefits of internal audits, but like everything, internal audits have limitations too.
- There is a shortage of qualified staff a company can hire for its auditing committee that conducts internal audits. A qualified and professional staff is required to conduct the process properly and efficiently. Lack of such staff can restrict the company from realizing the benefits of a good internal audit.
- There is a significant time lag that exists between the recording of financial records and the audit. Audit commences when the accounting process ends so the checking of the entries is done when some time has passed since they were made. This may result in some discrepancies.
- The staff conducting the internal audit misses out on some errors, depending on their expertise. Much more experienced and competent staff means fewer chances of errors going undetected. But otherwise, there is no guarantee that all accounts would be error-free. This can be damaging for the company if such errors are identified during the external audit, but that depends on the nature of the error and how damaging it is for the company.
- Even if errors are found, some managers are not very responsive to the correction of errors. They may choose to not make the audit reports public and can easily ignore the errors and not take necessary actions required.
- Since people who are like outsiders to the company do an internal audit, they have no interest in the betterment of the company. So they can choose to ignore some red flags. They do their work for the money rather than the company they are working for.
- Internal audit is like an extra cost that companies bear. This is because the internal audit is done for the company and the shareholders do not accept it. So an external audit is always required, hence an extra cost that companies for their sake only.
To conclude, where internal audit proceeds to bring in improved performance for a company and is a systematic approach for the company to bring about required change in the organization, it can also prove to be an unnecessary process that the company has to go through and may not reap any benefits if not done right.