Internal audits are an exercise that an organization undertakes to understand how well the organization is managing the risks that confront it. The audit examines a certain risk facing the organization — say, the risk of erroneous financial reporting, or the risk of weak cybersecurity procedures  — and tests the organization’s internal controls to keep those risks in check. The audit then results in a final report, usually with recommendations on what the business can do to improve.

Ideally, internal audits are conducted according to standards defined by the Institute of Internal Auditors. The audits should also be conducted by professionals who understand the organization’s business objectives, operations, and regulatory compliance obligations; and who also understand how to perform an internal audit objectively and according to rigorous standards.

Internal audits can be enormously helpful to organizations, because the audits help your organization to reduce risk and maintain regulatory compliance. Internal audits can also lay the foundation for easier (read: less expensive) external audits that your organization might need to undergo from time to time.

Definition of Internal Auditing

Internal auditing is a vital component of effective governance and risk management within an organization. Done correctly, these audits help the organization to accomplish its goals by providing objective assurance on how well the organization’s risk management efforts work, and on how the organization can improve. 

We should note that the definition and scope of internal auditing may slightly vary from one country to another based on local regulations, standards, and best practices. Broadly speaking, however, the Institute of Internal Auditors is an internationally recognized professional association that sets standards and provides guidance for the internal auditing profession.

Types of internal audits

Typically, internal auditors focus on a department, gather information about its current internal control process, perform fieldwork testing, follow-up with department staff about any issues they identify, and then prepare an official audit report. The auditors first review the report with management. Then they follow-up with management and the board of directors to assure that the company has implemented the report’s recommendations.

The internal audit report gives leadership the necessary tools to help the business operate more efficiently, by identifying problems and correcting issues before external auditors discover them or those issues cause a crisis.

Many organizations (and all publicly traded companies) have an audit committee on the board of directors that oversees the internal audit function. The audit committee assures that the internal auditors are able to operate independently from the business and that management visibly supports the audit team.

The Benefits of an Internal Audit vs. External Audit

Internal and external audits both serve vital roles to assure that an organization is operating effectively, transparently, and in compliance with applicable laws and regulations. That said, internal and external audits have distinct objectives, scopes, and benefits. 

Benefits of Internal Audit:

Continuous Improvement. Internal audit activity often focuses on improving processes within the organization, identifying inefficiencies, and recommending ways to optimize operations.

Flexibility. Internal auditors typically have a deeper understanding of the organization’s operations and can adapt their audit scope and approach based on the specific needs and circumstances of the organization.

Risk management. Internal audits play a crucial role in identifying and assessing organizational risks and in confirming that adequate controls are (or are not!) in place to mitigate those risks.

Operational insights. Internal auditors are generally more involved in the day-to-day operations of the organization and can provide insights and advice on operational matters.

Timely feedback. Since internal auditors operate within the organization, they can provide more frequent feedback to management.

Active approach. Internal audits can be conducted proactively, identifying potential issues and addressing them before those issues become significant problems.

Cost. Internal audit teams are already on payroll and are typically less expensive than hiring external auditors to review the same issue. Or, where an external audit is required, internal audits give you the opportunity to correct issues before the external auditors arrive, which means a more cost-efficient external audit.

Benefits of External Audit:

Independence and objectivity. External auditors are not employees of the organization, which provides more of an independent perspective and enhances the credibility of the audit findings.

Stakeholder confidence. External audit reports are used by external stakeholders, such as investors, creditors, and regulators. A positive report can enhance stakeholder confidence in the organization’s financial statements.

Regulatory compliance: External audits often required for compliance with various laws and regulations. For example, all publicly traded companies must undergo an annual financial audit; the PCI DSS cybersecurity standard for credit card data requires an audit of privacy controls.

External expertise. External auditors can bring specialized expertise and knowledge from working with a variety of other clients and industries, which can offer valuable insights.

Comparative analysis. External auditors, having worked with multiple clients, can sometimes provide benchmarking or industry comparisons, although this isn’t their primary focus.

