The Importance of Internal Audit In The Modern Finance World!

WHAT IS AUDIT?

“Audit is an examination of accounting records, undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they purport to relate.” Prof. Dickers

“Auditing is concerned with the verification of accounting data, determining the accuracy and reliability of accounting statements and reports.” R.R. Mautz 

• Auditing is nothing but the systematic and critical examination and verification of the books of accounts. It can be undertaken throughout the year or periodically.
• The primary aim is to find out whether the financial statements exhibit a true and fair view of the business.
• Origin of the term audit is said to be in the Latin term audire which means to listen.
• Audit of accounts by a duty qualified chartered accountant is mandatory for the registered joint stock companies, public trusts, bigger co-operative societies and for income tax and VAT tax payers above a particular limit.

Objectives of Audit:

• To find the reliability of the financial position and profit and loss statement.
• To check whether the financial statements of the company present a true and fair view.
• To check whether the financial statements are kept as per the provisions of the relevant Act.
• Verification of the entries with the relevant documentary evidences.
• To check whether all the money received is accounted for or not and all the payments made have proper supporting documents.
• To conduct an independent review of financial statements.
• Auditor has to examine the prevailing internal control and internal check systems prevalent in the organisation and must check the arithmetical accuracy of the books of accounts.
• The auditor has to check the physical existence of various assets shown in the balance sheet and check whether they present a true and fair value.
• After checking the accounts, the auditor has to express his or her personal judgement on the maintenance of the books of accounts.
• The company who audits its financial statements on a timely basis builds a good reputation and goodwill.
• Helps the stakeholders with decision making as audited accounts are considered more reliable.
• To detect and prevent frauds and errors.

Types of Audit:

Audit is a systematic examination of the financial statements of the company either by an indepedent external auditor or an internal auditor.

• Financial Audit: This type of audit, conducted by external auditors, examines the accuracy and reliability of a company’s financial statements to provide an opinion to stakeholders like investors and lenders.
• Internal Audit: Performed by the company’s own employees, internal audits focus on evaluating and improving internal controls, risk management and governance processes.
• Compliance Audit: This audit assesses whether an organization is following specific laws, regulations, policies, or procedures.
• Statutory Audit: A legally required audit for certain companies, such as public ones, to ensure financial statements comply with legal and regulatory requirements.
• Forensic Audit: A specialized audit conducted in special circumstances to investigate financial irregularities or suspected fraud. It is often more focused and detailed than a standard audit. 
• Tax Audit: An audit of an entity’s tax returns to verify that the information reported is accurate.
• Performance Audit: An assessment of the efficiency and effectiveness of an organization’s operations.
• Information Technology (IT) Audit: An audit of an organization’s IT infrastructure, policies and operations to ensure security and integrity. 

The Importance of Internal Audit in Modern Businesses

Internal audit is a crucial function that helps organizations ensure they’re operating efficiently and effectively. It keeps a regular and systematic track of the various financial transactions and data to make sure the company is in a sound, stable position and well complied with the corporate laws.

Internal audit is a vital function that helps organizations navigate today’s complex business landscape.

What Exactly Does Internal Audit Include and Why Is It So Important?

Internal audit involves evaluating an organization’s internal controls, risk management and governance processes. The goal is to provide assurance that the organization is managing risks and achieving its objectives.

Some Key Aspects of Internal Audit:-

• Risk Assessment: Identifying and assessing potential risks that could impact the organization.
• Control Evaluation: Evaluating the design and operating effectiveness of internal controls.
• Compliance Testing: Testing to ensure compliance with laws, regulations, and standards.
• Recommendations: Providing recommendations for improvement to management.

Internal Audit Provides Several Advantages:-

• Improved Risk Management: Helping organizations identify and manage risks more effectively.
• Enhanced Governance: Providing assurance that governance processes are effective and efficient.
• Increased Efficiency: Identifying opportunities for process improvements and cost savings.

