ZenGRC Team

Regular, comprehensive audits keep organizations on track. Audits come in all shapes and sizes, too: internal and external audits; audits of finance, audits of data, audits of operations.

As a business owner, whether for a large enterprise or a small business, you want to ensure that your stakeholders can trust your business operations and that your finances are in order. Internal audits are a great way to reinforce that trust and credibility. They also reduce the costs of external audits, on your door, and lessen your exposure to fraudulent practices and reputation risks.

Before we dive into the benefits of specific audit activities, let’s understand the different types of audits.

Types of Auditing

As mentioned above, different types of audits can happen within your organization every year. Understanding how each type benefits your business operations is helpful to appreciate an audit’s purpose and contribution to your company’s success.

Internal audit

Internal audits are audits undertaken by the company itself, either by an in-house internal audit team or a specially hired audit firm that answers to your management team alone. Internal audits are presented to management or the board for review and further action.

External audit

An independent external auditor performs audit activities to check compliance and financial reporting accuracy for statutory or public reporting purposes. For example, healthcare providers undergo audits from the U.S. Department of Health and Human Services; and all publicly traded companies undergo annual external audits, the findings of which are published for review by investors.

IT or information systems audit

These audits, performed by either internal or external audit teams, assess the readiness and resilience of an organization’s IT system infrastructure and controls that are in place to manage critical information and data assets.

Why are so many different types of audits required? The following section should help you understand the need for additional audit types, especially internal audits.

Purpose of Auditing

Audits, especially internal audits, are a tool to help management understand the organization’s performance, so that the company can improve its business processes and controls. Audits work by collecting evidence and data points about specific business functions, to compare that information against expected performance standards.

The Institute of Internal Auditors (IIA) defines the internal audit process this way:

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.

Audit functions act as watchdogs over your organization’s integrity and accountability. By scrutinizing your financial reporting, security, and business operations, and then providing objective assurance about progress toward your business goals, audits help management and other stakeholders understand how well the business is performing.

Who Benefits from Auditing?

Audits benefit both internal and external stakeholders. For example, in the case of financial audits, investors benefit from more assurance that a company’s financial audits can be relied upon; management and the board benefit from knowing where their vulnerabilities to fraud or financial misstatement might be, so they can address those problems before an incident leads unhappy shareholders to sue them.

Or, if an organization works in specific sectors such as payments processing or healthcare, that business is subject to certain industry compliance obligations such as PCI DSS or HIPAA standards for data security – standards that include regular audits of data security programs. When businesses pass those audits, that gives them more protection from regulatory fines and sanctions if the company suffers a data breach; and consumers get more assurance that they can trust that business with their personal data.

Since internal audits are a standard requirement, let’s understand the detailed benefits of internal audits in the next section.

6 Benefits of Internal Auditing

1. Strong internal controls
   Internal audits evaluate your internal controls, which comprise actions, systems, and processes (including monitoring) to assure that those controls are well designed and implemented and that they work as intended, no matter who serves in which role.
   
   
2. Efficiency
   Internal audits spot redundancies in your business practices, procedure, and governance processes; and develop recommendations for streamlining, saving time and money.
   
   
3. Security
   Internal audits scrutinize your cybersecurity environment – for example, identifying all your digital devices, and examining whether those assets are secured per your policies. These audits also look for vulnerabilities in your digital systems and networks and advice on closing gaps.
   
   
4. Integrity
   Internal audits provide assurance of process integrity – that is, that systems work the way they were intended to work, and the way that management promises those systems work. These audits can identify risks of human error or other system failures, such as complicated software that might crash at critical moments.
   
   
5. Reduced risk
   Internal audits consider all the identified risks to your enterprise and analyze whether your risk mitigation measures are working as they should. Where those measures aren’t, audit reports will tell you what you can do to resolve the issue.
   
