Guide: What is an Internal Audit?

When you hear “internal audit,” what comes to mind? For some auditing professionals, it’s a tick-the-box exercise—a compulsory board requirement. To auditees, it may appear to be a fault-finding mission. Audit directors, your Chief Audit Executive and operational managers, on the other hand, might view it as a means to evaluate and improve business processes.

Often, internal auditors who perceive auditing as a checkbox activity rush to get it done. Employees who view it as a fault-finding venture tend to be defensive. Business leaders who view it as a management tool are more inclined to use audit results strategically.

So, what is an internal audit? How important is it? And how can you bring every stakeholder on the same page to make internal audits more impactful—all while maintaining auditors’ independence?

Table of Contents
What Is an Internal Audit?
The Importance of Internal Audits
Different Types of Internal Audits
Internal Audit vs. External Audit
Creating an Internal Audit Process
Internal Audit Reporting and Communication Best Practices
Common Challenges in Internal Auditing
Technology in Internal Auditing
Simplify Internal Audit Management with Onspring

What Is an Internal Audit?

An internal audit is an unbiased, objective review of an organization’s internal systems, workflows, processes and procedures. During the audit, auditors use unique skill sets and industry knowledge to:

• Assess operational and IT risks
• Identify compliance issues
• Investigate internal or external fraud
• Detect inaccuracy in financial reporting
• Evaluate the effectiveness of the company’s risk management

The aim is to identify areas of improvement, confirm compliance requirements are met, and enhance overall efficiency.

The Importance of Internal Audits

Internal audits are important because they identify operational weaknesses and verify compliance. The audits are especially crucial now that the Sarbanes-Oxley Act of 2002 holds managers of public companies accountable for the accuracy of their company’s financial statements.

What’s more, internal audits play a role in risk management and safeguarding against waste, fraud or abuse. The results from an internal audit provide insights for the management team to improve processes that aren’t operating as intended.

Different Types of Internal Audits

You can conduct various forms of internal audits based on what you want to assess.

Compliance Audit

Depending on your industry, your company may be required to adhere to specific government regulations, local laws, industry-specific compliance needs, and external policies. Failure to comply can result in fines and lawsuits, which could financially burden your company. To demonstrate compliance, you may ask an internal audit team for ongoing compliance audits to assess your processes and offer a comprehensive opinion on your compliance status.

IT Audit

IT audits traditionally cover the CIA Triangle; confirming IT and Information Security Systems keep data confidential (C), provide data integrity (I), and are available (A) for use when needed by the end user. However, there are some special audits one can see in the IT realm:

• Address an external lawsuit
• Satisfy insurance and vendor requirements
• Achieve greater efficiency
• Investigate a complaint raised within the company

Regardless of the objective, a technology audit assesses whether your IT systems protect the company assets and align with business goals. Because operations at modern companies heavily rely on technology, IT audits are critical in confirming processes and information systems work properly.

Internal Financial Audit

If you’re a public company, federal law requires your organization to undergo an external, annual financial audit. To prepare for these external audits, a public organization can perform an internal financial audit.

While the law doesn’t require private companies to conduct financial audits, many organizations choose to do so. Internal financial audits provide management with an assessment of the effectiveness of the financial reporting processes and help validate the accuracy of financial statements.

Performance Audit

Performance audits focus less on processes and more on the final results. They evaluate your organization’s operations to determine if specific approaches work as intended to achieve set goals. Typically, you’ll require regular performance audits if you’re a government agency that receives funding from the federal government.

Take, for instance, a municipality that receives government funding to improve waste management. A performance audit might assess whether the municipality meets its target of reducing landfill waste by a specific percentage.

Environmental Audit

Customers are becoming more environmentally conscious, and so should your business. According to a joint study by McKinsey and NielsenIQ, from 2017 to 2022, products with eco-friendly claims accounted for 56% of all revenue growth in the consumer goods sector. As such, you might want to review your company’s environmental impact and assess:

• Your approach to minimizing greenhouse gases
• Whether you source raw materials responsibly
• How well you maximize energy efficiency
• Whether you utilize eco-friendly distribution methods
• Your compliance with environmental regulations

If you use triple-bottom-line reporting — evaluating performance based on people, planet, and profit—you can include internal environmental audits in your annual reporting.

Operational Audit

You’re more likely to run an operational audit when key personnel leave or when you’re under new management. The executive may want to assess how things are done and whether your company uses resources efficiently. During this audit, auditors review how resources—such as labor, technology and finance—are used to fulfill the company’s goal.

Special Investigation Audits

While most audits are conducted annually, in some cases, it might make sense for the internal audit team to evaluate special circumstances. For instance, if your company suspects fraudulent activity within a particular department, you can initiate a special investigation audit to uncover irregularities.

Internal Audit vs. External Audit

At face value, internal and external audits have the same objective: to analyze aspects of an organization and provide a basis for informed action. However, several key differences set these audits apart.

Internal Audit

• Your company selects the audit team.
• No specific title or license requirement for staff members to be auditors.
• The audit report is often used by internal management to improve operations, processes or policies.
• Audits are more fluid; employees can offer advice, discuss unrelated matters and have a consulting relationship.
• Typically, it is not legally required, but often ideal for risk management.

External Audit

• Your company selects the external audit firm but not the audit team members.
• External auditors must have specific licenses as part of the audit agreement.
• The report is often used by an external party to meet reporting requirements.
• Audits have a highly defined scope with clear boundaries to avoid exceeding audit limits.
• Often legally required by a regulatory authority.

