Audit Management

Every organization needs strong internal controls to ensure the integrity of financial statements, promote ethical values, and drive transparency across the enterprise. Internal controls are the mechanism to do those things; controls help identify risks and reduce them to an acceptable level.

Vital processes supported by robust internal control systems allow an organization to comply consistently with all applicable laws and regulations and to earn confidence, trust, and loyalty among its stakeholders. Internal controls also play an essential role in preventing employees and others from committing fraud.

Conversely, a lack of internal controls can weaken the integrity of accounting and financial reporting. Costs can rise because of reduced operational efficiency and increased potential for fraud and other kinds of crime. Ultimately, these issues affect the company’s reputation and financial standing in the market.

Types of Internal Control Activities

There are two primary types of internal controls: preventive and detective.

Preventive Internal Control Activities

As the name suggests, the aim of preventive controls is to prevent errors or fraud from happening in the first place. These controls are essential because they are proactive and help neutralize problems that could cause a lot of damage if they occur.

Key preventive control activities include:

Segregation of Duties

Also known as separation of duties, this internal control activity divides responsibilities among multiple employees to minimize the risk of errors or inappropriate actions.

By segregating duties, organizations assure that no single person can perform, authorize, and record financial transactions, which reduces the potential to commit fraud. For example, enterprises should separate the duties and responsibilities for:

• Receiving cash or checks, preparing deposits, and reconciling deposits
• Entering new vendors and paying invoices
• Entering and approving expenses
  
  

Authorization and Approvals

All financial transactions should be authorized and approved by a suitable person (or persons) to assure that transactions are appropriate and aligned with organizational goals. Here, “suitable” means that the approver has the authority to do so and the skills and knowledge to make informed decisions on behalf of the organization.

For example, a department may implement an internal control activity to assure that a manager should approve all purchase requisitions and perhaps an additional approval from a director-level manager for purchase requisitions over a specific dollar amount.

Verification, Reconciliation, Reviews, and Documentation

Many organizations implement control activities focused on compliance, financial, or operational issues. For example, it’s imperative to have specific people review and verify critical transactions and financial figures to confirm accuracy.

Physical Security

Physical security is another preventive control activity. It’s critical to limit physical access and implement internal controls for cash, equipment, inventory, checks, and all other assets considered business-critical for the organization.

In addition to physical control, financial assets should be counted and compared with amounts shown on control records and documents.

Detective Internal Control Activities

Unlike preventive control activities, detective controls aim to find errors and problems (and their root causes) after the mistakes have already occurred. Although these controls don’t prevent problems from occurring, detective controls are essential because they provide an after-the-fact opportunity to identify, understand, and correct irregularities.

Detective controls are implemented to support organizational objectives such as fraud prevention, legal and regulatory compliance, and quality control. These controls also confirm that the organization’s preventive controls are operating as intended.

Key detective control activities include:

Reconciliation

Some organizations perform monthly reconciliations of departmental transactions. Reconciliation involves cross-checking transactions to confirm that the information reported is accurate and up-to-date.

For example, expense activities recorded in accounting reports should be reconciled with relevant supporting documents to verify that the records reflect the correct transaction amount and are recorded in the accurate account. If material differences exist, the relevant department can take appropriate corrective actions.

Performance Reviews

An enterprise may undertake organizational performance reviews to assess its performance based on specific parameters. For example, a study may compare the annual budget with actual expenses to find unexpected differences and then analyze the source or cause of those differences.

Internal Audits

The enterprise may conduct an internal audit by:

• Performing a monthly reconciliation of bank accounts
• Reconciling petty cash accounts
• Reviewing and verifying refunds
• Auditing payroll disbursement
• Conducting a physical inventory

Internal auditors evaluate accounting and corporate governance processes to:

• Identify problems and correct errors early
• Improve the reliability of financial reporting
• Improve or maintain operational efficiency
• Assure compliance with laws and regulations

An organization may hire an external auditing or accounting firm for some or all of the above audit control activities. In this case, the auditing firm will test the organization’s accounting processes, review the control structure, and provide an opinion about the effectiveness of internal controls. The auditors may also offer suggestions to strengthen these controls.