   
6. Improved compliance
   Internal audits check the laws, regulations, and industry standards with which your organization needs to comply, and then assess whether you are, in fact, compliant. Where you miss the mark, auditors recommend how to remediate the problem.
   
   

How Automation Improves Internal Auditing

Regulations change; businesses do too, as they expand or contract or acquire new operations. Cybercriminals devise new methods of breaching systems, networks, and devices. As a result, fraudulent practices can slip under the radar.

Internal audits will catch these and other issues, but the time between audits is when these issues arise. Continuous monitoring is imperative, but your auditor can’t be everywhere. To help, you need automation.

Take Control of Internal Audits with ZenGRC

ZenGRC offers unlimited internal audits with just a few mouse clicks. It displays results on user-friendly, color-coded dashboards so you can see where gaps are and how to fix them. Its workflow features allow you to assign, track, and manage your governance, risk management, and compliance tasks.

ZenGRC also continuously monitors your controls from systems in between audit runs, so your networks and applications are effective and up-to-date between audits. ZenGRC’s “single source of truth” repository collects and organizes your audit trail. As a result, you are ready when it’s time for those dreaded external audits necessary to demonstrate compliance and attain the required certifications.

With internal audits taking care of themselves, you can focus on other matters like boosting your business and bottom line. To understand how to conduct worry-free internal audits, book a demo with ZenGRC today.

Collecting and evaluating audit evidence is essential in assessing an organization’s compliance with established standards. The American Institute of Certified Public Accountants (AICPA) serves as a guiding force, setting methods auditors should use to carry out their duties effectively. As auditors start their examination, they first collect and analyze various types of audit evidence, each serving as a piece of the puzzle that forms the auditor’s report.

This article focuses on audit documentation, the nature of the audit procedures, the collection of audit evidence and documentation, and the role of internal controls within the broader context of the audit evidence process.

What Is Audit Documentation?

Audit documentation refers to the written record of the procedures, evidence, and conclusions obtained during an audit engagement. It provides a detailed account of the specific documentation, such as working papers, checklists, and memos, that support the evidence gathered and the auditor’s conclusions.

The purposes and extent of audit documentation are multi-fold. Firstly, it serves as a tool for quality control by documenting the planning, execution, and supervision of the audit engagement, thereby ensuring compliance with auditing standards and requirements. In addition, it facilitates the review of the audit work by providing a comprehensive record of the procedures performed, which can serve as a foundation for future audits.

Audit evidence is a critical component of the audit documentation process. It refers to the information and supporting documentation obtained during the fieldwork phase of an audit.

Audit evidence is essential for auditors to evaluate the reliability of financial information and substantiate the significant findings and conclusions derived from the audit.

To fulfill audit documentation requirements, enhance audit quality, and accomplish the audit objectives on time, it’s vital to develop well-designed audit programs to document the evidence effectively.

What Documents are Required for an Audit?

The specific documents required for an audit depend on the type of audit being conducted and the industry, but some standard documents include:

• Financial statements
• Bank statements and reconciliations
• Invoices, purchase orders, and other supporting documentation
• Payroll records
• Tax returns
• Inventory records
• Contracts and agreements
• Policy and procedure manuals
• Regulatory filings
• Information technology documentation
• Minutes from board meetings

Proper documentation retention and organized audit files are crucial for ensuring audit evidence is readily accessible and facilitating efficient audits of financial statements. Maintaining the ability to quickly retrieve records requested by Certified Public Accountants (CPAs) and adhering to professional standards around audit documentation is vital for a smooth audit process.

Best Practices for Gathering Audit Documentation

Gathering thorough audit documentation is crucial for ensuring auditors have the information they need to conduct an efficient and effective audit. Following best practices around audit documentation enables transparent collaboration with auditors and adherence to regulations.

