Several business owners think internal audits are trivial, believing there are no real benefits to conducting this accounting activity.
To a small few, internal auditing is deemed unnecessary. And to a few others, it’s a pain in the neck worth neglecting.
But regardless of your company’s size, industry, or experience, internal audits maintain its importance in every enterprise for many reasons. And we’ll be discussing them all in this article.
But first, what exactly are internal audits, and why will it benefit your business to know what they are?
What are Internal Audits?
Internal auditing is an activity where an organization takes the initiative to examine its departments through an independent body.
According to the Chartered Institute of Internal Auditors, the goal of internal audits is to “provide independent assurance that an [organization’s] risk management, governance and internal control processes are operating effectively.”
It’s a broad activity encompassing different areas of business. Audits can focus on an organization’s finances, operations, IT, and more. But we’ll be focusing on its financial aspect in this post.
In a nutshell, what internal audits do is help organizations avoid the different types of accounting errors way before external audits are done. Errors of omission, commision, duplication, and many other types of errors can be spotted early on when independent auditors consistently and efficiently track records relevant to a business’s accounting and finances.
Now, we mentioned ideally, internal audits are independently conducted to avoid conflicts of interest. So a few companies might wonder whether in-house or outsourced accounting services is the way to go.
According to our certified public accountant (CPA), internal audits are often done within the company to maximize their benefits.
And how do they maintain independence? By having a department of their own.
These internal auditors don’t perform the work other departments do. They’re there simply to check the company’s controls (we’ll explain this concept in a bit). At times, these professionals “walk through” the process of the departments they’re auditing to see whether their individual processes work efficiently.
But another way internal audits maintain independence is by establishing a workflow, which we’ll get to right now.
General Workflow of Internal Audits
So, how does one conduct an internal audit? The workflow varies from organization to organization. But to give you an idea, here’s a general outline of how internal audits are done.
- Identify areas that need auditing
- Determine frequency of auditing (daily, weekly, monthly, etc.)
- Create an audit calendar
- Alert departments of scheduled audits
- Prepare the needed materials, documents, and tools
- Interview users
- Document results
- Report findings
5 Benefits of Internal Audits in Accounting
Now, we go to the raison d’être of this article — what are the benefits of internal audits in accounting?
Implementation of Effective Controls
According to one of NarraSoft’s CPAs, conducting internal audits results in numerous benefits, including having effective controls in place.
Controls pertain to a company’s internal system ensuring the “integrity of financial and accounting information” in order to “promote accountability” within the organization, Investopedia says.
But apart from accountability, internal controls also lead to a host of other advantages. Some of these include:
- Better compliance with tax regulations and standards
- Intelligent decision-making
- A better approach to risk assessment, which aims to identify and minimize the harm potential risks can inflict on an organization
Active Monitoring of Controls
Our CPA cites another benefit of regularly conducting internal audits, which is the active monitoring of internal controls. Ideally, companies grow over time, so existing systems might not work for whatever changes an organization has undergone.
And this is particularly true for internal audits. However, actively monitoring internal controls could have varying goals. As we said, it’s necessary for companies to check if their control activities are still appropriate given any major changes in the organization.
But regularly monitoring controls also greatly benefits internal audits as this determines whether such activities are being conducted properly.
Prevention of Fraud
It’s no secret financial matters tend to be vulnerable to fraud. So what better way to avoid this issue than to enact a stable system to keep it from happening?
While it isn’t the primary role of internal auditing to specifically detect fraud, the process — all including surprise inspections to reporting findings — can still significantly minimize its occurrence.
Thanks to its rigorous process, internal audits can help determine the accuracy and integrity of financial reports, as well as protect a company’s assets through regular monitoring.
Effective & Efficient Operations
If you think internal auditing isn’t technically mandated by law, you’re correct. But if you think your business benefits from internal audits simply because it makes your business respectable, you’re only partially correct.
Because the truth is, internal audits are helpful in another regard — making sure your company runs smoothly. So how does it do that?
Internal audits are inherently proactive. It creates an ideal environment in an organization by eliminating problems ahead of time. The general workflow of internal audits shows how stringent the process is in identifying areas that require constant monitoring.
Through these audits, companies can achieve maximum operational efficiency consistently.
Upholding Organizational Integrity
And lastly, integrity. A company’s integrity is contingent on several things.
How truthful is it about its finances? Who are the key people responsible for keeping track of such sensitive data? How does the organization hold these people accountable should something go amiss?
A company upholds these tenets of honesty, responsibility, and accountability when it integrates into its institution mechanisms that will ensure the accuracy of its financial records.
In other words, internal audits make your company look and feel good. And it’s thanks to this rigorous process that you can confidently say your business is well on its way to clean success.
In Summary
Internal auditing is the regular monitoring of an organization’s controls to see whether they’re effective. It covers numerous facets like operations and IT. But this article zeroes in on the accounting side of this activity.
The top benefits of conducting internal audits are:
- Implementation of internal controls
- Active monitoring of controls
- Prevention of fraud
- Effective & efficient operations
- Organizational integrity
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