While auditors may provide recommendations, there is a distinction between an audit and an internal control review. An audit verifies that your business is following documented business processes and generating accurate results. An internal control review checks if controls can be improved or automated and detects if they are inadvertently causing operational inefficiencies.

Why Are Internal Controls Critical?

Establishing and using the appropriate internal controls is essential for firms of any size. Internal controls may typically aid in discovering fraudulent activities, even though they cannot always prevent fraud, especially when higher management is involved.

In addition, internal controls can guarantee the timely and accurate preparation of financial statements and identify material misstatements before the final financial accounts are published.

Human error can still happen even when internal controls are established. However, it’s more likely that mistakes will be discovered immediately and addressed right away if the proper control processes are in place.

And last, creating solid internal controls may influence how a corporation operates. By establishing and effectively administering internal controls, businesses of any size may achieve three crucial business goals-accurate financial reporting, compliance with all applicable rules, and efficient operations.

How Do Internal Controls Impact a Business?

Correctly applying internal controls generates significant benefits for your organization. Here are the pros of the correct implementation of these controls.

Creating Processes

Standardized business processes and procedures communicate the intended operations for employees in every department. A corporation benefits from cohesion and transparency among functions when processes are established and documented, since everyone knows what is expected of them.

Separation of Functions

A system of checks and balances results from adequately constructed internal controls, ensuring an organization has an acceptable separation of roles. For instance, the person who reconciles bank statements and deposits checks shouldn’t be the same. These verifications help catch errors and reduce the risk of fraud.

Preventing Theft and Fraud

Fraud and theft may be lessened and even prevented with internal controls. Robust internal controls “keep honest people honest” by reducing the opportunities and temptations to do anything inappropriate.

Making Accurate and Timely Financial Statements

Internal controls drive processes for correct and timely transactions in accounting records. Both internal and external stakeholders depend on accurate and timely financial statements, which management uses for decision-making and preparing for the future.

Decreasing Errors

Well-designed internal controls will help your business prevent and detect errors. A robust internal controls review process helps identify where issues are still slipping through the cracks. Quality improvements and error reductions will protect your reputation and brand image with customers and stakeholders.

What Can Happen if Internal Controls Are Weak?

Unfortunately, weak internal controls may give a false sense of security that is worse than having no controls at all.

Weak internal controls will increase the likelihood of errors, fraud, and theft. Besides any money lost, consider the time that management will spend investigating the situation and, potentially, the expense of recruiting a replacement employee.

Weak internal controls are also an indication that business processes are not well-defined, which results in operational inefficiencies. It’s critical to clarify the roles and responsibilities of each department to avoid unnecessary redundancies and ensure nothing falls through the cracks.

Finally, if internal controls are ineffective, an organization could risk losing certifications, exposure to regulatory penalties, or experience a data breach. These costly consequences can cause damage to a company’s finances and its reputation.

What Are Internal Control Objectives?

A system of internal controls should be comprehensive and meet various objectives for the business. Mercer’s system of internal controls defines seven control objectives to assess the effectiveness.

Authorization

Before a transaction is recorded, all trades must be authorized by responsible personnel.

Completeness

The goal is to ensure that the accounting records contain all legitimate transactions.

Accuracy

All legitimate transactions must be truthful, consistent with the original transaction data, and recorded in a timely fashion.

Validity

The goal is to ensure that all recorded transactions accurately reflect the economic events that took place, are legal, and have been carried out following management’s general approval.

Physical Safeguards and Security

The goal is to ensure that access to physical resources and information systems are adequately managed and limited to authorized persons.

Error Handling

The goal is to guarantee that mistakes found at any processing step are promptly fixed and reported to the proper management level.

Segregation of Duties

Tasks shall be delegated to people in a way that prevents one person from having complete control over the transaction’s recording function and processing operations.

Most, if not all, of these control objectives should be satisfied by a well-designed process with proper internal controls.

