An internal audit analyzes the activities, processes and procedures of a business. The goal of the audit often is to improve the company’s productivity and increase its revenues. Unlike a traditional audit conducted by an investigative team seeking only to uncover possible legal or ethical infractions, an internal audit is performed to provide a company with constructive criticism to improve efficiency and ensure compliance with established internal and external regulations and procedures.
The birth of the internal audit is thought to have occurred shortly after the conclusion of World War II. That period is often considered to be the time when many of the world’s most successful businesses were started. This boom created a demand for business management strategies. The need for analysis of those strategies arose, and the internal audit concept was created.
Since management is normally held responsible for internal control, managers are often the target of this type of audit. To fairly and equitably analyze the company’s employees and management procedures, an internal audit generally requires the people conducting it to be independent evaluators. Often, third-party professionals are hired to conduct the audit to ensure neutrality.
The audit is normally conducted using a methodical system developed by internal auditing professionals. The system draws attention to organizational flaws and proposes workable solutions. While it evaluates the specifics of a company’s operations, the conclusions of an audit may contain generic guidelines appropriate to many business situations along with company-specific recommendations.
Many factors are considered and evaluated by the audit staff, including compliance with regulations and laws, risk management and asset protection. The dependability and constancy of financial reporting and operational efficiency are also closely scrutinized. The audit commonly reviews the company’s compliance with its own policies and procedures as well.
A normal internal audit project initially defines the scope and purpose of the exercise. The persons conducting the audit then discuss the nature of the business and its objectives with management. This may involve document review and discussions with various employees.
After the company profile is clearly defined, the audit focuses on what are perceived to be problems or high-risk factors. These areas are examined to determine if they are the actual sources of trouble. Possible solutions are presented to management for review. If they are approved and implemented, the internal audit is concluded. At this point, a date for a follow-up review is generally set to determine if the implemented improvements were successful.