Conducting effective internal audits is key to maintaining compliance and managing organizational risk. The appropriate audit type must be selected and the scope of the audit should be well defined. This approach allows auditors to identify specific vulnerabilities and uncover process gaps. Their findings will lead to actionable recommendations that strengthen your organization’s compliance posture.
The Basics of Internal Audits
Internal audits are an exercise a company undertakes to assess their internal controls, including governance, compliance, security, and accounting processes. Internal audits provide management and the board’s audit committee objective assurance about the design and operation of the organization’s governance, risk, and compliance (GRC) program and whether that program functions effectively throughout the enterprise.
Internal audits are valuable because they catch problems before external auditors find them. Fixing issues after an external audit costs much more time and money. Regular internal audits help your company:
- Evaluate and improve risk management
- Strengthen control processes
- Enhance governance procedures
By establishing a disciplined, integrated approach to policies, risks, and controls, your company shows it has a firm grasp of its regulatory compliance obligations.
What Is the Purpose of an Internal Audit?
Internal auditing provides valuable insight into an organization’s culture, policies, and processes. It supports board and management oversight by evaluating internal controls, including risk mitigation mechanisms and compliance with regulations.
Through a systematic risk assessment, an internal audit program helps management and other stakeholders identify and prioritize risks. It also assists with tracking and documenting any changes to the environment and mitigating any risks that are discovered.
Internal audits can also enhance the organization’s control environment by analyzing efficiency and operational effectiveness. For example, are your controls serving their intended purpose? Are they effective in risk reduction?
You can assure compliance with all relevant rules and regulations by conducting internal audits regularly (annually, for example).
Audits also provide peace of mind that you are ready for your next external audit. Internal auditing is important because it fosters client trust and prevents costly fines for non-compliance.
How Do Internal and External Audits Differ?
Internal and external auditors both assess whether the company’s financial reporting and other operational processes align with accounting principles. They also verify that internal controls are functioning correctly and that the company complies with applicable laws. That said, the two audits happen in different ways.
Internal auditors are employees of the business, whereas external auditors are independent of the organizations they examine. Internal audits are usually voluntary, while external audits are often required. For example, publicly traded companies are required by law to do annual audits. Lenders and other stakeholders may request audited financial accounts as a condition of continuing financial assistance.
Top Considerations When Conducting an Internal Audit
Conducting an internal audit requires careful planning to be effective. Here are five key considerations to keep in mind.
- Define clear objectives: Establish the purpose of the audit, whether it’s compliance verification, risk assessment, fraud detection, or improving operational efficiency. A well-defined objective keeps the audit process focused.
- Determine the audit scope: Identify the processes, departments, or controls to be evaluated. Consider high-risk areas, regulatory requirements, and business priorities to make the audit more impactful.
- Use a risk-based approach: Prioritize areas with the highest risk of financial misstatements, fraud, or operational inefficiencies. A risk-focused audit ensures that the most critical vulnerabilities are addressed first.
- Involve stakeholders: Engage key personnel, including management, compliance officers, and process owners. Their insights ensure that findings lead to meaningful improvements.
- Follow up on findings: An audit is only effective if the recommendations are implemented. Establish a process for corrective actions and reassess areas of concern for continuous improvement.
Internal Audits and Compliance
Compliance means following applicable laws, industry standards, contractual commitments, and corporate policies.
Large companies often have a compliance team to ensure they meet regulatory requirements. An internal audit might check how well this team is doing its job.
Other companies may not have a dedicated compliance team. Instead, internal audits assess how well business functions, like legal, HR, finance, and operations, follow regulations.
Compliance teams help organizations meet requirements, while the internal audit function evaluates the internal control environment for compliance, efficiency, or any other business objectives.
For example, an internal audit might assess how well the company follows the PCI DSS standards for credit card security or if its compliance team can manage multiple regulations, like PCI DSS and HIPAA, the standard for protecting personal health information.
Compliance and internal audit teams can collaborate to help leadership understand how well the company meets compliance standards. This improves decision-making, reduces risks, and supports business goals.
Working together makes compliance and internal audits more effective. They can do joint planning, coordinate risk assessments, and align reporting. It also involves shared participation in compliance-related committees, task forces, and working groups.
The compliance function often relies on internal audits to conduct regulatory audits. However, internal auditors look at more than just compliance risks when evaluating the effectiveness of an organization’s risk management process.
Your compliance officer may have recommendations for an internal audit plan, but compliance is a management function. It must be audited independently, typically by internal auditors.
Types of Internal Audits
Organizations can conduct various types of internal audits, depending on their specific goals and objectives.
- Operational audit: Evaluates the efficiency and effectiveness of a function or department. It assesses organizational structure, processes, data accuracy, asset management, staffing, and productivity.
- Compliance audit: Ensures adherence to laws, regulations, policies, or procedures. It is often conducted due to policy or statutory requirements.
