Internal Audit

What is an Internal Audit?

Internal audit provides independent assurance that an organization’s risk management, governance, and internal control processes are functioning effectively. The internal auditor performs a special role as a monitoring agent overseeing other managers’ shares, who are employees of the same organization.

The Institute of Internal Auditors (IIA) has developed the following globally accepted definition of Internal Audit:

  • Internal audit is an independent and objective assurance and consulting activity designed to add value and improve an organization’s transactions.
  • It helps an organization meet its objectives by providing a systematic and disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

Internal Audit Target

The target of the internal audit is to support the members of the organization in the performance of their activities, generating benefits to determine whether the systems and procedures established are effective and make recommendations for the improvement of policies, procedures, systems, standards, philosophy, among others.

The audit work includes:

  • Preparing reliably and entirely reports for internal and external use.
  • Ensuring compliance with policies, plans, procedures, rules, and regulations within the organization.
  • Economic and efficient use of resources.
  • Follow-up and control of the administrative management of the business.
  • Increase the chances of achieving the company’s targets.
  • Ensuring the veracity of the financial data provided by the entity.
  • Identify any type of error, as well as possible scams and frauds.
  • Protecting and ensuring assets.
The Internal Audit serves as a tool to help control when the business expands. The greater the growth, the greater the complexity, requiring greater controls and monitoring in all aspects.

Independence and Objectivity of Internal Audit

Independence and objectivity are two fundamental components of effective internal audit activity, so the Internal Audit activity must be objective and independent of verification and consultation, specifically designed to increase the positive results of given management.
Independence is established by organizational structure and reporting lines. Objectivity is achieved by an appropriate mental attitude.
The objectivity, skills, and knowledge of competent internal auditors can add significant value to the organization’s internal control, risk management, and governance processes. Similarly, they can assure other stakeholders, such as regulators, employees, financial providers, and shareholders.

Steps to perform Internal Audits

When an internal audit is performed, evaluation systems must be established for transactions continuous improvement in any organization. It is important to perform a general analysis of the organization to be audited. Thus, the audit team can have a better understanding of the work processes and what the entity’s targets are.

These are:

  1. Elaboration of Audit Programs
  2. Audit Plan
  3. Review of documentation and preparation of checklists
  4. Audit Performing
  5. Audit Report filing
  6. Follow-up of improvement shares
Thus, Internal Audit continuously verifies the effectiveness of the controls established by an organization, systematizing its management model through the information collection that allows it to study and improve management, control, and risk plans.
The Internal Audit activity evaluates the risk exposure of the organization’s governance, transactions, and information systems. They also evaluate other aspects, such as ethics and values within the organization, performance management, communication of information regarding risks and controls within the organization to facilitate a good governance process.

How does an Internal Audit differ from an External Audit?

The main difference is:

  • The Internal Audit is part of the organization and performs a diagnosis intended for the company, basing its procedures on the permanent evaluation of the information systems of the economic units and the internal control of transactions and operations, whose purpose is the issuance of reports, aimed at making suggestions for the improvement of this. The work scope of internal auditors is comprehensive.
  • If the External Audit is independent of the organization, provide an independent opinion of the annual financial statements of the latter on the reasonableness, trustworthiness, and authenticity of such financial statements, generally intended for third parties outside the company. The external audit is carried out when it is intended to publish the financial statements examined, accompanied by the independent auditor statement to ensure the public of the authenticity of these that allows the users of such information to make decisions.

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