Key Trends In Internal Audit Include:-

• Data Analytics: Using data analytics to enhance audit effectiveness and efficiency.-
• Cybersecurity: Focusing on cybersecurity risks and controls.-
• Agile Auditing: Adopting agile methodologies to improve audit processes.

Some Unique Aspects of Internal Audit:-

Three Lines of Defense (3LoD) Model: This model is a widely adopted framework for risk management and internal audit. The three lines are:

1. First line: Business operations and management, responsible for managing risks.

2. Second line: Risk management and compliance functions, responsible for overseeing risks.

3. Third line: Internal audit, providing independent assurance.

Audit universe: An internal audit’s audit universe includes all auditable entities, such as processes, systems, and locations. Auditors prioritize these entities based on risk and business impact.

Risk-Based Audit (RBA): RBA involves identifying and assessing risks to determine audit priorities. This approach ensures internal audit focuses on high-risk areas.

Continuous Auditing (CA): CA involves ongoing audit activities, often using data analytics and automation. This approach enables internal audit to provide real-time insights and assurance.

• WHAT IS A CONTINUOUS AUDIT?

• Audit that remains continue throughout the financial year is known as the continuous audit.
• The auditor checks each and every transaction. The large scale business organisations require constant check of their business matters, as there may be declaration of dividend, during the year.
• In case of a company, where the volume of transactions is quite large, the management can follow the policy of applying continuous audit.
• If the internal control systems prevalent in the organisations are not satisfactory, then to apply continuous audit will be the best option in order to represent a true and fair view of the organisation.

R.G. Williams says that continuous audit is one where the auditor or his staff is consistently engaged in checking the accounts during the whole period, or where the auditor or his staff, attend at regular or irregular intervals during the period.

Internal Audit’s role in cybersecurity: Internal audit plays a critical role in evaluating an organization’s cybersecurity posture, including assessing controls and incident response plans.

Soft skills for internal auditors: Internal auditors need strong communication, interpersonal and problem-solving skills to effectively interact with stakeholders and drive change.

Challenges Internal Audit Faces:-

• Staying Relevant: Internal audit must demonstrate its value and relevance to the organization.
• Keeping up with Technology: Internal audit must stay current with emerging technologies and risks.
• Talent Management: Attracting and retaining skilled internal audit professionals is crucial.

Internal Audit’s Evolving Role in Digital Transformation:

Internal audit is undergoing a significant transformation, driven by technological advancements and changing business needs.

Digital Audit: Internal audit is leveraging digital tools, such as data analytics and artificial intelligence, to enhance audit efficiency and effectiveness.

Agile Auditing: Internal audit is adopting agile methodologies to improve audit processes and respond to changing business needs.

Cybersecurity Audits: Internal audit is playing a critical role in evaluating an organization’s cybersecurity posture and incident response plans.

Data Analytics: Internal audit is using data analytics to identify risks and opportunities for improvement.

Cloud Computing: Internal audit is assessing the risks and controls associated with cloud computing and software-as-a-service (SaaS) applications.

Best Practices for Internal Audit:

Risk-Based Audit Planning: Focusing audit efforts on high-risk areas and business priorities.

Stakeholder Engagement: Engaging with stakeholders to understand their needs and expectations.

Continuous Evolution: Staying current with emerging technologies, risks and audit best practices.

Quality Assurance: Ensuring audit work is of high quality and meets professional standards.

Communication: Providing clear, timely and actionable recommendations to stakeholders.

Internal Audit’s Role in Enterprise Risk Management (ERM):

Internal audit plays a critical role in ERM by:-

Providing Assurance: Providing assurance on the effectiveness of risk management processes.

Identifying Risks: Identifying and assessing risks that could impact the organization.

Advising Management: Advising management on risk management strategies and mitigation plans.

Monitoring Progress: Monitoring progress on risk mitigation plans and reporting to management and the board.