Internal audit is a structured endeavor aimed at furnishing independent assurance while also augmenting the efficacy of a company's operations. It aids companies and organizations in accomplishing their goals by meticulously scrutinizing internal systems, managerial effectiveness, and financial undertakings. The significance of internal audit for small and medium-sized enterprises is burgeoning as it guarantees the judicious utilization of resources while mitigating risks to an acceptable threshold through a risk-based internal audit methodology. Internal audit services encompass a broad spectrum of assessments, including financial, VAT and compliance, operational, information systems, and specialized investigations.
Professional Internal Audit Services
The primary objective of internal audit within an organization is to add value. In delivering internal audit services, it is imperative to adhere to its fundamental principles, namely Independence, Objectivity, Proficiency, Diligence, and Quality. Here are several instances illustrating how internal audit can provide assistance:
- Enhancing the internal control system
- Ensuring the accuracy and reliability of financial and operational information through established review and reporting mechanisms
- Identifying opportunities for resource optimization and cost savings
- Ensuring compliance with relevant rules and regulations
- Detecting and preventing financial statement misrepresentation, including overstatement of assets or revenue, and understatement of liabilities and expenses
- Preventing the misappropriation of assets, such as theft of cash, supplies, inventory, equipment, and information, which may be concealed through record adjustments that internal audit can uncover
- Identifying and preventing unrecorded cash theft, such as accepting payments from customers but not recording them as sales
- Preventing fraudulent payments for goods or services, such as overstated invoices or personal use of invoices
- Preventing fraudulent expense reimbursement, including payment for fictitious expenses Detecting and preventing false claims for compensation, such as overtime for hours not worked or payments to fictitious employees
- Ensuring compliance with tax laws
- Detecting and preventing conflicts of interest, such as undisclosed personal economic interests in transactions that could adversely affect the organization or its shareholders
Additionally, internal audit assists in interpreting fraud risks and assessing whether they require special attention during internal audit procedures. It aids in evaluating potential fraud indicators and suggesting controls to mitigate and detect fraudulent activities. Furthermore, internal audit evaluates the effectiveness of risk management processes and contributes to their enhancement.
Main Types of Internal Audits
a) Financial Audits
Internal audits focusing on finances encompass the examination of the accounting and finance department within the company. This department commonly encompasses areas such as accounts receivable, accounts payable, payroll and compensation, fixed assets, cash and treasury management, and financial reporting. Depending on the scale of the finance and accounts department within the company, financial internal audits can be organized as follows:
- An individual internal audit engagement is dedicated solely to one specific area or section within the accounting and finance department. For example, an internal audit engagement might focus solely on accounts payable, with the internal audit report exclusively addressing this aspect.
- In small businesses, it may be more suitable to consolidate all components of the accounting and finance department into a single internal audit engagement, rather than conducting separate audits for each section.
Financial internal audits also cover testing of design and implementation of internal controls on accounting and finance department.
b) Operational Audits
Operational internal audits assess the effectiveness and efficiency of the operational aspects of a business, while also conducting risk assessments. This entails a comprehensive analysis of the processes and procedures within the company's operations, aiming to identify opportunities for reducing operational costs, enhancing risk management, and improving internal controls and operational processes.
c) Information System Audits
In today's business landscape, information systems play a pivotal role in achieving success, underscoring the importance of internal audits of these systems. Such audits are imperative to assess internal controls on information systems, test IT operations, disaster recovery plans, and ensure business continuity. They verify adherence to standard practices and relevant SOPs, accuracy and reliability of generated information and reports, identification and management of threats, and the presence of adequate controls on information security and confidentiality.
d) Project Audits
This form of internal audit is conducted to evaluate and assess different facets of a project under review. Generally, an internal audit of a project encompasses a detailed examination of financial, operational, information system, and compliance aspects.
e) Investigative Audits
Internal audit may be required to probe any suspected fraudulent activity, embezzlement, or breaches of relevant laws and regulations.
f) Compliance Audits
These audits are conducted to assess the adherence to internal policies and procedures as well as external rules and regulations. In recent years, the UAE has implemented significant laws and regulations pertaining to various aspects. Moreover, there are laws and regulations applicable to both mainland and free zone operations.
Internal Audit Process
a) Internal Audit Charter
The internal audit charter serves as the primary policy document outlining the purpose, authority, and responsibilities of the internal audit function, whether it is conducted internally or outsourced. This document is endorsed by the audit committee or board members and provides guidance for the day-to-day operations of the internal audit function.
b) Annual Internal Audit Plan
In organizations with a well-established internal audit function, an annual internal audit plan is crafted. Typically, this plan is formulated at the beginning of the financial year and encompasses a comprehensive list of internal audit engagements, resource allocation, timelines for each engagement, risk assessments, and the department's annual budget for the respective financial year.
c) Internal Audit Engagement Execution
During the implementation phase of each engagement outlined in the internal audit plan, the following actions are undertaken:
- Planning
The process begins with an initial risk assessment conducted at the engagement level, followed by a review of any previous audit reports. Subsequently, there is communication with the client regarding the audit scope, leading to an initial audit meeting aimed at discussing and gathering crucial information on key areas.
- Audit fieldwork
The process encompassed the creation of an audit program, testing internal controls, and executing detailed audits, which included thorough examination and review of transactions, documents, systems, policies, and SOPs. This involved preparing working papers and corroborating draft audit findings through additional investigation and discussion with the auditee.
- Reporting
All findings from the field work are compiled in a draft report. For each finding, corresponding implications and recommendations are included and if necessary, relevant annexures are attached with the report. Draft report is issued to client with the request and deadline to provide response to the findings in the report. Once findings wise response is received from auditee, it is incorporated in the draft report and final report is issued to the Audit committee/owners.
- Follow-up