The importance of internal auditing has significantly amplified over the years due to various high-profile scams. While external audits are substantially crucial for companies, internal audits also play a critical role in ensuring long-term success. Internal auditing deals with risk management and internal control systems. For that reason, it looks at various aspects of a company’s operations. While it may look at financial records like external audits, it also focuses on non-financial information.
Internal auditing can help companies evaluate their internal controls, accounting processes, corporate governance, and risk management policies. These audits also help companies identify all regulatory requirements and ensure compliance. On top of that, internal audits may also look into other areas. The primary objective with most of these is to ascertain accurate and timely financial reporting. In some cases, internal audits may also include financial audits.
What is a Financial Audit?
A financial audit, as the name suggests, deals with a company’s financial records and statements. Every company prepares several financial statements. These may include the balance sheet, income statements, cash flow statements, statement of retained earnings, etc. It examines all these financial statements to ensure they are accurate and in accordance with the applicable reporting framework.
An example includes external audits. These are annual audits performed by independent auditors. The objective of these audits is to obtain an audit report which states whether the financial statements are free from material misstatements. The report will also include the auditors’ opinion on whether the statements comply with the applicable frameworks.
The external audit report is crucial for companies as it helps their stakeholders make confident decisions. This is why it is critical to have independent auditors perform the audit. In some cases, companies will also perform these audits internally through an internal audit team. However, these audits differ from external audits in several key aspects.
What is Financial Audit in Internal Auditing?
The objective of internal audits is to ensure accurate financial reporting, among other goals. While internal audits primarily focus on risk management and internal controls, they may also look at a company’s financial records. Thus, these audits also refer to examining a company’s financial statements. The objective for these audits may, however, differ from other audits. For example, unlike external audits, financial audits in internal auditing don’t conclude with an audit report.
It aims to look at a company’s financial reporting systems. It also seeks to obtain evidence related to compliance with regulatory and other applicable frameworks. Similarly, it will also involve reviewing the company’s accounting policies and procedures. While a report is not compulsory, internal auditors may present their recommendations in an internal audit report.
These audits are crucial for internal auditors. The necessity to include financial audits in internal auditing stems from the overall goal that internal auditing sets to achieve. As mentioned, however, these audits do not result in an audit report. For stakeholders, these audits performed by internal auditors are not as reliable as external audits.
How do internal auditors perform Financial Audits?
The process for financial audits does not differ significantly between internal and external audits. Usually, these start with reviewing a company’s financial statements. For internal audits, these audits may occur in the light of the company’s internal control systems and risk management policies. This process also entails collecting evidence related to the company’s financial statements.
These audits also include reviewing financial information. For companies, these audits performed by internal auditors present a chance to examine the financial statements internally. For companies going through accounting policy changes, these audits can be crucial before providing them to external auditors. During the process, internal auditors can also chip in with any recommendations related to the financial statements.
The fundamental difference that financial audit in internal auditing presents is that of a conclusion. For internal auditors, this conclusion for these audits may relate to the company’s internal control or financial reporting systems. Internal auditors do not present their opinion in the form of a report. Instead, they make observations and provide the management with recommendations on any shortcomings.
What is the importance of Financial Audits in Internal Auditing?
These audits are significantly crucial. Besides the importance of reviewing a company’s financial reporting, it also establishes the efficiency and effectiveness of the company’s internal control systems. For internal auditors, it is one of the primary responsibilities they perform during their work. A company’s internal control systems can have a substantial impact on its financial reporting.
Overall, these audits present a company with the chance to review its financial statements internally. This process can help identify any deficiencies in the accounting and financial reporting process. Ultimately, these audits can help companies strengthen their internal control systems while also focusing on risk management.
Internal audits have become more prevalent in the modern corporate world. Financial audits in internal audits are an audit of a company’s financial statements. While financial audits are generally in the form of external audits, they may also be internal. Financial audits in internal auditing tie into the overall objective for internal auditing.