How to Determine Which Control Activities Are Most Important for Your Business

Robust internal controls are the key to minimizing uncertainties and boosting an organization’s ability to achieve its stated goals. However, there are many different types of controls, and it can be challenging to determine which control activities are relevant.

Selecting the best control activities and implementing an effective system of internal controls begins with a business first identifying its goals and objectives related to:

• Operations
• Financial reporting
• Compliance

Next, management should establish a common “language” for risks and controls to:

• Improve risk identification, classification, and response
• Standardize rules using a standard methodology
• Improve reporting, business performance, and decision-making
• Reduce dependence on external oversight and audits

Once the control language and methodology are established, adopt a consistent and disciplined reporting structure to assure that reliable, up-to-date information about risks and controls is available across the company.

Finally, leverage technology to manage internal controls, implement controls for self-assessment and ongoing monitoring, and follow through on corrective actions.

Not all organizations will implement the same internal control activities. But in general, management should select controls that:

• Increase accountability
• Encourage sound management practices
• Assure that functions achieve their intended results
• Provide accurate and timely information and reporting
• Assure compliance with laws and regulations
• Support the requirements of external auditors
  
  

How Automation Helps Implement Internal Controls

Eliminating situations when the firm is left exposed by leaving the metaphorical garage door open may be accomplished by moving to the future of controls (FoC). Organizations will use controls on the path to a successful FoC journey to boost investor confidence, business intelligence, and operational performance.

The key to realizing that vision is to maximize automation – not just for its own sake, but also when and where it makes sense. As a result, organizations can reduce the time and effort needed to ensure compliance by intelligently integrating automation and next-generation technology into internal controls frameworks.

• Rapid, real-time risk and exposure detection (not just during quarterly reviews or audits)
• Use data to enable quick, objective decision-making
• Investigate the root cause of problems rather than merely their symptoms
• Change your risk-management strategy from defensive and reactive to aggressive and proactive

Control environments may contain three more crucial lines of sight, such as offering insight, supervision, and foresight, rather than only carrying out actions geared toward looking backward. This allows businesses to operate more effectively in the present and the future.

Internal Control Activities in COSO Internal Control-Integrated Framework

Since 1992, many publicly traded organizations in the United States have used the Internal Control-Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to develop and implement specific internal controls that are right-sized to them.

In May 2013, COSO published an updated version of the framework that incorporates changes that have taken place in the business and operating environment over the past few decades. The new framework also makes it easier for companies to see gaps in compliance with Section 404 of the Sarbanes Oxley (SOX) Act.

The COSO 2013 framework comprises five integrated components of internal control:

• Control environment
• Risk assessment
• Control activities
• Information and communication
• Monitoring activities

According to COSO compliance, the framework enables organizations to strengthen internal control, which is “a process effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.”

The internal control activities can be adapted to an organization’s structure and considered at every level, including entity, divisional, operating unit, and function group.

Include ZenGRC in Your Control Plans

Improve your internal controls and manage compliance to frameworks (such as the COSO internal control framework) with ZenGRC. Leverage this integrated platform to meet your risk management, cybersecurity, audit, governance, and compliance needs.

ZenGRC enables reliable risk, audit, and compliance management with easy access to information and continuous monitoring with dashboards and advanced reporting features. Automated workflows ensure nothing falls through the cracks.

The document repository is a single source of truth to store policies, procedures, business continuity, and disaster recovery plans. You will always be audit-ready with ZenGRC.

Schedule a demo to see how ZenGRC can help you manage all of your compliance requirements.

You don’t have to jump through endless hoops to achieve regulatory compliance. By finding an easy way to comply with the right laws, regulations, and industry standards, regulatory compliance can offer several benefits for companies. Specific compliance requirements vary by industry and country. But in general, implementing regulatory compliance is a mandatory requirement for every sector and every company in countries with a robust business and economic landscape.

Regulatory compliance is especially important in industries with strong compliance oversight, such as financial services and healthcare, as well as sectors where issues like data protection, cybersecurity, and consumer privacy are critical to business continuity and legally compliant operations.