Some essential best practices include:

• Maintain organized records that are easy to locate and filed logically based on a documented retention schedule. Understand ahead of time what materials may be relevant to auditors for specific documentation requirements.
• Digitize records whenever possible for straightforward sharing along with proper access controls. Keep thorough version histories to track changes to documents related to significant matters.
• Establish robust information destruction policies that align with regulations and professional auditing standards around documentation retention periods.
• Proactively index materials so auditors can search for audit evidence efficiently. Keep related disclosures and oral explanations well documented.
• Plan for consultation on reporting or disclosure issues by retaining memos and email threads related to amendments of final conclusions.
  
  

Why Is Audit Evidence Important?

Audit evidence plays a vital role in auditing, allowing auditors to justify their conclusions effectively. The opinions expressed by auditors in their audit reports rely heavily on the quality of the evidence they have gathered.
Moreover, should any disputes arise regarding the audit findings, auditors depend on the strength and credibility of the audit evidence to substantiate their stance.

Publicly traded companies must undergo an audit of their financial statements to investors every year. Those statements contain an enormous amount of information that investors use to decide whether to commit their money — so the accuracy of those financial statements is a high priority.

For the audit opinion to be credible, the company’s claims about its financial performance must be corroborated either by external evidence (such as a bank statement) or through an analysis conducted by the auditors. By exercising their professional judgments, experienced auditors ensure the accuracy of the information provided by the company.

What Is Audit Risk?

Audit risk is the risk that material errors or weaknesses still exist in a company’s systems, even though the auditor gives a “clean” opinion of the company’s internal controls. Put another way, it’s the risk that the auditor misses something important.

There are several types of audit risk:

1. Control risk is when the client’s internal control systems do not detect or prevent potential material misstatements.
2. Detection risk is the possibility of a significant misrepresentation or error going undetected by the audit procedures.
3. Inherent risk is the “natural chance” of a significant error or misstatement before any controls are implemented to reduce that risk.

One goal of the audit team is to lower the risk of missing any significant errors that may be present. Auditors can do this by performing more checks to reduce the risk of making mistakes. Practically, that means gathering more evidence during the audit process.

How Is Audit Evidence Obtained?

Audit evidence is collected via audit procedures. Those procedures are categorized as risk assessment procedures and audit procedures. The latter includes tests of controls and substantive procedures.

There are seven types of audit procedures, and the purpose of the process typically dictates which one is used:

1. Inspection
   Auditors collect evidence by inspecting physical assets, records, or documents.
2. Observation
   Auditors observe the client’s business processes and operations to identify deficiencies.
3. Inquiry
   Auditors talk with the client’s senior management to gain a deeper understanding of business processes for the auditing process. Inquiry alone, however, isn’t considered sufficient audit evidence to reduce the risk.
4. External confirmation
   This involves obtaining written or oral responses from third parties, such as customers, suppliers, or financial institutions.
5. Recalculation
   The auditors perform calculations to verify that the final account balances match those reported by the client.
6. Performance
   The auditor independently performs procedures or controls that were initially performed by the entity to verify their effectiveness.
7. Analytical procedures
   The auditor analyzes financial and non-financial data, such as comparing current and prior-year financial ratios or trends, to identify unusual fluctuations or patterns that may indicate potential errors.
   

According to the Public Company Accounting Oversight Board (PCAOB), which regulates audit firms in the United States, any audit evidence obtained must be sufficient and appropriate.

Sufficiency measures the quantity of audit evidence; appropriateness refers to the quality of audit evidence. The sufficiency of the audit evidence is affected by both the risk of material misstatement and the risk associated with the control and the quality of the audit evidence obtained.

What Are the Types of Audit Evidence?

There are eight types of audit evidence. Each type has a specific purpose depending on the audit’s goal, the client’s objectives, and the assertion being tested.

