Internal Audit: Why your Business needs it

Chomwa Shikati
Aug 25, 2017 · 4 min read

Whether small or large, your business needs an internal audit function. There is a belief that only large organizations can stand to gain from the benefits of having an internal audit function, but that is not the case. Regardless of the size of an organization, internal audit provides a number of crucial insights and important services to company management. As a matter of fact, a small business establishing an internal audit function is an important step towards the growth of the company.

So what is Internal Audit? The Institute of Internal Auditors defines this way, “internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.” Now that we have a definition, what are the benefits of your business having an internal audit function or a program for internal controls in place?

Consider six of some of the benefits that your organization can reap from performing regularly scheduled internal audits:

Detect Fraud. One of the benefits of having an internal audit function is the detection and prevention of fraud. Businesses lose a lot of money every year due to employee theft. Small business would feel like they don’t need or cannot afford an internal audit function, but even the small staff they have can be used to create a function which can be used to monitor their employees. This Internal audit function can be used to stop theft like; check tampering, cash theft, fake unauthorized expenses, unauthorized payroll transactions and exploiting payments from customers. A publicized policy of internally auditing financial transactions for fraud may hinder a member of staff from exploiting company funds.

Increase financial reporting reliability and integrity. All financial statements are prepared by complying with certain regulations and standards. Sometimes these standards are changed and since the bodies responsible for these are not obligated to inform every business owner about them, it is the job of the internal audit to help you and your financial team adhere to these changes and make you avoid any sanctions or fines. Internal audit increases your financial reporting reliability by ensuring compliance with laws and statutory regulations.

Will provide a Risk assessment. An internal audit function will assist management with identifying and prioritizing areas or processes that require attention and audit focus to actions that may adversely affect the organization; prioritizing projects by level of potential risk; and develop a plan that will limit exposure to loss. The risk assessment process includes the review of existing documentation such as Prior Audit Findings, the entity’s Strategic Plan, and its Financial Statements, and interviewing department heads and process owners with a focus on “what can go wrong” scenarios.

Monitoring and Improving controls in the organization. Most internal auditors have a lot of experience in knowing how controls fail and how they are evaded. Internal auditors will monitor and evaluate procedure and policies in an organization regularly in order to prevent and minimize fraud and other losses from occurring. They will perform tests of controls to verify whether controls are working as designed. Therefore, internal audit identifies redundancies in operational and control procedures and provides recommendations to improve the efficiency and effectiveness of procedures. By allowing internal audit to provide advice on how to implement mechanical monitoring of controls and transactions, an organization ends up with improved performance and a better understanding into risks.

Makes the organization process dependent and not person dependent. By helping put in place policies and procedures that will improve the efficiency in operations, an internal audit function will therefore make an organization process dependent.

Serves as an Early Warning System, enabling deficiencies to be identified and re-mediated on a timely basis. Because of the procedures undertaken to improve the risk management, controls and governance processes of an organization, the internal audit function will spot any deficiencies that will harm an organization and provide solutions and remedies to them. This will also help an organization be ready for any external, regulatory or compliance audits.

Other benefits of having an internal audit also include;

· Internal Audit “reports” directly to management or the Board (not an outside agency or adversarial entity),

· The scope of the internal audit is defined by management or the Board (not an outside agency or adversarial entity)

· Improves the “control environment” of the organization

· Ultimately increases accountability within the organization.

Once you start practicing regular internal audits, you will discover a huge range of additional benefits. You organization does not have to go all out and hugely invest to employ an entire department. The function can be internal, but just as easily out-sourced or co-sourced. You can start by also having effective internal controls that provide risk assessment in areas of need, and once the benefits are seen a decision can be made to get a full internal audit function.

What are your thoughts? Do you think all businesses stand to benefit from having an internal audit function? Share your comments and thoughts in the comment section below.

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Written by

A Lamp Lighter (cshikati@gmail.com)

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