- Financial audit: Independently evaluates the fairness, accuracy, and reliability of financial data over a fixed period. The goal is to make sure financial reports are complete and accurate.
- Follow-up audit: Conducted about six months after an audit report to assess corrective actions taken on previous issues and the effectiveness of recommendations.
- Investigative audit: Triggered by unusual or suspicious activity, it focuses on specific aspects of a department or individual’s work to determine losses, control weaknesses, and corrective actions.
- Information technology (IT) audit: Evaluates controls in information processing systems for data integrity, asset security, and efficient operations to achieve business objectives.
- Management audit: Provides independent insight into the efficiency of business processes, organizational structure, and opportunities for increased efficiency.
- Integrated audit: Combines two audit types, such as IT and operational audits or financial and IT audits, focusing on internal controls over financial reporting.
What Are the 5 Cs of an Internal Audit?
Regardless of the type of internal audit your organization might conduct, there are five core aspects that every internal audit covers, namely:
- Criteria—Which stakeholders requested the audit and why?
- Condition—What were the prevailing organizational conditions that necessitated an audit?
- Cause—What caused these conditions to arise that triggered the need for an audit?
- Consequence—What could the conditions lead to and what might happen if these conditions were not audited?
- Corrective action—How can the organization use the audit findings to fix the condition?
Standards for Professional Internal Auditing
Internal audits work best when they follow established professional standards. These standards create a thorough, consistent audit process that meets industry expectations.
The International Professional Practices Framework (IPPF) provides key guidelines for conducting effective internal audits. This framework, developed by the Institute of Internal Auditors, offers:
- Core principles for effective auditing
- A code of ethics for auditors
- Performance standards for quality audits
When conducting internal audits for compliance management, your team should incorporate these professional standards alongside relevant frameworks like ISO 27001, SOC 2, and PCI DSS based on your industry requirements.
Standard operating procedures (SOPs) are equally important for successful internal audits. Well-documented SOPs help your audit team:
- Follow consistent methods across all audits
- Maintain quality through clearly defined steps
- Train new auditors effectively
- Create reliable, comparable results over time
Your SOPs should align with company policies and applicable laws and regulations. They should clearly outline how to prepare for audits, conduct fieldwork, document findings, and create interim reports.
Who Performs an Internal Audit?
No matter what type of internal audit your organization conducts, it will need to be done by an internal auditor.
Unlike compliance officers who come from various educational backgrounds, internal auditors are professionals trained according to established standards of the Institute of Internal Auditors.
Your organization’s management hires internal auditors, although they should report directly to the audit committee of the board of directors. Ultimately, internal auditors are employed to show the board, management, and staff how the organization can function more effectively.
9 Steps of the Internal Audit Process
The basic steps to conduct an internal audit are as follows.
- Identify areas for auditing: Start by pinpointing departments or activities that require review. These could range from complex processes like manufacturing to simpler tasks like accounting. List each activity and its associated functions that need auditing, effectively creating an audit checklist.
- Determine audit frequency: Assess how often each area needs auditing. Some departments, like HR, may only require annual audits, while others, such as manufacturing, might need daily checks for quality control and set benchmarks.
- Create an audit calendar: Develop a structured schedule to integrate audits into corporate objectives. Scheduled audits become part of your consistent maintenance processes and are treated as a priority, similar to other business goals.
- Notify departments: Inform departments about upcoming audits so they can prepare necessary documents and materials. Surprise audits should only be used if unethical or illegal activity is suspected, and managers should not feel threatened by the process.
- Interview employees: Conduct interviews to understand how employees’ work processes align with written policies. This helps assess employee competence and identify training needs.
- Perform field work: Go beyond interviews by testing controls or business processes to evaluate their alignment with expectations. Design audit procedures in advance to make sure they address the specific issues being assessed.
- Document results: Record findings, including discrepancies between practices and policies, as well as instances of compliance or non-compliance. This step aims to identify gaps and develop solutions to bridge them, and serve as an interim step for the final report. This also allows you to refer to previous audit notes moving forward.
- Report findings: Prepare clear and concise final internal audit reports for senior management. Include an action plan to address compliance requirements and gaps and improve areas of concern.
- Post-audit remediation and follow-up: Address identified gaps and conduct a follow-up audit to improve compliance programs and prepare for external audits. This step also involves identifying risks like reputation, operational, compliance, and cybersecurity risks, and creating a plan to remediate them.
Take Charge of Compliance Management with ZenGRC
ZenGRC is a GRC solution that helps you simplify compliance management and internal audits. It eliminates inefficiencies caused by spreadsheets and multiple systems by providing a centralized platform for greater accuracy, collaboration, and transparency.
With pre-loaded compliance frameworks, continuous monitoring, and automated evidence compilation, ZenGRC saves you time, reduces costs, and ensures readiness for audits. Its dashboards offer clear visibility into compliance health, helping organizations manage risks and streamline processes effectively.
Schedule a demo today to see how ZenGRC can transform your compliance management.