1. Physical examination
   This involves inspecting tangible assets, such as inventory, machinery, or documents, to verify their existence, condition, or ownership. Physical examination provides direct evidence and is often documented in audit work papers.
2. Confirmations
   This refers to relying on third parties such as banks to confirm various aspects of the financial statements (for example, the closing bank balance or accounts payable records).
3. Documentary evidence
   Auditors will gather documentation, such as internal process documents, emails, or logs, to help with different portions of the overall audit. For example, the auditors may use the documentation for vouching or tracing a process flow as a part of the audit procedures.
4. Analytical procedures
   This includes any analysis performed by the auditors using their calculations to substantiate the financial information and any accounting records provided by the client to find discrepancies.
5. Oral evidence
   Auditors may hold question-and-answer sessions with their client’s senior leadership team to inquire about the business operations when planning and designing the audit procedures.
6. Accounting system
   This allows the auditor to access financial reporting documents and any information related to financial statements. The accounting system may also act as the source of audit evidence.
7. Re-performance
   The auditor assesses the control risk by re-performing key internal control processes to check for deficiencies.
8. Observatory evidence
   Auditors may observe activities or processes during site visits or walkthroughs. This allows them to assess the effectiveness of internal controls, compliance with regulatory requirements, or adherence to specific procedures.
   
   

What Are Internal Controls?

Internal controls are safeguards that organizations put in place to protect themselves from various risks. These risks can be related to finances, day-to-day operations, or long-term strategies.

Internal controls consist of specific rules and proven methods to minimize these risks. For example, they can help a company secure its data against online attacks or ensure that fraudulent activities do not compromise financial transactions.

Remember that internal controls are not limited to technology solutions, such as user access controls. Internal control includes physical security measures, staff training, audits, investigations, or even a speech from the CEO stressing the importance of good conduct. Your company’s threats and the likely damage from each hazard will determine the controls you use.

Why Are Internal Controls Important?

Internal controls are important for businesses for several reasons.

1. Risk Reduction
   By identifying and mitigating risks, internal controls safeguard the company’s ability to maintain operations, protecting it from events that could disrupt its functioning.
   These systems establish checks and balances, ensuring accurate financial reporting and safeguarding of assets, which helps maintain the company’s stability and reputation.
2. Fraud Prevention
   Internal controls are crucial in detecting and preventing fraud. They establish segregation of duties, requiring multiple individuals to be involved in critical processes such as cash handling, financial approvals, and inventory management.
   This reduces the opportunity for one person to manipulate or misuse company resources for personal gain, effectively mitigating the risk of fraud.
3. Business Continuity
   In unforeseen circumstances or disruptions, internal controls help maintain business operations smoothly and efficiently. They establish clear procedures and guidelines for employees to follow, minimizing the interruption of staff turnover, absences, or emergencies.
   By providing a structured approach, internal controls assure operational stability, customer satisfaction, and the ability to meet business objectives.
   
   

How internal controls can help with audit preparations?

Adequate internal controls and ongoing monitoring activities enable better preparation for quality audits that align with professional standards. Some key ways internal controls facilitate smooth audit engagements include:

• Internal control documentation around processes provides auditors insights to inform risk-based audit planning procedures.
• Evidence of controls operating effectively allows engagement teams to reduce substantive testing potentially.
• Control deficiencies flagged early by internal audit can be remediated ahead of external audit fieldwork, reducing overall findings.
• Continuous internal control monitoring helps ensure financial reporting processes adhere to procedures between audit cycles.
• Management testing results assure the auditor of control effectiveness when assessing audit risk and scoping areas needing heightened focus.

Maintaining strong internal controls not only enables audit readiness but fosters reliable reporting. Optimal collaboration with auditors hinges on sound access controls and working paper retention for transparent traceability.

Maintain Your Compliance with ZenGRC

GRC software improves audit collaboration and efficiency, saving time and money while enhancing the financial value of your organization’s compliance program.

ZenGRC automates the entire compliance process, identifying compliance gaps in your system and providing guidance on addressing them. This platform monitors your systems, ensuring compliance between audits and promptly alerting you to any issues or vulnerabilities.

Schedule a demo today to see how ZenGRC can help your organization automate the audit evidence-gathering process.