What is an internal audit?
Internal auditing allows organisations to reflect on their existing settings and to improve their operations. It is an independent advisory service that assesses the business’s risk management, governance and control processes in a structured way.
Related: Compliance and risk management: how they differ
Internal audit explained
Internal auditing is an independent advisory service designed to add value and improve an organisation’s operations. It helps an organisation achieve its objectives by taking a systematic, disciplined approach. This involves evaluating and improving the effectiveness of governance, risk management and control processes. As part of the procedure, the internal auditor ensures that once the audit is completed, they monitor the steps taken to address any identified risks.
An internal audit is performed by qualified professionals who have a good understanding of the exercise but also who know the company culture, its systems and processes. For example, the internal auditor may evaluate the use of emerging technologies in the organisation. It may also investigate global opportunities and recurrent operational issues. A holistic internal audit should assess the business’s risks and identify the controls in place to mitigate those risks. It may also cover ethic auditing, quality controls, financial state of play and overall efficiencies.
The conclusion of the audit should be communicated to key parties involved, generally the board and management teams.
Related: How to conduct an ethics audit
Why internal auditing is important
Successful internal audits bring valuable visibility to organisations. They may lead to growth opportunities, efficiency gains or cultural changes. All organisations should plan for and conduct internal audits to give their board members confidence in the decisions made for the business. The process provides them with accurate and unbiased visibility on their governance and control frameworks.
Conducting internal audits is like keeping your finger on the pulse of an organisation’s operational processes, performance and culture. The internal auditor may identify challenges before they arise or may pin point efficiency gains. The relevant management teams are made aware of the report and take action to address any gaps.
Internal audits versus external audits, communalities and differences
Understanding the difference between internal audits and external audits is paramount as they serve distinct purposes. Internal audits are conducted by a company’s employees or outsourced professionals and focus on governance, risk management and internal controls to improve processes. On the other hand, external audits, performed by independent firms, assess financial reporting accuracy and provide assurance to external parties involved like shareholders. Internal audits report to the board and management on an ongoing basis, while external audits report annually to external parties.
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4 important steps to conducting an internal audit
Internal audits are conducted by professionals who have experience in such exercise and who have a good understanding of the business’s functioning. Collaboration is essential in the process to ensure sufficient and accurate information is collected and analysed. The business communicates who the internal auditor is and what they aim to achieve.
Step 1: planning and preparing
Planning the audit is key to its success. This phase involves defining the scope, identifying the parties involved, and creating a project charter to maintain focus on the objectives. The more thoroughly leadership teams plan the audit, the more likely it is to succeed. Creating a project initiation document may be useful too.
Once the planning of the project is completed, the next step is preparing. It involves constructing a detailed view of the day-to-day operations once the audit is launched. Creating a detailed project plan can help visualise task dependencies and promote accountability among the parties involved. Ideally, the project plan has project milestones to ensure key deadlines are met.
Step 2: performing the internal audit
Conducting the audit involves collecting data, both qualitative and quantitative depending on the audit’s objectives. The internal auditors should inspect whether the business meets set standards or certification requirements. To do so, they analyse documentation and conduct employee interviews. Once the data has been collected, it is analysed and evaluated. Gaps, risks and opportunities, along with their potential impact on the business, are identified for improvement actions.
Step 3: publishing results
Once the audit is finalised, internal auditors present and publish the results to the key parties involved. The conclusion of their report is based on facts and also provides recommendations on how to address the challenges identified.
Step 4: taking actions
This phase involves implementing the changes suggested by the auditors. These may be prompt and straight forward actions or they may be long term changes requiring budget allocation and strong change management strategies.
How often you audit depends on past results and any changes that might affect the business. If there is a recurrent problem area, check on it more often until the fix is achieved for the long term.
Related: Tips for those managing organisational change
How to prepare for an internal audit
Preparing for an internal audit is not a one-off exercise. Instead, it is an ongoing activity that should take place year-round. Staying organised and keeping clean records makes the process smoother. Here are some important tips on how to prepare for internal audits.
Stay organised
The foundation of a successful internal audit is well-maintained records and overall organisation. Ensure that key documentation, such as compliance policies, operational procedures and governance frameworks, are organised and up to date. This makes it easier to assess processes and identify areas for improvement. If needed, leverage document management systems to keep records in order and easily accessible.
Review your internal controls on a regular basis
Internal controls are critical for ensuring that operations are efficient, that risks are managed and that compliance requirements are met. Regularly evaluate the business’s processes, such as risk management strategies, employee access to sensitive systems and fraud prevention measures. By proactively addressing control gaps the company reduces the likelihood of issues arising during an internal audit.
Assess the company culture through employee surveys
Engaging employees in the process allows the auditors to access valuable information. Internal audits often require input from various teams. Encourage open communication and ensure employees understand the importance of the audit. Consider using surveys or interviews to gauge the effectiveness of processes and identify cultural factors that may impact performance.
Related: Employee satisfaction surveys: what they are and why they’re important for your business
Create a compliance check-list
Developing an internal audit preparation checklist can keep your organisation on track. This should include tasks like reviewing past audit findings, verifying compliance with internal policies and ensuring that all procedures are documented. A checklist ensures that no critical steps are overlooked.
Related: A guide to HR compliance with checklists and examples
Address any risks
Identify potential risks or problem areas in advance of the audit. This might include inefficiencies in processes, gaps in compliance or areas prone to error. Addressing these proactively can demonstrate your organisation’s commitment to improvement and reduce the likelihood of issues being flagged during the audit.
Prepare your teams and communicate well
Ensure your team is fully prepared for the internal audit by clearly defining their roles and responsibilities. Brief relevant team members on what to expect during the audit, and assign a point person to manage communication with the auditors. Ensure open communication throughout and provide documentation that will help the process run smoothly and minimise stress.
Related: Guide to managing employee stress in the workplace
Get buy-in from key participants
Leadership buy-in is essential for the success of the audit. They should support the audit process and sponsor it. This proactive step will help during the data collection phase and will ease the collaboration with different involved parties. It sets the expectations and leads to a more effective internal audit.
Internal audits are a powerful tool for improving organisational performance and ensuring robust governance. By planning thoroughly, maintaining transparency and actively involving all parties, businesses can maximise the value of the audit. With ongoing preparation and a focus on addressing risks and inefficiencies, internal audits help organisations build resilience, enhance decision-making and foster continuous improvement.
