Why is Internal Audit Important for Your Company in Singapore?
Internal auditors form a company’s financial watchdogs. They are tasked to objectively examine the company’s financial documents and review the operating procedures independent of management. So an internal audit focusses on enterprise risk management functions, security processes and regulatory compliance among other departments.
Internal auditors look for discrepancies between operational processes and what those processes are designed to do. And if such discrepancies are found, they advise the senior management on processes to be implemented for improvement.
So an internal audit is essentially a pre-emptive manoeuvre to maintain operational efficiency and financial reliability, and to safeguard assets. It provides independent assurance that an organisation’s risk management, governance and internal control processes are operating effectively.
What is the Internal Audit Process?
Generally, the parties involved in an internal audit are the auditors, the audit committee, and the department being audited.
Step 1 – To start with, the internal auditors will randomly sample documents, review manuals and observe how work flows through a department, or the entire company. They will also look for signs of asset mismanagement, fraud and also test risk management controls./p>
They typically analyse documents outlining a company’s mission, objectives and related performance, then determine how well these goals are being met. Using various assessment techniques, the internal auditor will examine the effectiveness of internal control procedures and determine whether employees comply with them.
These assessments can be completed after reviewing documents such as responsibility flowcharts, control policies and results from previous audits. When gathering information for their final report, internal auditors will observe operations firsth and, take notes, review official documents and interview employees.
Step 2 – Next, the internal auditors prepare a report listing their findings, and send it to the audit committee. The report includes a summary of the procedures and techniques used for completing the audit, a detailed description of findings and suggestions for improvements to internal controls and procedures.
Step 3 – Finally, the committee reviews the report, and suggests suitable improvements to the departments concerned.
The Value of an Internal Audit to a Company
The benefits of an internal audit to a company include:
Increase in productivity: Internal auditing is an objective assurance and consulting activity designed to add value and improve an organisation’s operations. It can help an organisation accomplish its strategic objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control, and governance processes.
Confidence to stakeholders: The internal auditor reports to executive management that important risks have been evaluated and necessary improvements highlighted. This executive management and boards to demonstrate that they are managing the organisation effectively on behalf of their stakeholders.
Detection of frauds: Regular internal audits assess a company’s controls and help uncover evidence of fraud, waste or abuse. The frequency of internal audits will depend on the department or process being examined. For example, in manufacturing, daily audits may be required, while for human resources, an annual review may be sufficient.
Quality control: Internal auditors play the role of combining assurance and consulting. Assurance informs the management how well systems and processes are designed to keep the company’s goals on track. Consulting advises the management on how to improve those systems and processes if and when necessary.
Good corporate governance: Internal audits evaluate a company’s internal controls, including its corporate governance and accounting processes. They ensure compliance with laws and regulations, accurate and timely financial reporting and data collection. They also help maintain operational efficiency by identifying problems and correcting lapses before they are discovered in an external audit.
The Difference Between Internal and External Audit
Although they share some characteristics, internal and external audits have some differences, in terms of appointment, objectives, and responsibility.
Internal audits evaluate and improve the effectiveness of governance, risk management and control processes. They are reported to the company’s board and senior management within the organisations governance structure.
External audits on the other hand are normally reported to shareholders or members outside the organisations governance structure. These are done to add credibility and reliability to financial reports from the organisation to its stakeholders.
Moreover, internal auditors deal with issues that are fundamentally important to the survival and prosperity of any organisation. Unlike external auditors, they look beyond financial risks and statements to consider wider issues such as the organisation’s reputation, growth, its impact on the environment, and the way it treats its employees.
What Activities are Included in the Internal Audit?
Think of the internal auditor as the organisation’s critical friend. Someone who champions best practices and is a catalyst for improvement. Below are the key things an internal auditor does.
Evaluating risks: It is the management’s job to identify the risks facing the organisation and understand how they will impact the delivery of objectives if not managed effectively. An internal audit is designed to look at the key risks facing the business and how to manage them effectively. An internal auditor should be able to anticipate possible future concerns and opportunities providing assurance, advice and insights.
Managing risks: The internal auditor’s work spans multiple levels. This includes assessing the tone and risk management culture of the organisation to evaluating and reporting on the effectiveness of the implementation of management policies. So essentially it involves evaluating controls and advising mangers at all levels.