Creating an Internal Audit Process

Conducting an internal audit involves several structured steps. However, to ensure thorough evaluation and accurate results, you want to follow established standards and frameworks to guide your audit process. Two of the widely recognized frameworks are published by the Institute of Internal Auditors (IIA) and the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Follow these key steps to align your internal auditing process with industry standards.

Step 1: Building the Internal Audit Team

The first step is to form a capable and independent audit team. While the law does not require specific licenses for internal audit members, it’s crucial they have strong analytical, critical-thinking, ethical, and communication skills. With these skills, your team will be able to identify issues that others may overlook and communicate them effectively to management.

Step 2: Audit Planning

Once you have the team, it should perform a risk assessment to determine the critical areas of risk the team should focus on and what the audit aims to achieve. In this step, you’ll identify areas and processes to be audited. Then, create a detailed plan highlighting the audit timeline and procedure.

Step 3: Audit Scoping

After planning, introduce your audit team to relevant stakeholders, outline topics of focus, and establish expectations between the auditees and the audit team. Clarify the purpose of internal audits and allow stakeholders to air any concerns or provide additional information.

Step 4: Fieldwork

In this phase, your audit team will collect data primarily through documentation (reports, screenshots, policy, etc.) and interviews with applicable personnel. The auditors will assess processes and internal controls to verify whether they are performing as intended. They will then analyze the data to identify areas for improvement.

Step 5: Documenting the Findings

Once fieldwork is complete, your auditors should document the findings and recommendations in a clear, organized manner. All findings should be backed by evidence gathered during the audit process and assigned an owner. In this step, your audit team may also prepare a preliminary report summarizing the key points senior management should know about.

Step 6: Reporting

Share the audit findings with relevant stakeholders and management, along with recommendations for addressing identified issues. Allow stakeholders to provide feedback on the findings and suggestions.

Step 7: Follow-up

After reporting, finding and recommendation owners should document action plans to address the audit items reported. The audit team or a designated follow-up team should monitor the implementation of the recommendations and confirm the audit changes suggest lead to tangible improvements in the organization. You can conduct a follow-up audit to verify that the identified issues are resolved.

Internal Audit Reporting and Communication Best Practices

Successful audits depend on clear communication. After all, you want all stakeholders to understand, accept and act upon your audit’s findings. Here are some audit reporting and communication best practices to consider.

• Foster open, collaborative communication between auditors and auditees to ease the minds of auditees who might feel audits are fault-finding missions.
• Present audit findings in a straightforward and concise manner to and confirm every stakeholder understands the key points.
• Customize reports to suit the needs of different audiences, focusing on what is most relevant to each stakeholder group.

How to Ensure Action Is Taken on Audit Recommendations

After communicating audit recommendations, you can take some steps to ensure audit suggestions are acted upon:

• Specify actionable steps in the audit report, assigning clear responsibility to relevant stakeholders.
• Set deadlines and milestones for each action item to allow regular follow-up and progress tracking.
• Engage with management support to emphasize the importance of acting on audit recommendations and allocating necessary resources.

Common Challenges in Internal Auditing

Although internal auditing is crucial, conducting one isn’t short of challenges. Auditors face obstacles that can compromise the process and, in turn, audit results.

Resource Constraints

Most internal audit departments operate with limited staffing, budget and time. These constraints can limit auditors’ ability to conduct thorough and comprehensive audits.

How to Address Resource Constraints

• Utilize technology to automate routine tasks and reduce the need for human labor.
• Outsource or co-source certain audit functions when necessary.
• Prioritize audits based on risk levels.

Lack of Expertise

As the demand for internal audits continues to rise, attracting and keeping top internal auditing talent is difficult. This skill gap can hinder your company’s ability to conduct audits that fulfill modern requirements and company objectives.

Strategies to Overcome Talent Shortages

• Invest in training programs to upskill existing employees.
• Partner with external audit firms or freelancers to fill skill gaps on a temporary or project basis.
• Identify and upskill talent within the organization to ensure continuity in the audit functions.

Remote Work Challenges

Over 25% of the global workforce engages in some kind of remote work. While convenient, remote work creates challenges for internal audits. For instance, auditors may struggle to inspect the physical assets, facilities and operations when employees work remotely. They may have to visit different locations to conduct physical assessments.

Strategies to Overcome Remote Work Challenges

• Adopt a secure digital platform for document sharing, video conferencing, and real-time collaborations.
• Tailor the audit process to accommodate remote scenarios such as video-assisted inspection and virtual walk-through.
• Set clear protocols for remote audits to provide transparency.

Technology in Internal Auditing

Technology is transforming how organizations do internal auditing. Initially, auditors were known for preparing financial statements and performing operational audits, and were skilled and trained for that. Today, however, technology is changing these roles. The modern auditor utilizes technology to execute most of their functions. In fact, a recent study shows that AI can analyze 100% of financial transactions to cut down audit time and improve decision-making accuracy.

As such, using auditing tools that integrate into a governance, risk and compliance (GRC) solution can help your organization:

• Automate routine audit tasks and reduce audit time
• Access real-time data to promptly identify risks and non-compliance issues.
• Centralize all audit-related documentation, making it easier to track and manage audits.
• Facilitate better communication between audit teams, management and other stakeholders to align audit goals and findings.

Simplify Internal Audit Management With Onspring

Managing internal audits can be complex and time-consuming, but the right tool makes all the difference. At Onspring, we offer an internal audit management platform to simplify the process. With our platform, you can automate routine tasks, streamline workflows, centralize audit documentation, and provide seamless team communication. Request a demo today to see how Onspring can improve your internal audit management.