Why An Internal Audit? – How to Assess Operational Processes

Many small businesses typically ask why an internal audit is required, derived from the belief that it is generally only necessary in larger, more complex businesses.

Without fully understanding what an internal audit can help to improve, it is difficult to see value in the exercise.  Businesses that are constantly in a process of churn will benefit by conducting an assessment of their operational processes with an audit.

Definition of an Internal Audit

Why an Internal Audit
Internal Audits Increase Reliability of Processes

They are inspections or assessments conducted by a business to evaluate efficiency, reliability and performance of its operational processes and procedures and their conformance to internal or regulatory requirements.

To benefit from the results of an audit requires an understanding of the current state of the business or of the internal audit scope. This serves as a baseline to compare future audits and assess effectiveness. Process mapping is a great tool to use to develop this baseline.

Red Flags That Highlight the Need for an Audit

These include:

  • Constant re-work or re-jects in operations
  • Although there are some procedures and guidelines for specific activities they are not being consistently followed
  • Different departments are operating modified versions of procedures
  • There is a lot of finger-pointing when compliance issues arise
  • Never-ending cycle of meetings to resolve a specific issue which defies resolution

What an Internal Audit is Not

It is not for

  • Finger pointing at certain employees and providing an opportunity for blame. In most cases the cause of the mistakes by the identified employee is due to the fault of management – a lack of, or poorly defined processes and procedures.
  • Looking for opportunities to retrench employees

If employees believe that the purpose of the audit is for either of these two reasons, they are often less inclined to actively participate in the audit and more likely to cover up mistakes.

Internal Controls are Defined by Management

Internal controls as defined by management are the methods and procedures adopted by management to meet its mission, goals and objectives including checks put in place to ensure compliance.

They include

Processes for planning, organizing and executing operations
Reporting Systems for monitoring, measuring and analyzing performance
Tangible Actions by management and relevant personnel for risk-management

Why an Internal Audit? – Internal Audits Assess the Effectiveness of Internal Controls

Why an Internal Audit
Increase Efficiency and Drive Costs Down with an Internal Audit

There are 5 key functions of an internal audit.

Assess current state of processes documentation 

Understanding the processes and procedures as they currently exist provides comparison with baseline results and future audit results

Risk assessment

 Helps management identify areas of non-compliance to regulations, standards, and industry best practices for correction  

Why an Internal Audit? – To Provide a Gap Analyses

Helps Identify gaps where procedures and controls are not properly designed or are lacking

Testing

Test controls to assess if controls are working as designed

Reporting 

Provide observations and recommendations to improve processes and controls.

Key Benefits of Internal Audits

The scope of the internal audit is defined by management. They could choose to conduct an audit of the entire operations, or of select core systems and processes. At the end of the exercise, the Lead Internal Auditor provides the final audit report to management

  • Continually improves the internal controls of the business
  • Makes the business process-dependent instead of person-dependent
  • Identifies bottlenecks, redundancies and overlap in operational procedures and provides recommendations for improvement
  • Increases accountability within the business.

Conclusion

Answers to the question – why an internal audit? have been provided in this article.

When properly conducted, an audit should provide an unbiased assessment of the operations of a business and generate a report for management with information on the performance of governance processes, internal controls, and risk management efforts for necessary action. For Assistance:

Related Article

Benefits of an Internal Audit – How to Continuously Improve

References

Jean-Marc Mickeler (2020) Building Resilience: The Importance of Audit During Times of Disruption. Forbes. https://www.forbes.com/sites/deloitte/2020/09/24/building-resilience-the-importance-of-audit-during-times-of-disruption/?sh=2b3847e775a5

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