An audit is a process that involves a practitioner examining an entity’s records, usually financial, to identify specific information. Usually, the term audit refers to financial audits. In these audits, an auditor examines a company’s financial statements. The purpose of conducting such audits is to identify any misstatements in these statements. However, this objective may change according to the type of audit and laws surrounding them.
Financial audits are crucial for companies. The need for such audits stems from previous controversies and the agency problem. Usually, the term audit or financial audit refers to external audits. These involve an independent third-party examining a company’s financial statements. The outcome of external audits is an audit report that specifies the auditors’ opinion of the client’s financial statements.
However, audits can also be internal. Internal audits are different compared to external audits in several regards. Similarly, the objectives of internal audits also differ from that of external audits. Before understanding how these objectives vary, it is crucial to understand what an internal audit is.
What Is Internal Audit?
Internal audit is a process through which internal auditors evaluate a company’s internal controls. While internal audit primarily focuses on identify weaknesses in a company’s internal control systems, it also has other aspects. The requirement for having internal auditors stems from corporate governance, which illustrates how companies should be controlled and directed.
Internal audits seek to ensure a company complies with all relevant laws and regulations. It also helps in ascertaining the company’s financial records are accurate and present a fair view. On top of that, internal auditors are also responsible for risk management in a company.
Overall, internal auditors have many responsibilities in any company. Unlike external audits, internal auditors are a company’s employees. In some cases, the internal auditors may not be independent of the company’s management, which may hinder their scope. However, if they are objective in their tasks, internal auditors can provide great value to any company.
What Are the Objectives of Internal Audit?
While there are some standards that dictate how auditors should conduct internal audits, the scope depends on each company. Every company may specify the expectations it has from its internal audit function. Based on that, the objectives of an internal audit may differ from one company to another.
However, there are some objectives of internal audit that are common among all companies. Some of these include the following.
Evaluating Internal Controls
The primary function that internal auditors fulfill in any company is to evaluate its financial controls. These controls relate to how a company operates and manages its risks. Internal audits assess controls in various areas, such as operational effectiveness, financial compliance, and security. Based on their analysis, they can also recommend several actions to ensure no further breaches occur.
Monitoring Regulatory Compliance
As a part of risk management, internal auditors also monitor a company’s regulatory compliance. While internal auditors are not responsible for ensuring such compliance, they can identify any lapses. Once they do so, they can report it to the management. This objective also coincides with the objective of external audits.
Verifying and Protecting Assets
Internal auditors also verify a company’s assets. It is a part of their evaluation that they carry out for internal controls. They also ensure that proper maintenance procedures are in place that safeguards these assets. By doing so, internal auditors protect the company’s assets. On top of that, internal auditors also monitor asset acquisitions and disposals to ensure proper valuation occurs.
Ensuring Accuracy of Financial Records
Internal auditors ensure that the financial statements prepared by a company’s management are accurate. This objective is similar to that of external auditors. Usually, internal auditors also perform similar procedures as external auditors. As mentioned, however, they report any misstatements to the management. In most cases, this objective may not make a primary goal for internal auditors.
Making Observations and Recording Findings
Internal auditors don’t play an executive role in a company. Instead, their job is to identify problems by observing various processes. By doing so, they aim to identify any weaknesses in the company’s internal controls. Once they find such issues, they record their findings. Ultimately, they report these weaknesses to the relevant authorities, who take corrective actions.
Mitigating Risks
Internal auditors also play a substantial role in mitigating risk factors. It is a part of the internal controls that a company employs. Internal auditors not only monitor existing risks but also identify new risks that the company may face. Once they analyze those, they can make recommendations on any mitigating procedures that the company can employ.
Conclusion
Internal audit is a process that companies employ to ensure the effectiveness and efficiency of internal controls. However, there are also other objectives of internal audits. These include evaluating internal controls, monitoring regulatory compliance, and verifying and protecting assets. Furthermore, it involves ensuring the accuracy of financial records, making observations, and recording findings, and mitigating risks.
