Auditors are professionals who examine a company’s financial information. Usually, they have a specific goal for which they investigate this information. During this process, they collect evidence which they can use to form an opinion based on the audit objective. Once they do so, they provide their findings in the form of a report that they present to the intended users.
There are two prevalent types of audits that auditors may perform, including external and internal audits. There are many differences between both of these. Because of that, the audit reports and the content for each will also vary. For external audits, the report format is very well-known. However, some people may not know about the contents of internal audit reports.
In this article, we cover the main key elements of the contents of the internal audit report. Before we jump into these, let’s firstly understand what the internal audit is and its process.
What is Internal Audit?
Internal audit is a process in which internal auditors evaluate a company’s internal controls. Based on that evaluation, they gather evidence regarding how effective a company’s internal controls are when mitigating risks. On top of that, internal audits include examining a company’s corporate governance and financial reporting processes.
Internal audits are a part of a company’s operations undertaken by internal auditors. These auditors are the company’s employees. It differs from external auditors, where the auditors work for an external audit firm. Regardless of the type of audit, both auditors are independent of the management and objective in their audit.
What is the Internal Audit Process?
Internal audits don’t have a distinguished process. Instead, it may differ according to the company’s needs. However, most internal auditors begin their process with planning. During this stage, they define the objectives for the auditing. Usually, this includes identifying weaknesses within a company’s internal control systems. The planning stage is crucial for shaping the overall internal audit process.
Once internal auditors plan for the internal audit, they get to the execution phase. During this process, they follow the plan and perform fieldwork. Therefore, they investigate the company’s internal controls and financial reporting processes. This stage aims to identify any anomalies or deficiencies. Usually, auditors check how the controls perform in achieving the intended purpose.
The next stage for internal auditors is to report their activities. As mentioned, this comes in the form of an internal audit report. The contents of the internal audit report may differ according to the company’s needs. However, it usually includes the deficiencies identified during the audit process. Furthermore, it also contains recommendations from the internal auditors.
Lastly, an internal audit includes following up on the identified deficiencies and recommendations. Internal auditors only have an assurance and advisory role in a company. They cannot make any changes or have executive rights. Therefore, they can only provide recommendations and follow up on how the management implements them.
What are the Key Elements of Contents of the Internal Audit Report?
Internal audit reports are an effective tool for a company’s management, board of directors, and audit committee. This report possesses any deficiencies that internal auditors identify during their work and any recommendations along with them. However, there are no set standards for the contents of the internal audit report. Usually, however, it includes the following.
Background and objective
The internal audit report usually contains an objective and background section. This section defines what the purpose of the audit is and why internal auditors performed it. It may include reasons such as high-risk perceivability, management changes, fluctuations in risks identified, etc. This section defines the overall scope of the internal audit.
Internal audit reports also set the scope of the work and when the internal auditor performs it. This scope depends on the objective and background defined in the above section. The scope defines what the internal auditors expected to achieve, what areas the audit covers, what risks it addressed, etc. It also shows the limitations that internal auditors may have faced.
Any internal audit report will include deficiencies identified by the internal auditors. It may come in the form of the overall findings that internal auditors made during the audit. Similarly, this section may consist of both minor or significant deficiencies that auditors identify. This section is the most crucial part of the internal audit report.
As mentioned, internal auditors report the deficiencies they identify during their work. For each of these, they also provide recommendations on what countermeasures the management should take. However, it is for the management to decide whether to go through with those recommendations. Although internal auditors cannot force the management to take action, they can still provide advice as a part of their advisory role.
Follow-up and tracking
Internal audit reports may also include a section about follow-up and tracking. In this section, internal auditors mention how the management is performing in addressing previously identified deficiencies. However, this section is not a part of every internal audit report. Internal auditors usually include it in quarterly or annual reports.
Internal audit is a process through which internal auditors examine a company’s internal control systems for deficiencies. It also includes investigating the company’s corporate governance. Internal audit reports don’t have specific standards that define their contents. Usually, however, these reports will have some common sections, as mentioned above.