Previously I had discussed an article about internal audit, where the work needed to be done to ward off acts of financial fraud that could have happened to any company, more can be seen here. Don't forget if the company wants to grow and last long, it must have a strong internal financial system. Sophisticated marketing strategies that generate large turnover are needed as the spearhead of finance, but historically shows that many financial bankruptcies occur because of the weak internal control of a company.
Do you know? Barings Bank, based in London and more than 200 years old (established since 1762) collapsed in 1995 due to the internal audit function not functioning properly. Nick Leeson from the Singapore office brought his downfall by making high-risk speculative investments that were not well detected.
The Difference Between Internal and External Audit
Internal auditors will examine issues or potential problems in the company related to business practices and risks, while external auditors examine the financial statements and issue opinions about the financial statements.
Internal audits should be conducted every month throughout the year while external audits check only once a year.
Purpose of Internal Audit for the Company
The main purpose of doing an internal audit is to prevent misuse of money in your company. Internal audit can help a company to achieve its mission with a systematic and disciplined approach by assessing and improving the effectiveness of risk management, control, and regulatory and legal compliance processes. A good internal audit helps show the company's actual performance and can be a benchmark for company health.
For start-up companies, the internal audit is usually done by the owner himself because it tends to be simpler and there are only a few transactions. However, with the development of the company, a special auditor is needed or delegated with the services of existing financial consultants. Generally, the responsibilities of an internal audit are as follows:
- Perform the full audit cycle, including risk management and control over operational effectiveness, reliable financial reports, and compliance with all company regulations and applicable laws.
- Determine the scope of internal audit and make annual planning.
- Take, analyze and evaluate financial documents and their supporters, including previous reports, documentation, data, flowcharts, notes or proof of manual or electronic transactions.
- Prepare and present reports that show the results of the audit and the process.
- Serves as an independent and objective source of input to directors and owners to ensure the validity, legality and achievement of objectives.
- Find gaps or "holes" that have the potential to disrupt the company's operations and recommend precautions and cost savings.
- Follow up on audit results and monitor actions taken by management.
- Follow the latest developments regarding sector regulations, the latest tools and techniques, and performance standards.
What Makes an Effective Internal Audit?
Internal audit adheres to several principles that aim to make the process effective and function as a reliable tool in supporting management actions and regulations and making continuous performance improvements.
These principles can ensure that the results obtained are accurate, objective and informative enough for management to make decisions. If there are multiple auditors working independently, this can support them to get the same results when conducting audits under similar conditions.
- Ethics: trust, integrity, confidentiality and prudence are important in internal audit
- Fair output: audit results, conclusions and reports reflect the audit activities correctly and accurately.
- Professional: auditors must act in the interests of their duties.
- Independent: auditors must be independent / not involved in the activity being audited and be objective.
- Proof: Existing evidence must be verifiable and based on available information.
Important Aspects of an Internal Audit
In addition to involving documents and supporting evidence, one important aspect of this process is the human factor. Even though it has been supported by the use of technology, internal audit will still involve direct communication with personnel who carry out the work being audited.
So as an auditor, be friendly, build the same understanding and use a little humor to reduce the pressure of the audit process that sounds "terrible". Provide understanding that this process has the main goal of which is to encourage performance improvement, not to find fault or embarrass anyone, especially the person you are talking to.
Try to be open in conducting audits and explain to people who are met that they are free to express opinions throughout the process. Always discuss things found with the staff concerned and convey your expectations to him to improve it. Allow them also to read your notes and findings, in other words this internal audit is open.
Avoid getting involved in conflicts or arguments about your observations, let alone directly displaying their names in the report. This can be counter productive because these people can become defensive and refuse to cooperate.
It would be very helpful if you do internal audit learning and have good interpersonal skills. You can get it through the widely available personality training, self-management and negotiation. Soft skills like this that will help you a lot in doing work as an auditor. If the information you want to get, then how to get it is also important.
Some types of tests or personality assessments that you can try are the DISC Personality Profile (Dominant, Influential, Stable, Conscientious). Each type and combination of these basic personalities has different characteristics in behaving and responding to situations under stress. With this expertise, different individuals will be able to be handled in the right ways to achieve your goals, effective audit results.
Types of Internal Audit
Internal audit can include systems, processes, and products.
This type of audit is better done using an internal audit checklist. System audits focus on the overall quality of the company's management system and compare planning activities with system requirements to ensure correct implementation. In a company, an internal audit of the financial system is usually the most frequently performed because it helps in the accuracy of reporting the company's profit and loss.
A process audit is an in-depth analysis that verifies all the processes of a management system that function and produce as desired. This process audit also looks for opportunities for improvement and the possibility of taking corrective action. This is usually done with a focus on specific, vulnerable, new or high-risk processes for the company.
Product audits produced by the company can go through several stages, ranging from design, production and delivery to match product specifications, such as size, dimensions, functions, packaging and labeling. Usually done at regular time intervals.
Standard Questions for Internal Audit
The following are some basic questions to help the audit process. The answers to these questions often open the way to additional information needed in conducting a more accurate audit process.
List of common questions for internal audit:
- What are your responsibilities?
- How do you know how to do it?
- What training is given to new employees?
- How to assess the effectiveness of a training?
- Is training data stored in an archive?
- What is the purpose of your process?
- What is a quality policy and where to find it?
- What documents do you use and are they correct?
- What results from the process that you do?
- How is your filing system?
- How do you make sure the company's products meet the requirements?
- What happens when product requirements are changed?
- Are customer satisfaction data analyzed?
- What is the responsibility or who has the authority to handle process violations or product mismatches?
- What are the trends in products that are not appropriate and what is done about it?
- Are there specific procedures for corrective action if there is a discrepancy?
- Do employees know the purpose and quality of regulations?
- Are the rules and objectives available and relevant?
- How are quality goals determined?
- Is there a clear relationship between rules and objectives?
- How is progress in achieving goals measured and communicated?
- Have the number of customer complaints changed over time?
- What tools are used to identify the source of complaints?
- How are corrective actions and their success communicated to employees?
Things to Look For in Conducting Internal Audit
What is being audited? Systems, Processes, Products? The greater the scope of work the more time is needed to complete it. The most frequently performed by companies is an internal financial audit, other audits usually depend on management, legislation and or industry.
2. Auditor's expertise
If your company audits based on internal data, you will get operational effectiveness from the process. But to ensure the company is up-to-date with industry regulations and changes in business, you need expertise from outside the company. Make sure you work with a reputable financial consulting company.
3. Technology Support
Using the latest technology will make it easier for companies to help align and organize the entire audit process. Some features that must be available include processes that are easy to learn, can be customized and dashboards that show data in real-time. Some questions that you can ask the vendor:
- Is it easy to use or do you have to click several times to go to the desired place?
- How long does the installation take? A few weeks, a few months, a year?
- Does the program run quickly and responsively or sometimes slowly?
Well, you already know more about things that need to be considered before starting your company's internal audit activities. Here's the summary:
- Difference between internal and external audit.
- What makes an effective internal audit?
- Important aspects of an internal audit.
- Types of Internal Audit.
- Standard question for internal audit.
- Things that need to be considered in conducting an internal audit.
Taking into account the company's growth factors and internal risks, it's time you start or do an even better internal audit. Make the internal audit work for your company easier and more appropriate with the services of a Logiframe consultant. With the experience of professional consultants and a total of decades of experience in their fields, Logiframe is able to assist you in conducting audits with specific objectives as outlined by top management, working together with your internal functions to test the effectiveness of internal control of financial statements, and others.