Internal Audit Definition
An internal audit (IA) is a way that organisations can evaluate their own business operations in order to establish how well they conform to a set of specific criteria. It’s an organisational initiative that monitors and analyses internal controls.
What are Internal Controls?
Internal controls refer to the rules, procedures and mechanisms implemented by a company to make sure there is financial integrity and reliability, to prevent fraud and to encourage accountability. Internal controls are not only in place to comply with laws and regulations and to stop employees from committing fraud or stealing assets from the company, but they are also instrumental in improving operational efficiency by enhancing the accuracy of finance reports. Overall, internal controls promote an environment where managers and employees can maximise the effectiveness and efficiency of their operations by monitoring the accomplishment of objectives.
The Purpose of Internal Audits
Internal audits are very important for a company to operate at maximum efficiency. Internal audits allow management to observe and make improvements to current processes and practices, such as supply-chain management and IT systems, if they are not functioning as they should be. In other words, auditors look for discrepancies between the reality of operational processes and what the processes are designed to do.
According to PwC, stakeholder groups are expecting internal audits to ‘look deeper and see further’, with them enabling change and supporting organisations’ strategic agenda. Without having the right insight into business operations, many internal audits teams fail to do this.
Internal Audits Procedures
Carrying out internal audits regularly aids management in uncovering evidence of waste, abuse and fraud. How often internal audits are executed depends on the particular department. Certain types of manufacturing may need daily audits to ensure quality control. At the same time, human resources may only need an annual audit of records. Audits can either be scheduled, to allow managers to prepare the necessary documentation, or a surprise, if illegal or unethical activity is suspected.
Whilst an external auditor mainly focuses on financial risk, the internal auditor analyses wide-ranging issues relating to the organisation’s reputation and growth. An internal audit is a way of discovering any threats to an organisation’s reputation, as it can draw out violations of employee safety or instances where they are treated unfairly. The internal audit assesses the management of risk and ensures that management handles its operations and processes in an efficient, secure and compliant manner.
After the internal audit is complete, auditors issue a final audit report indicating how processes are functioning. This is normally provided to the senior management as well as the internal audit committee. If needed, internal auditors can provide consultation sessions to help improve lacking areas and organise a follow-up audit to see if any improvements have been made.
By sparking new initiatives, internal audits help a business thrive and reach its potential in a dog-eat-dog world.
External Audit Definition
By law, many commercial and non-profit organisations across the globe need to be externally audited. And for this reason, they are incredibly common. An external audit is an exanimation conducted by a party which is not a department of, or employed by, the company, government entity, legal entity or organisation that’s being audited. Therefore, with the audit being performed by an auditor independent of the entity being audited, there can be a true and fair account of previous financial performance and current financial position.
It doesn’t stop at finance either; external audits also analyse whether organisations are meeting legal obligations in terms of social responsibility, IT and health and safety.
The Importance of External Audits
People who require the finance information of an organisation, such as the public, investors or the government, rely on external audits to provide an unbiased, trustworthy audit report. Internal and external audits can impact the credibility of the audit in a number of ways. On the whole, an external audit conflict of interest is much less common than with an internal audit. A conflict of interest is a situation when an auditor who is in a position of trust has a competing professional or even personal interest, whereby it is difficult to fulfil duties impartially.
When an entity receives an external audit, there is an enhanced efficiency. With employees already busy with other tasks and external auditors having undergone more training, external audits are generally a more efficient choice and they also limit the internal fraud that could restrict the validity of an internal audit. An external audit often provides the answers to a company’s accounting discrepancies, for example missing funds, or it could simply audit the company’s accounting cycle. An accounting cycle is the holistic process of recording and processing an entity’s financial statements.
Skills Audit Definition
Central to the smooth running and success of any organisation is understanding the skills and knowledge that it already has and, if not, requires to prosper and grow. This information reveals whether the organisation is meeting its goals. Without this, it is impossible to know how to improve. Also, staff training and development can be more focused and better targeted, and recruiting requirements can be better defined and result in the best-suited candidate being selected. A skills audit is a process used to identify an organisation’s skill gaps to result in a training needs analysis that indicates where training is needed.
The skills audit process usually involves determining skills requirements, auditing actual skills, determining development needs and planning for restructuring.
Benefits of Skills Audits
Skills audits can help create valuable workplace skills plans, lower staff training and development costs. As development efforts are identified and more focused, the acquired information can be used for many purposes, for example, internal employee selection and placement, and there should be an increased all round productivity when workers’ skills and knowledge are better matched to their position.