Conducting internal audits can help you evaluate your business operations to identify areas of strength and weakness, enabling you to make necessary adjustments to your processes and policies according to your overall goals.

In the dynamic business world, it’s crucial for organizations to continuously evaluate and enhance their internal operations to ensure efficiency, compliance, and long-term success. One powerful tool at your disposal is an internal audit. This examination can provide valuable insights into your company’s activities, equipping you to pinpoint areas of improvement, mitigate risks, and make informed decisions both now and in the future.

External versus internal audits

External audits focus primarily on the financial aspects of an organization, including its financial statements, transactions, and accounting practices, to help ensure the accuracy and fairness of those elements and that the paperwork is prepared in accordance with accounting standards. They are conducted by certified public accountants who are not connected to the organization being audited and thus can provide an objective and fair assessment of its financial position. External auditors issue a report with their findings to external stakeholders, such as shareholders and investors.

Conversely, internal audits are conducted by a team of the organization’s choosing and can cover various areas, including finances, operations, and compliance with policies and regulations. They focus on evaluating and improving an organization’s internal controls, processes, and systems, such as risk management or daily operations. Internal auditors are typically employees of the organization, though some companies may choose to hire outside contractors to reduce bias and ensure objectivity. Either way, these auditors report their confidential findings and recommendations directly to management or the board of directors.

Benefits of conducting an internal audit

Broadly speaking, internal audits play a pivotal role in uncovering potential risks to your business. By examining your organization’s various processes, policies, and procedures, you can identify areas that are inaccurate or need to be improved. There’s no limit on how often you can conduct an internal audit, and with regular audits, you can be more proactive in effectively mitigating those risks while also enhancing overall efficiency. This close investigation also allows you to locate areas where processes can be streamlined, enabling you to eliminate redundancies and ultimately reduce your operating costs. Through analyzing workflows and resource allocation, you can better optimize your business operations to enhance productivity and pinpoint opportunities for cost savings.

Further, your organization needs to stay compliant with laws and regulations to maintain integrity and avoid legal consequences. Internal audits can play a big part in ensuring that your company is adhering to applicable rules and regulations, thereby reducing your risk of noncompliance penalties. They also help demonstrate a commitment to ethical practices, which can enhance your company’s reputation both within and outside of your organization.

Types of internal audits

As a business owner, you can choose which internal audits to conduct based on your business’s needs, objectives, industry requirements, and regulatory compliance obligations. These are just some of the options available.

Financial
An internal financial audit is often conducted in preparation for an external one. It focuses on the accuracy and reliability of a business’s financial information, examining various financial statements to ensure compliance with accounting standards, regulatory requirements, and organizational policies.

Compliance
A compliance audit checks that an organization is adhering to state and federal laws and procedures, such as legal requirements, internal policies, contractual obligations, and ethical standards.

Operational
This type of audit evaluates the efficiency and effectiveness of an organization’s operational processes. Auditors assess workflows, resource utilization, productivity, and procedures to identify areas for improvement and optimizing operations.

Information technology
IT audits focus on information systems, technology infrastructure, and data security. The auditor reviews the reliability of the organization’s IT controls, data integrity, and cybersecurity measures, ensures their compliance with IT policies and regulations, and offers solutions for any issues that may become apparent in the review process.

Important steps for the process

Your internal review process may change over time based on what you find works best for your organization, but there are a few key steps your auditors will need to follow.

1. Plan and prepare
   With your selected audit team, develop a comprehensive plan that outlines the methodology, resources needed, and timeline for the review process. Define the purpose and scope of your internal audit, such as by noting specific areas to review or information required, to ensure a focused and effective examination. It’s also important to make sure that the overall objectives align with both your organization’s goals and industry standards.
2. Conduct fieldwork
   Your internal auditors will gather relevant data and documentation through interviews with employees, observations of daily activity, and data analysis. They may also want to perform testing and verification procedures to assess the accuracy and overall effectiveness of internal controls and locate any discrepancies. All findings and evidence gathered through this process are meticulously documented to use later in the audit report.
3. Analyze and report
   Once all the essential information is obtained, the auditors will analyze the collected data to identify specific strengths, weaknesses, and opportunities for improvement. They may further evaluate your business’s compliance with regulations and industry standards, specifying if any areas are at greater risk, and then present their findings and recommendations in an audit report draft to management and employees in the audited departments. This allows your team members to review the draft and ask any questions before it’s finalized and submitted as evidence of the internal audit process.
4. Implement recommendations
   Based on the results of the internal audit, you and your team can implement the recommended improvements and changes. It’s crucial to establish a timeline for doing so and monitor your progress so the task doesn’t fall by the wayside. By regularly reviewing and tracking the effectiveness of these changes, you can better understand how your organization is progressing and if the internal auditing process was effective.

Internal audits are a reliable way to establish a strong foundation for your business and ensure its prosperity in the long run. And when you’re proactive with your review process, you may potentially catch small issues before they can have any lasting impact on your organization.

TAKE ACTION:
Determine if your business could benefit from conducting one or more of the different types of internal audits.