A variety of companies have experienced consequences of noncompliance in recent times, from oil and gas companies (BP) and manufacturing plants (Republic Steel) to telecommunications companies (WorldCom), banks (JP Morgan Chase), and consulting firms (Arthur Andersen).

An organization that achieves regulatory compliance can confidently indicate to its stakeholders that it has met specific standards and is certified by an industry-accepted regulatory body. By following the laws and regulations relevant to its business operations, it can prove its integrity, reliability, and ethics-all of which can engender stakeholder trust and strengthen its competitive position.

The Benefits of Regulatory Compliance

Maintaining compliance helps your company mitigate risks like security breaches and data losses, as well as avoid disciplinary action that could lead to license revocations, damaged reputations, lost customers, and financial penalties and losses.

A few specific benefits include:

• Keeping up with a constantly changing regulatory environment: Perfect compliance may feel like a far-off dream for companies struggling to continuously adapt and update their regulations in order to meet federal, industry, and state standards. A GRC platform with compliance programs can help you to more efficiently anticipate these sudden curves in the road.
• Protecting your business’s resources and reputation: Noncompliance can result in massive reputational losses and broken trust with your customer base. Worse, you can have your license revoked, impacting your ability to meet business objectives and goals. By maintaining regulatory compliance, you mitigate these risks and help to keep daily operations running smooth.
• Protecting you from cybersecurity threats: Cybersecurity compliance helps your company to mitigate the risk of data breaches and malware attacks internally and externally. By maintaining this type of compliance, you protect the data privacy of your company, your employees, and your customers. The National Institute of Standards and Technology (NIST) creates many of the cybersecurity regulatory compliance standards for US companies if you’re looking for a good place to start improving your cybersecurity compliance.
• Improving efficiency: Many regulatory compliance protocols require structured data storage, streamlined business processes, and regular reports on business functions. All of these work to improve your company’s efficiency over time, helping to reduce your costs.
  
  

What Does Regulatory Compliance Mean?

Regulatory compliance means an organization is aware of and aligned with all the laws and regulations relevant to its business and industry. These regulations may be set at the local, state, federal, or international levels.

Regulatory compliance differs from corporate compliance, which is about following internal policies and rules to achieve some self-set goals and objectives. However, both types of compliance are essential since they can drive the organization’s strategic direction, determine its ethical framework, and ensure accountability and transparency.

What is Regulation?

A regulation is a law enacted by a governmental body granting a regulatory agency enforcement authority. One of the most well-known regulations in the United States is the Sarbanes-Oxley Act of 2002 (SOX). SOX established stringent rules for U.S. public companies to document financial compliance and corporate disclosures. Its goal is to prevent financial fraud and protect investors and the public.

SOX also granted the Securities and Exchange Commission (SEC) enforcement authority and created the Public Company Accounting Oversight Board (PCAOB) to oversee audit rules.

Another regulation, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), regulated the protection of patient information, specifically electronic protected health information (ePHI), and granted the U.S. Department of Health and Human Services (HHS) oversight authority to enforce compliance.

Some other examples of regulatory compliance regulations relevant in the U.S. business landscape include:

• Health Information Technology for Economic and Clinical Health Act (HITECH)
• Payment Card Industry Data Security Standard (PCI DSS)
• California Consumer Privacy Act (CCPA)
• European Union’s General Data Protection Regulation of 2016 (GDPR)
  
  

What Does Regulate Mean?

While “government regulation” refers to the law, “regulate” means controlling or supervising using rules and regulations. Thus, legislative and executive branches establish the laws, but government agencies enforce these laws, ensure compliance, and track noncompliance.

What is a Regulator?

Agencies act as regulators for their industries by creating guidelines and frameworks to help organizations successfully meet compliance requirements. For example, the HHS offers HIPAA guidance materials outlining the HIPAA regulations and suggested safeguards to help covered entities (e.g hospitals) implement HIPAA.

Similarly, the SEC provides links to materials that outline the steps to SOX Section 404 compliance for small businesses.

The term “regulator” also acts as a shorthand for external auditors engaged by a regulatory agency to verify a company’s regulatory compliance posture.

