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How to Conduct an Internal Audit

Conducting an internal audit can benefit a company by assessing and improving its internal controls, corporate governance, operational efficiency, and risk management. Internal audits play a crucial role in ensuring that the organization complies with legal and regulatory requirements while maintaining the accuracy and timeliness of financial reporting. Management usually appoints internal auditors to design audits that align with the organization’s strategic goals and objectives and resolve potential issues before they escalate.

In this article, we explain what an internal audit is, the different types and the reasons for conducting one, the frequency of internal audits, how to conduct an internal audit, and the five Cs of an effective report.

Key takeaways

  • An internal audit can help manage risk and evaluate the effectiveness of a company’s financial, operational, compliance, environmental, IT, and other components.
  • Internal audits can catch and correct process flaws, enhance the efficiency of operations, and help management adjust course as needed.
  • Conducting an effective internal audit includes thorough planning, auditing, reporting, and monitoring the results of recommendations.

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What is an internal audit?

An internal audit evaluates vital aspects of a company’s operations, financial controls, and corporate governance. It is a regularly scheduled management function that can help refine internal processes, mitigate risks, enhance resource utilization, ensure compliance with laws, protect against potential fraud, waste, or abuse, and efficiently manage information systems.

An internal auditor works on behalf of management to identify and address issues or gaps before they escalate or are uncovered in an external audit. Internal audit reports offer management recommendations for improving current processes that may not function as intended and affirming effective practices.

In Canada, internal audits are usually guided by the standards set by the Institute of Internal Auditors (IIA). These standards include ethics, performance, and implementation guidelines for internal auditors.

Related: Internal Auditor Job Description: Top Duties and Requirements

Types of internal audits

Internal audits typically fall into one of the following types:

  • Compliance audit: Ensures a company complies with laws and regulations.
  • Internal financial audit: Evaluates the accuracy of financial reporting and prepares for an external audit.
  • Environmental audit: Reviews the environmental impact of the company, including safe material sourcing, reduction in greenhouse gases, energy usage, and carbon footprint.
  • Technology/IT audit: Evaluates controls, hardware, software, security, documentation, and backup/recovery systems.
  • Performance audit: Focuses on outcomes over processes, including objectives, key performance indicators, and other metrics related to bonuses and incentives.
  • Operational audit: Evaluates efficiencies and processes, most often during staffing changes, and determines if they fulfill the mission statement, value, and objectives of a company.
  • Construction audit: Ensures appropriate physical development, on-time project completion, accurate billing, payments and collection, and adherence to contract terms with general contractors, subcontractors, and other vendors.
  • Special investigations: Unique audits reporting on mergers, hires, or internal complaints.

Before you hire an internal auditor, preparing relevant interview questions can help you select a team that aligns with your goals and objectives.

Related: AI in Recruiting: A Practical Guide for Talent Acquisition Leaders

Reasons to conduct an internal audit

Here are some of the most important reasons to conduct an internal audit:

  • Compliance: Ensure adherence to laws, regulations, and internal policies.
  • Risk management: Identify and mitigate risks before they become larger issues.
  • Operational efficiency: Evaluate processes and procedures to improve efficiency and effectiveness.
  • Financial accuracy: Verify the accuracy and reliability of financial reporting.
  • Fraud prevention: Detect and prevent fraud and other unethical practices.
  • Continuous improvement: Provide recommendations for continuous improvement and best practices.

Related: How to Open a CRA Payroll Account

Frequency of internal audits

The company sets the frequency of internal audits, and some departments may be audited more often than others. Several factors can help you determine the optimal frequency, including the complexity of the processes, regulatory requirements, and the company’s specific needs.

A company in a high-risk sector or one that uses complex processes may decide to conduct internal audits more frequently. Where processes are well-established, a company may choose to be audited annually or every other year. More frequent audits may be required for newly developed processes until they are stable.

Related: Decrease Your Time-to-Hire for a Competitive Edge

How to conduct an internal audit

Following a consistent methodology at regular intervals can ensure a smooth and repeatable process to monitor internal mechanisms over time. Here are the essential steps to help you conduct an internal audit successfully:

  • Planning: Set the audit requirements, objectives, timeline, schedule, and responsibilities across audit team members. This can include a review of prior audits to understand management expectations for presentation and data collection.
  • Auditing: Develop a thorough understanding of the internal control procedures and determine if employees are complying with internal control directives. The scope of analysis may be expanded depending on initial findings.
  • Reporting: Auditors often prepare an interim report highlighting significant findings followed by a formal report summarizing procedures and methodology used, findings, and recommendations for improvements and future monitoring.
  • Monitoring: The final report may recommend following up after a specified time to ensure recommendations were implemented and improvements realized.

Related: Essential ISO Audit Cheat Sheet

The 5 Cs of an internal audit report

Most internal audit reports follow what is referred to as the 5 Cs, answering critical questions:

  1. Criteria: Share what issues were identified, who requested the audit, and why. Is the internal audit being conducted to prepare for an external audit?
  2. Condition: How the issue relates to a company goal or expectation. Was a policy broken, a goal not realized, or another condition not satisfied? Is safeguarding required? Is the team investigating a possible issue or anomaly?
  3. Cause: Why did the issue arise? Who was involved, what processes were broken, and how could it have been avoided?
  4. Consequence: What are the outcomes? Are the issues limited to internal matters, or are there risks of external consequences? Are there financial implications? Does it require the implementation of new governance policies?
  5. Corrective action: What can the company do to fix the problem? What are the next steps management will take to resolve the issue? What type of monitoring or review will occur after solutions have been implemented to ensure a fix?

Related: What Are CRA Business Expenses in Canada?

An internal audit is a valuable tool to help company leaders understand what is working and what can be improved. It can help managers improve processes and efficiencies, understand employee engagement, and positively impact the bottom line.

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