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Internal auditing is a frequent and continuous audit implemented by the organization’s accountants for the purposes of verification of financial records, monitoring the operating results, evaluation of internal controls, assessing the efficiency of operations, and fraud detection. Internal audit provides the management and the stakeholders with an independent view of the appropriateness of the organization’s risk management, control environment, and governance processes. It also catalyzes the culture of strong risk and compliance within the organization. In addition, internal auditors evaluate the organization’s processes to identify possible weaknesses in internal controls that can potentially lead to the wrong results. If the auditors identify any problems, they report it to the management for taking the necessary actions.
Furthermore, internal auditing achieves the above-mentioned aims by conducting a wide range of activities. Firstly, it provides an independent and candid assessment of the organization’s operations. Secondly, it informs the management about the effectiveness of the governance, risk management, and control processes. Moreover, internal audit advises the management on the information it should know at the appropriate time. This paper demonstrates that internal auditing plays a significant role in preventing fraud, improving organizational operations, and risk management.
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Importance of Internal Auditing
Internal auditing provides a wide range of services to the management of the company such as detection and prevention of fraud, checking on compliance with the government regulations, and monitoring internal control. Undoubtedly, these activities of internal auditing enhance the business growth as explained below.
Companies lose a lot of finances annually due to employee theft. Employees can commit fraud through the cash theft, deliberately refusing to reveal payments from the customers, misusing the credit cards, and fraudulent payroll transactions (Balmer, 2012). Therefore, the internal audit staff creates audit policies, conducts audits, and monitors employees’ behavior to detect and prevent these malpractices. As a result, a continuous and ongoing audit on financial transactions for fraud may prevent the misuse of the company’s resources.
Internal auditing, apart from assessing the fraud risk, also involves regular examination of the policies and procedures to ensure compliance with the company’s regulations and reduced exposure to the fraud and wastage. An example of the activities that may lead to the financial loss in a company is the extension of credit. If the firm formulates a policy governing such an activity, internal auditing tests the company’s compliance with the set policy (Pickett & Pickett, 2011). However, the implementation of the policies can be effective only if the organization establishes a specific system. Hence, internal auditing becomes necessary for guaranteeing that the policies are in force.
Internal audit also monitors the practices of the company with the aim of ensuring that the business operates at maximum efficiency. Inefficient operations enhance the costs with no increase in the profit. Therefore, operational audits reveal inefficiencies and points of wastage in the company operations as well as check the compliance with the government regulations. Furthermore, the internal audit reports to the management for corrective actions before the government discovers the company’s non-compliance to policies (Balmer, 2012). Thus, internal auditing helps the company to avoid fines and other legal actions. Internal audit also reviews the company’s compliance with the human resources laws to avoid the lawsuits and employee turnover.
Moreover, internal auditing is vital for promoting a good corporate governance in the organization along with improving the accountability in both financial and non-financial aspects. Lastly, internal auditing provides assurance to the management, board of directors and stakeholders that the governing of the company is effective.
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How Internal Auditing Improves Organizational Operations
Internal auditing improves organizational operations through assurance, insight, and objectivity as well as assures the management that the company observes its policies and upholds controls effectively. Furthermore, the auditors introduce a wide range of experiences from fields outside the accounting. They present valuable information in operations, technology, engineering, and other spheres that assist in enhancing the performance. Additionally, they provide solutions, advocate for best practices, help in efficiency improvement, and catalyze risk control (Nichols, 2014). Besides, the auditors act as a safety net for the management and all the stakeholders. Thus, the value of internal auditing in enhancing the organizational performance is explained in the following aspects.
Internal auditing assures that the company’s risk management, control, and governance are effective and in line with the organization’s objectives in strategy, finance, and compliance. One of the performance enhancements of internal audit is their ability to mitigate risks. Internal auditors systematically assess and integrate professional judgment on potential adverse events. Moreover, the organization that mitigates risk enhances its competitiveness, maintenance of financial strength, and product quality. Besides, internal auditors proactively identify risks, analyze them, investigate the sources, and assure the organization that effective controls are involved (Media, 2012).
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Internal auditing helps to improve efficiency by conducting analysis and assessments of business processes and providing recommendations thereof. In addition, internal auditors evaluate operations and assess whether the organization follows correct protocols to meet the intended goals as well as give recommendations on how the organization can modify operations to achieve its objectives.
Furthermore, internal auditors serve as catalysts for the improvement. They provide an accurate interpretation of facts, figures, and processes with the intention of identifying and improving deficiencies along with guarding the organizational resources against wastage. Consequently, these specialists present their findings and recommendations to the management for the implementation of the stipulated causes of action (Media, 2012).
Role of Internal Auditing in Risk Management
The management of risk is a fundamental concern of internal auditing. Organizations face a wide range of risks including safety risks, market failure, supplier failure, the risk for organizational reputation, and financial risks. The effective management of the risks determines the organization’s success.
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Internal auditing performs the crucial role in evaluating the effectiveness of the risk management activities of the organization. Moreover, risk management involves identifying, analyzing, responding to, and monitoring strategic risks that could affect the ability of the organization in attaining its objectives. The goals of an organization such as operations, strategy, and compliance have business risks. The management’s assessment of risk in ordinary business activities such as business expansion, planning, lending and borrowing practices, strategic partnerships, policy changes, and financial reporting is a regular and continuous process. The corporate legal counsel also assesses the potential litigation that the company may face (Nichols, 2014). Besides, the internal auditors conduct an evaluation of the above activities and the entity-wide risk management system advising the management on the issues they identified in the course of the audit and offering the appropriate corrective measures.
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Organizations implement major strategic initiatives to achieve the set objectives. Evidently, the internal auditors participate in the status updates of these initiatives. The auditors then assess the current and potential risks attached to these initiatives and report their findings to the audit committee to enable effective management’s reporting.
Internal auditing conducts a fraud risk assessment of the company using the fraud deterrence principles to address the fraud risk. Internal auditing also helps the company in establishment and maintenance of Enterprise Risk Management (ERM) processes. ERM process contributes significantly to maintaining the quality and meeting professional standards. Internal auditing is also important in top-down risk assessment as it plays an advisory role (Banks & Walker, 2012).
To conclude, internal auditing plays a pivotal role in the organization. Internal auditors have a vast understanding of the systems, culture, and processes. They assure the management and other stakeholders that the governance processes are effective and the internal controls can adequately mitigate the existing and potential risks. The specialists also provide recommendations for improvement as well as assess whether the organization is set right to achieve its strategic and financial objectives. Moreover, they ensure the people entrusted with the management of the organization’s resources are responsible. Undoubtedly, these facts indicate that internal auditing brings a great value to the organization and its stakeholders.