Internal audits are conducted by businesses to assess their internal controls, such as corporate governance and accounting procedures. Internal audit's primary goal is to provide independent assurance that the company's risk management, corporate governance, and internal control mechanisms are working correctly.
Internal auditing guarantees that all rules, regulations, and laws are followed to ensure timely financial reporting and data collecting for analysis. It also aids the organization in determining what is wrong, improving efficiency, and determining what is incorrect before an external audit is conducted. This also gives management and the board of directors time to fix errors before the external audit.
Advantages of Internal Audits
1. The most significant benefit of internal audit is that, it aids in the detection of problems before the external audit. So, by the time an external audit occurs, management will have corrected those flaws. This also helps to limit the likelihood of fraud because management cannot review everything, so auditors, who are professionals, can immediately spot any mistakes.
2. Internal audit introduces a sound accounting system with stages and procedures to keep financial records easy to verify and manage. This makes it easier to attain desired goals and outcomes.
3. Internal audit also assists management in decision-making and keep them in check. Internal control, internal check, and internal audit are all tools that can help a company achieve its goals. Management also compares prior year's audit reports to assess how the organization is doing and improving and then makes effective decisions based on this information. Internal audits are frequently used by management to make essential changes for a more efficient firm.
4. Internal auditing can help protect assets. Company executives may misappropriate assets for personal gain rather than for the benefit of the company. The internal audit ensures that cash, stock or inventory, and other assets are being used appropriately and aren't being used for purposes other than generating revenue for the company.
5. Internal audits can assist in resolving labor and responsibility issues. During an internal audit, the activities of every employee, including managers, are scrutinized, and the auditors might bring out the necessity for separate labor for a specific task if necessary. As a result, there is a division of labor. This also aids in assigning responsibilities to idle personnel or those who are not performing their duties correctly since they can be given a standard or benchmark to reach to remain employed. Any action that is judged to be appropriate to hold persons accountable can then be done.
6. External audits benefit from internal auditing as well. An internal auditor's work can assist an external auditor by making it easier to conduct an external audit. Both audits follow identical procedures, and external auditors frequently review internal audit reports. They should not, however, rely solely on internal audit reports.
7. The income statement and balance sheet prepared from the previous year's audit reports can be used to make budgeting decisions for the current year. This aids the corporation in improving its overall performance.
8. Internal audit, like asset protection, ensures that resources are being used appropriately. Misuse of resources results in resource waste, which leads to higher expenditures for the organization. Using the regulated cost of output, the company may determine the optimal use of resources. An internal audit can assist in putting those resources to the best service and in the organization's best interests.
9. Finally, internal audits aid in the proper investigation of many parts of the firm. When doubts arise, the internal auditor can utilize facts and numbers to determine what isn't correctly done. These requests are made by the company's management, who asks the auditors to look at various sectors of the firm.
Disadvantages or Limitations of Internal Audits
We've discussed the many advantages of internal audits, but they have limitations as well:
1. There is a scarcity of qualified personnel that a corporation can hire for its internal auditing committee. To complete the procedure accurately and efficiently, skilled and professional personnel is essential. Due to a lack of such personnel, the organization may be unable to reap the benefits of a thorough internal audit.
2. Between the recording of financial records and the audit, there is a significant time lag. When the accounting process is completed, the audit process begins, and the entries are checked after some time has passed. There may be some inconsistencies as a result of this.
3. Depending on their level of knowledge, the internal auditing team may miss some errors. There are fewer chances of mistakes getting undiscovered with a far more seasoned and capable team. However, there is no guarantee that all accounts will be free of errors. If such errors are discovered during an external audit, this can be costly, but it all relies on the type of fault and its cost.
4. Even when problems are discovered, some managers are slow to remedy the situation. They may decide not to make the audit reports public, and they may choose to disregard the faults and fail to take the necessary actions.
5. Internal audits are conducted by persons who are like outsiders to the organization and have no vested interest in the company's success. As a result, individuals have the option of ignoring some red flags. They are motivated by money rather than by the company for which they work.
6. Internal auditing is a cost that businesses must endure. This is because the internal audit is performed for the company's benefit, and the shareholders refuse to accept it. As a result, an external audit is always required, resulting in an additional cost that corporations incur only for their benefit.