Why Internal Audit is Important for any Business?

We all are somewhat aware of different types of audits and the purposes that they serve. When we require our accounts and financials audited, we get done the statutory audit. For the non-financial aspect, we have the secretarial audit, and for the verification of cost accounts, the option of cost audit is available. The audits mentioned above are the most common types of audits that organisations have to get done mandatorily or voluntarily. 
 
But sometimes, organisations need to check the efficiency and effectiveness of their operations, which is when one needs internal auditing. Earlier, its scope was majorly limited to finance and related activities. It was more focused on the actions which were cost centric. But now its area has stretched and covers non-financial aspects as well.
 
It has become relatively easy for the management to track their organisation's performance in a better manner. Internal audit elevates the growth of the organisation. 
 
The purpose behind this audit should be understood first before going in-depth about this topic. Setting objectives and keeping in mind the requirement of internal audit and what we want to achieve through this audit is crucial because it helps develop the right path with the right actions. It is advisable to hire an internal audit consultant as they have immense experience in this field and this makes the task easy for the organisation. An internal audit gives the organisation assurance that its internal operations are working well in the way they are supposed to work. 
 
* It mainly assesses the risks present and checks if adequate mitigation techniques are there in place. 
 
* It assures that all the laws are complied with.
 
* The internal control system of the company is appraised.
 
* It detects fraud, if any, occurring or having the potential to happen in the organisation. 

INTERNAL AUDIT PROCESS

Like the other audits, internal auditing also has a procedure to be followed for better results. The process is highly simplified and consists of phases like planning, executing, reporting, tracking and follow-up. Here, we have briefly talked about the process from the point of view of the internal auditor and management.
 
By failing to prepare, you are preparing to fail. This statement holds great significance in the case of internal auditing. It is a must to prepare and plan for what you want to achieve from this audit and how you will execute it. For this step, thorough discussions with management are necessary. If the auditor is an outsider, then this step becomes even more critical. The audit scope should be set and defined so that no ambiguity is faced at the later stage. Various risks being faced by the organisation should be taken into account. 
 
The next step is to act on what you have planned. For this audit, samples are selected from the areas where the audit is required to be done. The selection could be of some transactions, documents or any other item representing the whole area to be reviewed. Controls are checked at this stage to make sure that they are working suitably. 
 
Audit execution, the essential thing in the whole process, is incomplete without reporting to the concerned management. All the material findings should be timely reported to the administration to take appropriate actions without further delay. The auditor and management should sit together and discuss the changes to be made. 
 
The last step in this procedure is follow-up. Follow up is the most significant step to increase the effectiveness and get the best results from this audit. If this step is absent from the procedure, there are chances that the changes may remain unimplemented. For this, management and the audit department maintain a database and update it regularly to work on the findings.
 
Companies Act, 2013 also recognises internal audit as a statutory requirement. Rule 13 of Companies (Accounts) Rule, 2014 makes it mandatory for the following companies to get the internal audit done-
 
* Listed companies
 
* Unlisted Public companies having-
 
1: paid-up share capital of 50 crores or more; or 
 
2: turnover of 250 crores or more; or
 
3: outstanding loans or borrowings exceeding 100 crores 
 
4: outstanding deposits of 25 crores or more.
 
Private companies having-
 
1: turnover of 250 crores or more; or
 
2: outstanding loans and borrowings exceeding 100 crores.
 
An internal auditor is appointed to conduct the audit, and it is not mandatory to appoint a professional like CA, CS or CMA in place of the auditor. Even an employee of the company can conduct this audit. His appointment is made by passing a resolution at the board meeting. 
 
One of the major limitations this audit has is the independence of the auditor. As already mentioned, the auditor can also be an existing employee of the company, which reduces the chances of him being independent. One can appoint an internal audit service provider to overcome this problem of independence.

INTERNAL AUDIT REPORTING

Internal audit, as previously mentioned, is a simple process, but when it comes to reporting, there is no defined format which makes it challenging to present the findings. There is no single format that can prove out to be appropriate for all organisations. For reporting, one has to figure out a way to present the findings as per the management's requirement. It doesn't mean that no uniform format is needed. An organisation should try to follow a uniform format with some required changes for reporting every year, so it becomes easier for the management and other stakeholders to understand and analyse the report. 
 
The report should be comprehensive, clear, brief, and correct. 
 
Clear communication is a must for getting the best output from this reporting. Suppose the results and issues are poorly reported; in that case, likely, the management doesn't get the motive and points properly and end up achieving fewer benefits than it could get if the reporting were clear. 
 
All the findings should be reported to the management in a final internal audit report, but before that, it is very much needed that the auditor gets to discuss the points with the management and understand the matters from their point of view. For this, one should follow the below-mentioned steps.
 
* Discussion draft- It is better if the auditor first prepares a report based on his findings solely. All the results found and concluded based on fieldwork done by the auditor forms part of this draft report.
 
* Exit meeting- The auditor and management should meet and discuss the management's recommendations for the final report. 
 
* Formal draft- The recommendations made by the management in the exit meeting are then included in the formal draft.
 
* Final report- At last, a final report is made and submitted to the authority. 
 
Like any other audit, internal audit also has the scope of some mistakes which are very common to occur-
 
* If the report lacks a flow and is unclear, readers are likely to misunderstand the information. Due to no proper format of reporting, the chances of this problem happening is high. 
 
* Sampling is the most challenging task. Selecting the appropriate sample of a proper size that can accurately represent the whole population is not possible. There is always a scope of deviation. 
 
* Generally, the reports are quite lengthy, which makes the reader less interested, and the readers often lose focus by the end of the document. 
 
To subdue this problem of lengthy reporting, a summary is prepared, attached at the start of the document and titled an executive summary. It is like a concise report that gives the reader a good brief of the whole piece and makes his task easy. This way, the reader can have a glimpse of all the topics covered and have the option to choose what matter he wants to read comprehensively. It should also include the auditor's opinion on the matters. 
 
This summary can significantly enhance the quality and impact of reporting. 
 
Internal audit is not paid much attention and importance compared to the other audits, but its outputs and findings can significantly help the organisation's growth. Advantages of internal audit cannot be over-emphasised as it reveals and gives insights about the organisation related to the entity's operations and are not adequately covered in any other audit.