Common questions on the lips of business owners in time of financial crisis are; why should I still keep my internal auditors? What are the importance of internal audit department? Is our internal audit department not an unnecessary overhead for our businesses?
Internal audit is arguably one of the most important aspects of accountancy yet many company’s first point of call in time of cost cutting is the internal audit department.
If you are a business owner and you are thinking of getting rid of your internal audit team. I urge you to pause, read through this post to see if you will have a change of mind.
Firstly, one thing needs to be made clear. Your internal control and audit processes are more important than results.
Too many people make the mistake of thinking that internal audit function is more about catching the thieves and fraudsters in an organization.
Well, in as much as the internal audit function does the above, they are not their primary function and the reason why they are established.
The big question – probably the most important question is; Would you rather have an effective internal audit department that constantly review your controls, processes and operations for opportunities to make improvement or have an internal audit function that are busy chasing shadows all in the name of trying to score points? Catching thieves in this instance.
I think the answer to the above question is obvious. You can read my previous article on setting KPIs and Managing the performance of your Internal audit department for more insights. My focus in this article is to highlight the importance of internal audit department in an organization
11 (Eleven) Importance of Internal Audit department in a business
Below are some of the importance of having and retaining internal audit department in your small business. Note that
Establishment of controls
Internal audit department is the go to people when it comes to establishing controls in an organization. Although the responsibility of ensuring that controls are in place lies on the shoulders of the management, but common practice is that management falls back to internal control to assist in the area of setting up controls to help an organization achieve her objectives (short & long terms).
Someone can argue that management of a company can establish controls without involving the internal auditors. Well, this is true but how many managers are more qualified to establish controls than qualified accountants working as internal auditors?
one of the primary functions of the Internal auditors is to validate information. We all know that it is the function of accounting department to prepare bank reconciliation for example, but, what if someone in the accounts department is playing some game? Bank reconciliation validation is not the only area where internal auditors validate information.
The above example of validating information is what assurance service is all about. Internal auditors any review a process and not find any problem. And this makes some business owners and managers really angry. This is a major information gap that needs plugging.
Reviewing existing controls
Apart from helping to establish controls, internal auditors continuously review existing controls to ensure suitability in any given situation.
Recommending process improvements
Based on the assessment from the above, internal auditors would be in a better position to make recommendations for process and control improvements where there is need.
Ensuring compliance and providing advisory functions
Internal auditors are compliance experts. Part of their daily routine is to keep ensuring that all processes are compliant. This entails giving advisory service to other departments within the organization.
Carrying out periodic market survey
In the bid to ensure that procurement department of an organization is serving the business as they should, internal auditors periodically carryout market survey on selected purchase and compare for price variation.
Modern day internal audit is risk based. This entails continuous review of the risk landscape of any given organization. I have previously written on DIY Risk Management process, you can refer to it if need be.
Building and updating risk register
The internal auditors build a company’s risk register and regularly update it to ensure that it is still fit for business.
Another key high risk area where the importance of internal auditors cannot be over emphasized is in the area of payroll pre-audit. I don’t need to tell you that a lot of shady business still goes on under the hood of salary and staff remuneration processing. If your internal audit department have not been pre-auditing your payroll, I suggest you start now.
All the above 10 points listed above in this article are all geared towards saving resources for the organization. The only problem and the reason why business owners don’t really appreciate the good work that internal auditors put in is because Accountants- especially internal auditors by nature don’t get loud about their achievements. This in my opinion has to change.
Required ingredients for a functional internal audit department
- Complete support from the top: an undivided and undiluted support from the highest level in an organization is a major ingredient without which the internal auditors cannot function effectively. It becomes worst when the Board of a company do not see the need of having people check things for them.
- Audit charter: this is perhaps the most important document that every internal audit department must have. It is in a nutshell the authority and compass needed to be effective as internal auditors.
- Risk register: this is a living document upon which risk based audit approach hinges on. This is a single document that gives complete overview of the risk landscape of an entity.
- Risk management plan: there are different ways of dealing with different risks. Risks can either be; (a) Accepted, (b) Transferred, (c) Mitigated against. The risk management document is where company’s policy on risk management is clearly spelt out.
- Audit plan: one of the measurement criterion for measuring the effectiveness of an internal audit function is the percentage of items in the audit plan that are completed in a given period.
- Thoughtful follow up: one thing is to make recommendations another thing is to follow through with the recommendation(s).
Doubting the importance of Internal Audit function is similar to doubting the importance of accounting.