Analysis of operating procedures: Internal auditors work closely with line managers to review operations and report their findings. They have an overview of the operating procedures of every department in the company and can advise on how to optimise them.
Providing assurance: Internal auditors sometimes work with other assurance providers in the company to ensure that all available assurance resources are optimised. They do this by avoiding duplication and gaps in the provision of assurance. This also helps in ensuring that the company’s audit committee has all the assurance it needs on the proper working of the company.
How Accounting Differs from Auditing
Accountants and auditors are responsible for detecting and deterring fraud. To this end, they
evaluate accounting systems for weaknesses
design and monitor internal controls
determine the degree of organisational fraud risk
interpret financial data for unusual trends, and
follow up on fraud indicators.
Many of the basic processes of both accounting and auditing are similar. Both use essential procedures and techniques of bookkeeping, computation and analysis. Both accounting and auditing strive to ensure that the financial statements and records provide a fair reflection of the actual financial position of an organisation.
So both activities are inter-related and go hand in hand, especially in setting up processes in the organisation.
The controls designed and implemented by the accountant can be tested by the auditor. The auditors can use their experience and expertise and provide feasible suggestions for process improvements. These can then be implemented by the accountant for better risk management.
Auditing however, is a specialised field within the larger world of accounting.
Accounting involves preparing and maintaining the financial statements of a company, starting with bookkeeping. Auditing on the other hand, is the evaluation of the financial statements prepared through accounting. Auditing starts only when the work of an accountant is done. Once the statements are prepared, the auditor starts verifying their completeness and accuracy.
What is an Audit Assessment and What Does it Entail?
Simply put, audit assessment is the qualitative analysis of a company’s internal audit processes. The goal is to see how these processes are working, whether they’re in line with the company’s strategy and if they are supporting the business as effectively as possible. The assessment focuses on eight core attributes of an internal audit process:
quality and innovation
An audit assessment will:
provide value-added services and proactive strategic advice to the business well beyond the effective and efficient execution of the audit plan
advise on taking a more proactive role in suggesting meaningful improvements and risk assurance
bring analysis and perspective on root causes of issues identified in audit findings to help business units take corrective action
deliver objective assurance on the effectiveness of an organisation’s internal controls
What is Audit Consulting?
As companies become more complex, so do the internal auditing process. Effective internal audit capabilities demands significant investment in skilled resources, methods, training and technical infrastructure. That’s why many companies today require internal audit consulting to ensure their departments are developed strategically, in line with the company’s processes.
With organisations being driven to do more with less, the internal audit function has become a prime candidate for strategic sourcing. This can include co-sourcing or outsourcing the entire internal audit function or just certain critical elements of it.
Both kinds of audit consulting helps reduce costs, frees up capital, and enhances the management’s ability to focus on the core business. They help a company tap into specific skill sets, industry knowledge and global resources on an “as needed” basis.
Outsourcing of internal audit by tapping into experience and insights from the wider market can assist with growing stakeholder demand and calls for increased risk management and transparency.
On the other hand, a co-sourced approach to internal audit is recommended when an organisation is struggling to retain specialist resources, fill particular skills gaps or needs to respond to digital or transformational disruption. Co-sourcing can provide the necessary skills and experience that an in-house function would have difficulty maintaining single-handedly.
Thus, audit consulting – whether outsourced or co-sourced – has the following benefits:
State-of-the-art advice on critical business risks, implementation of effective controls and compliance processes, identifying better practices, reducing the cost of operations, and realising profit improvement opportunities.
Potentially significant savings on internal audit costs, particularly for organisations with significant global travel, high turnover of internal audit resources or varying internal audit activity levels.
Access to the right skills, in the right place, at the right time; thus being flexible to adapt to changing business needs.
Shift of the costs of developing and maintaining an internal audit capability to the consulting firm and freeing up of capital and resources for core business purposes.
Overcoming human resource challenges – attract and retain talent, maintain knowledge on evolving risks and develop the skills to drive value.
Alignment of internal audit function’s strategic objectives with key business processes.
Review of overall risk management, compliance monitoring, and business performance.
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