Internal Audit: A key to business success

Have you thought your business could be performing better? Have you thought you could be spending less and operating more effectively? Are you sure there is no fraud or malpractice in your company which could be affecting its operations and profit? If one or more these questions are entering your mind and seeking answers, it’s time for you to get the services of an internal auditor.

 

An internal auditor can help find solutions to a lot of your company’s problems. At its simplest, internal auditing is a catalyst for improving a company’s financial management, governance, risk management and management controls by providing advice and suggestions based on analyses of data and business processes. In other words, internal auditing is an independent activity that is designed to add value by improving the operations of your company. It helps in early accomplishment of your business goals by bringing a systematic and disciplined approach to business.

 

What an internal auditor does?

An internal auditor locates areas where you can save time and money by examining the day-to-day operations and daily responsibilities of the employees. He identifies areas of waste, excessive spending and improper spending by employees. Ordinary accountants may not be able to identify these problems either because they are the beneficiaries of the prevailing system in the company or they have become used to it after several years.

 

Many business owners think that they are aware of everything that happens in their company and everything is under their control. This may or may not be true, but there is no doubt that an internal auditor adds immense value to a company’s operations.

 

Without proper auditing of your accounts and business practices, you may not catch certain weaknesses. For example, you may not notice immediately any variation in the usage of materials or labour in production if you aren’t performing audits. But eventually it will lead to the collapse of your business unless the problems are rectified and remedial measures taken fast. You become aware of some problems only when customers or others complain, but an internal auditor can bring them to your attention at an early stage, much before they create damage and losses. It’s not that the problem is huge all the time. The solution sometimes could be as simple as upgrading a system or piece of equipment for better efficiency.

 

How does internal auditing benefit you?

All the duties carried out by internal auditors are for the benefit of the company. Some of their contributions are very crucial for the existence of the company. They identify risks which must be eliminated, addressed or avoided, and identify strengths which must be bolstered. The following are some of the key responsibilities of internal auditors:

 

RISK MANAGEMENT: Risks can emerge from anywhere and anytime for a company. Some of them are man-made, due to bad planning, inefficiency, fraud etc, and sometimes they arise from situations which are beyond our control, like natural disasters, political tension and disputes, economic recession etc.

Whatever the reason, the focus must be on averting and minimising the risks. The primary duty of an internal auditor is to identify the risks and suggest solutions. Their expertise, knowledge, and broad perspective of your organization and the general market enable them to suggest solutions to deal with crises and risks. Internal auditors can also evaluate control efficiency and their effectiveness and advise the management about whether they are adequate to respond to the risks that threaten the organisation.

 

FINANCIAL ACCURACY: Internal auditors ensure the accuracy of financial statements. Finance is the cornerstone of every business operation and any mistake or flaw in financial statements can have disastrous consequences for the existence of the company itself. Only an expert can detect these faults.

 

Internal auditors also examine credit lines extended to customers by the company and credit which the company has taken from banks or other financial institutions. They will ensure compliance with rules and regulations and make sure that the company’s interests are protected by providing advice on managing debt. They can create a credit policy if the company doesn’t have one.

 

REVIEWING PROCEDURES: Internal auditors can review the existing procedures and processes closely and assess whether they are well designed to meet the objectives of the company, and can advise about the necessary changes. The company has several valuable assets, like tangible property, human resources, and intellectual property which must be protected against theft and misuse. Internal auditors can evaluate the procedures used to safeguard these assets from theft, fire, illegal activities, or other types of loss.

 

DETECTION OF FRAUD: Fraud is widespread nowadays and they appear in several ways. Some employees have cheated their employers of thousands of dollars through fraudulent financial reporting and practices. Internal auditing can help detect and prevent financial fraud. You will be able to find bookkeeping mistakes by conducting an audit of your own volition.

 

It’s very easy for any internal auditor to detect fraud in any operation once they have access to all records. Fraud can be perpetrated by the company staff, or by an outside agency with the connivance of the company staff. An auditor can bring to the attention of the company management about the extent of damage caused by the fraud and ways to prevent them in future.

 

Need for independence

Internal auditors must be given full freedom to carry out their duties and responsibilities fairly and fearlessly. Though internal audit may be part of the organisation, the auditors must report to the highest governing body or the top management so that their work is not influenced or hampered by other staff and interests. Normally, the internal audit function is established by the board of directors or the owner of the organisation.

 

Also, the internal audit team must be given full and unrestricted access to all records, data, personnel, and assets. For auditing to be effective, the company management or owner must be open to discussing tough issues and seizing opportunities to make necessary changes for improvement. There is no point in detecting a fault if remedial measures are not taken.

 

At the same time, internal auditors are not responsible for the execution of company activities. Their role is mainly as advisors. They advise management and the Board of Directors regarding how to better execute their responsibilities and achieve the desired results.

 

Internal auditors are trustworthy and reliable because they are required to follow the profession’s internationally accepted code of ethics and standards for professional practice. They abide by a code of ethics that upholds the principles of integrity, objectivity, confidentiality, and competency. They are also well-read, and in order to maintain their professionalism and competence, they stay ahead of business trends through constant learning and keep their eyes open to scan for signs of trouble, and are able to anticipate future challenges and risks.

 

Finally, internal auditors are not just auditors. They are risk and control experts, analysts, problem-solvers, reporters, and trusted advisors. They serve as the eyes and ears of the company management. Any company owner would take their advice seriously because their only objective is to help the client and his business.

 

Today’s internal audit professionals come with several skills. They are respected for their critical thinking abilities, communication skills, as well as their general industry-specific knowledge. For these reasons, they are able to contribute to an organisation’s success.

 

CA. Abdul Khader MT

(Author is an Auditor and Financial Consultant)