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Home > Auditing Checklists > Understanding Internal Audits

Auditing Checklists

Understanding Internal Audits


Checklist Description

This checklist provides guidelines for identifying internal audit resource requirements.

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Definition

The Institute for Internal Auditors (IIA) defines internal auditing as “an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.” An internal audit “helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”

The following comprise a set of guidelines for initiating an internal audit:

  • Clarify guidelines and expectations with management (for example, purpose, timing, scope).

  • Set up an audit committee and, with its help, develop an audit charter.

  • Consider an appropriate budget and staffing model.

  • Formulate reporting responsibilities for the internal audit function.

  • Initiate a risk assessment, with management and audit committee involvement.

  • Develop an internal audit plan in response to the risk assessment.

  • Determine staffing requirements.

  • Carry out the audit plan, including a monitoring and follow-up system.

  • Update the risk assessment plan as circumstances change.

  • Enhance and modify the audit function to meet the organization’s changing needs.

If an evaluation of internal controls is to be effective, the audit function should be properly financed. When making staffing decisions, companies should look at their risk profiles. A business facing a significant number of risks or particularly complex risks will require various types of specialist expertise. A chief audit executive heads most internal audit departments, with specialist support staff.

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Advantages

  • Internal audits improve understanding of underlying business trends by giving independent objective financial information.

  • Internal audits let managers know if a business can expand or needs to pull back, if it can deal with the normal revenue ebbs and flows, or if it should take immediate steps to boost cash reserves.

  • Internal audits can identify and help to analyze trends, particularly in the areas of receivables and payables. For example, is the receivables cycle lengthening? Can receivables be collected more aggressively? Is some debt uncollectable?

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Disadvantages

  • Results sometimes depend on the accounting methods used. Measuring and reporting give management considerable discretion and opportunity to influence results.

  • Internal audits are not always rigorously carried out, and figures may not be a true reflection of the financial position of the company.

  • Salaries for internal audit staff are paid for by the organization; this can lead to bias.

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Action Checklist

  • When reviewing internal audits be prepared to be involved in a long and detailed process of analysis where some areas will need clarification by experts.

  • Check which Generally Accepted Accounting Principles (GAAP) are used in the internal audit of the business area or country in which you have an interest.

  • Internal audits are not infallible. If you are unsure about specific areas or numbers, don’t hesitate to ask for clarification.

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Dos and Don’ts

Do

  • Make sure that you take the time and effort to analyze the internal audit and, if in doubt, consult an external expert.

  • Use your judgment when reviewing internal audits; numbers do not always tell the whole story.

Don’t

  • Don’t leave out the boring bits; number crunching is not always effortless or interesting, and often it is tempting to skip parts. Sometimes, however, the truth lies in the detail.

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Further reading

Websites:

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