An internal audit is an excellent way for directors to obtain a clear, concise and objective insight into how their business is doing.
No business journey comes without its highs and lows. While sometimes we may not be able to prevent the lows, we certainly can do our best to be prepared for them. An internal audit affords businesses an insight into how on track they are to completing their goals and attaining their targets while providing a detailed report on the health and efficiency of the company.
Having this information enables directors to make necessary changes to the culture and processes of the company with a view to maintaining growth, mitigating risk and avoiding compliance breaches. Internal audits save time and money in the long run, and they can often uncover potential problems before they become expensive emergencies.
- Who should perform an internal audit?
- Internal vs external audits
- What does an internal audit consist of?
- Your internal audit, your info
1. Who should perform an internal audit?
Ideally, an auditor!
There are certain standards that should be kept to when it comes to having an internal audit carried out. The best way to keep to these standards, so as to have the job done properly, is to involve someone qualified and specialised enough to bring expertise to the table. In the UK, members of the Chartered Institute of Internal Auditors adhere to a Code of Ethics, alongside international standards, in order to assure that they will be able to carry out a truly independent and objective assessment of the business that they are auditing.
Of course, an internal audit can be performed by someone within the company. Depending on the size, or how many departments are being looked at, it is possible for the directors or perhaps the accounts team to have a look into the state of affairs. Those within the company will certainly have an understanding of inner workings and can make a decent assessment of things with reference to the needs of the business historically. Of course, this will also avoid incurring the additional expense of bringing in an auditor. Having current employees conduct an assessment may be useful but for many firms, ideally you want a more independent review.
For a fresh perspective, it may be wise to bring in an expert from outside of your organisation when planning for an internal audit. As different business sectors will have different considerations in play when analysing facts and figures, selecting someone who has knowledge of your field is recommended. Welink Accountants offers filters for exactly this reason.
This also avoids any potential conflicts of interest that may be at play when relying solely on staff members for an internal audit. Exposure to cold hard facts in the light of day often saves time and money down the line, so it can be beneficial to have someone with no other connection to the business taking a look at things. The data gleaned from a professional auditor can prove invaluable when putting together future growth strategies, as they are paid to leave no stone unturned.
2. Internal vs external audits
While the two may be similar, there are marked differences between internal audits and external ones.
Firstly, an external audit is conducted for the benefit of those outside of the company day-to-day. This can include shareholders, regulators, or in some cases HMRC. Normally, they are designed to examine the company’s financial records so as to ensure that they are correct and in line with regulatory obligations. In the UK, certain companies are required by the Financial Conduct Authority (FCA) to appoint an external auditor annually. These include those who deal with mortgages, personal investing and securities and futures. Private limited companies who meet 2 or more of the following must also have an external audit:
- turnover of more than £10.2 million
- assets valued at more than £5.1 million
- more than 50 employees on average
Some companies will have the requirement for an external audit stipulated in their articles of association or may be compelled to do so at the request of their shareholders. This may be the case even if they are not required to by HMRC. Certain companies must have an external audit regardless, including those that are publicly listed or have shares traded on a regulated market, those involved in banking, e-money companies, insurance companies, and pensions or labour regulated bodies, among others.
Ultimately, an internal audit is done in the interests of the company and its progression, whereas external audits are required in certain circumstances for the benefit of the government bodies, or external stakeholders. Internal audits are also more likely to consider non-financial factors, so as to apply context to the raw numbers that are analysed. An external audit is merely designed to confirm the company’s financial position, with no real regard to any advising or growth planning.
3. What does an internal audit consist of?
An internal auditor should conduct a thorough ‘check-up’ of the company’s state of affairs. This will include analysing a variety of factors, both in-house and externally. As it is being done at the behest of the business leadership, internal audits can vary in terms of levels of focus and scrutiny. In some companies, even only certain departments will be selected, as opposed to the business as a whole. As such, there is no fixed formula for internal auditing, however many will likely feature elements from the following:
A good tool for assessing the financial health of the company involves looking at how management conducts itself. It is important to understand how the company’s affairs are being managed, as it may be that resources are being wasted, or that certain practices may be leading to potentially costly issues down the line.
Analysing management is crucial to understanding the nature of internal control at the company, as well as how the leadership of the firm impacts other areas important to the audit, such as risk assessment.
Any good internal audit will seek to identify possible risks, both current and conceivable. An internal auditor is tasked with highlighting existing concerns, alongside calculating how several factors may present hazards going forward. This is crucial to enable the company to implement controls and safeguards so as to mitigate potential future losses. Investing in a thorough internal audit may well be the difference between saving money in the long run or facing an expensive obligation down the line.
For businesses that may be easily impacted by external factors, having an internal audit to check on their financial well-being can be the difference between having a proper strategy and going in blind.
A good internal audit will pour over the many different elements that are or may be impacting the company’s targets and objectives. This enables the company to identify issues that are holding them back, but also positives that can be built upon. Reviewing financial data can also help the business when assessing how on target they are for current and future objectives.
4. Your internal audit, your info
A great advantage of having an internal audit performed is the fact that it can be kept private. Information revealed as a result of an external audit has the potential to impact business, as the negatives will be shared along with the positive.
It may be wise for companies to have an internal audit done in preparation for an upcoming external audit, even if just to make sure that their house is in order beforehand with regard to compliance and controls. Management can define the bounds of an internal audit, and the report goes directly to the directors, meaning they have a first-hand account of how well their business really is doing. Taking the opportunity to have this done without the pressures of external organisations or shareholders allows for a clear and objective assessment, and gives the board time to plan for the future.
Yes, having an internal audit done professionally with an expert is likely to cost a business money, but the long-term savings from this may be far greater so it is certainly an avenue worth considering.