While both internal and external audits have distinct benefits, they do complement each other. Internal audits focus more on process improvement, risk management, and operational effectiveness, while external audits primarily concentrate on the accuracy and integrity of financial statements and compliance with external regulations. Both are essential for a comprehensive assessment of an organization’s health and performance.

What Are the Five Cs of an Internal Audit?

The Five Cs of an internal audit relate to specific elements of an audit that are crucial for effective audit reporting and communication. The Five Cs are often employed to guide the creation of audit reports that are clear, concise, and actionable.

  1. Compliance. Assuring that the organization adheres to internal policies, procedures, and external regulations.
  2. Controls. Evaluating the effectiveness of the organization’s internal controls in managing risks and assuring reliable financial reporting.
  3. Culture. Assessing the organizational culture to see how well it promotes ethical behavior and aligns with the company’s values and objectives.
  4. Continuous improvement. Identifying opportunities to enhance operational efficiencies and effectiveness.
  5. Communication. Assuring open channels of communication between auditors, management, and other stakeholders.

The Internal Auditing Process

The process of an internal audit unfolds in several stages. It is a structured, methodical approach designed to provide assurance over an organization’s operations, identify areas of improvement, and verify compliance with established policies and regulations. Internal audits will typically unfold in the following way.

  1. Planning. First, auditors engage in planning to determine the scope, objectives, and focus of the audit. This stage involves understanding the auditee’s operations, identifying potential risks, and setting priorities. Key activities include risk assessment, selecting audit areas of high relevance or concern, and determining the necessary resources and timelines for the audit. 
  2. Preliminary assessment. Before diving deep into the audit, auditors conduct a preliminary assessment (sometimes called a preliminary review) of the selected audit areas. This provides an understanding of the processes, procedures, and controls in place. It helps the auditors decide where to focus their efforts and helps in designing detailed audit procedures.
  3. Fieldwork. This is the core phase of the audit where auditors gather evidence. They review documents, perform testing procedures, conduct interviews, and observe processes in action to assess the effectiveness of controls and to detect any irregularities or deficiencies. The methods and procedures used will vary depending on the nature of the audit area and the identified risks.
  4. Analysis and findings. After the fieldwork, auditors analyze the evidence they’ve gathered. They compare their findings against standards, policies, procedures, or best practices to identify discrepancies, weaknesses, or areas of non-compliance. This stage often involves determining the root causes of issues and understanding their potential effect on the organization.
  5. Reporting. Upon completion of their analysis, auditors prepare a formal audit report. This report outlines the scope of the audit, the methodologies used, key findings, recommendations for improvement, and any responses from management. The report is presented to senior management, and often to the audit committee or board of directors, to assure appropriate oversight.
  6. Follow-up. A crucial yet sometimes overlooked phase of the audit process is the follow-up. After a certain period (say, six or 12 months), auditors revisit the areas where issues were identified to verify that corrective actions have been taken and that the recommendations have been implemented effectively. This assures that the audit process results in tangible improvements in the organization’s operations.
  7. Continuous improvement. Internal auditing is not just a one-off process. Leading internal audit functions engage in continuous improvement, regularly updating their methodologies, tools, and skills based on feedback, emerging risks, and changes in the business environment. This iterative approach assures that the internal audit remains relevant and effective in helping the business to meet its objectives.

Make managing the internal audit process easier with ZenGRC

ZenGRC is revolutionizing the way organizations manage their internal audit processes

Designed with user-friendliness and efficiency in mind, this platform streamlines audit workflows, centralizes documentation, and offers real-time insights into audit progress and findings. No longer do companies need to grapple with disparate spreadsheets, manual tracking, or communication breakdowns. 

With ZenGRC, audit teams can collaborate seamlessly, easily track tasks and timelines, and generate comprehensive reports at the click of a button. By automating repetitive tasks and providing intuitive dashboards, ZenGRC ensures that auditors can focus on delivering value rather than getting bogged down with administrative challenges. For businesses looking to elevate their internal audit functions, ZenGRC offers the perfect blend of simplicity, functionality, and oversight.

Worry-free compliance management is the Zen way. For more information on how ZenGRC can help you, schedule a demo.

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