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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