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What is an Internal Audit? And, why is it Necessary?

Posted by Tom Hallissey on Apr 25, 2019 10:00:00 AM

internal audit

Contrary to popular opinion, an internal audit is not only needed for large, complex corporations. It can be used by many different types of companies to gather information about current operations and the ways in which they can improve.

What is an Internal Audit?

According to the Institute of Internal Auditors, “internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.”

How this Type of Audit Works

Independent audits are performed by professionals who have no personal connection to an organization. They can be used to make sure a company is working efficiently, effectively and as securely as possible.

Internal auditors primarily help businesses in three key ways:

  • Monitoring, analyzing and assessing risks and controls
  • Reviewing compliance with state and federal policies and laws
  • Making recommendations and reassurances to ownership or governing boards

Generally speaking, an internal auditor gathers information about how a company is operating and finds ways it can be run more efficiently and effectively.

A magnifying glass used to examine financial statements

Why is having an Internal Audit Important?

Many companies today have regular audits of their operations conducted. There are many benefits to having an internal audit, including:

  • Receiving objective insight
  • Improving operational efficiency
  • Evaluating risks
  • Protecting assets
  • Ensuring compliance

An outside perspective can give an organization’s leaders fresh financial management ideas, which can help them make better business decisions.

An internal auditor presents her finding to her client.

Internal vs. External Audits

Although internal and external audits can be easily confused, they have very different objectives and procedures.

  • An internal audit is a tool used to educate management and employees about how business operations can be improved. An internal auditor works on behalf of the company they audit.
  • An external audit is used to give reliability and credibility to financial reports, which are prepared for shareholders. This type of auditor inspects accounting records and financial statements to see if they have met standards, such as the Generally Accepted Accounting Principles.

An important difference between the two is that external audits are regulated, while internal ones are not.

An internal audit is usually completed on a periodic basis to make sure a company is operating as efficiently as it can be. These audits can be performed in a wide range of industries, including financial services and health care.

If you have any questions about how the internal auditing process works, contact a local accounting professional.

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Topics: Business Accounting

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