Why Regulatory Compliance Is an Important Part of Business Today

Financial Health

Any compliance officer will tell you that financial safety is the first benefit associated with regulatory compliance. Regulatory noncompliance can result in steep penalties for the errant organization. This is what happened in 2020 to Goldman Sachs, Wells Fargo, and JP Morgan Chase, who ended up paying fines of $7.50 billion out of a total of $11.39 billion imposed on all U.S. banks during the year.

Protection from Lawsuits

In addition to avoiding financial penalties, complying with laws and regulations protects organizations from lawsuits-whether brought by the agency or someone else (e.g., the public). For example, in 2019, between 2011 and 2019, 142 local governments filed lawsuits against businesses for noncompliance with the Americans with Disabilities Act (ADA).

Business Continuity and Competitiveness

Regulatory compliance provides numerous guideposts that show businesses what is required to succeed in their industry. Compliance laws also evolved to help create uniformity in the marketplace and enable companies to compete fairly, ethically, and on equal footing. Companies that achieve regulatory compliance may achieve a good position in their industry.

Maintain a Solid Reputation

Companies that comply with regulations and laws offer consumers a sense of security. In return, they trust such companies with their data, money, and loyalty.

Protection from Cybercrime

Higher-risk industries like healthcare and financial institutions recognize the value of the information they collect and acknowledge that they are attractive targets to malicious actors.

However, other industries sometimes feel that they are not as likely to be attacked. This mistaken assumption often leads to limited regulatory compliance focus and diminished security, increasing the likelihood of cyberattacks and data breaches.

Data breaches decrease customer retention, which can have a catastrophic financial impact on the company, and even lead to bankruptcy and closure. Regulatory compliance provides added information security by requiring organizations to adhere to rules that can protect their assets from threat actors and acts as one of many safeguards to ensure data protection.

Increased Profitability

Regulatory compliance and the audit reports proving compliance allow companies to market themselves better. SOC 1, SOC 2, and SOC 3 reports help clients trust their vendors and demonstrate ongoing SOX compliance. Without these reports, the business might lose customers and thus take a hit to its profitability.

How to Use Risk Management as Part of Regulatory Compliance Management

Creating a robust corporate compliance management system requires a thorough risk assessment and determining the tolerance for each. If a threat is unlikely to impact the organization and the cost to mitigate the potential danger is high, part of the compliance risk management process may be to accept that risk.

For example, a sole proprietor who handles low volumes of personal customer information may choose not to employ end-to-end data encryption techniques. This decision may make logical sense if the data can do minimal damage and no one is sharing data between computers. However, they may still purchase firewall protection to protect their computer from threat actors.

But, if the same business owner later hires an employee who can access the data, the risk of data loss-whether accidental or malicious-increases. So now they need to reassess the potential harm to customer data and decide if they should invest in end-to-end data encryption.

Larger organizations have a more difficult time navigating compliance regulations. They often hire a compliance consultant to determine the appropriate risk profile or establish an in-house compliance department to achieve and maintain regulatory compliance.

How To Leverage Compliance Management Software for Profitability

Despite the many benefits of regulatory compliance, regulatory requirements can feel like a quagmire dragging down profitability. For example, collecting compliance documentation and aggregating the required information costs companies money in valuable employee hours. It also requires communicating across multiple departments and ensuring cross-departmental consistency.

Resource time is the most significant cost associated with the audit process. The Chartered Institute of Internal Auditors noted in a November 2017 report that gathering audit evidence is often problematic, leading to additional time spent on the audit. Other issues are disproportionate controls and complex spreadsheets that lengthen the audit process.

The right compliance management software can ease compliance management burdens and help organizations leverage the positives of regulatory compliance while removing (or at least minimizing) the negatives. ZenGRC is a comprehensive platform that empowers organizations to meet their compliance responsibilities and manage risk with ease.

ZenGRC Simplifies Compliance and Drives Compliance Efficiencies

ZenGRC provides a robust, integrated system of record-keeping for compliance. With this platform, all entities involved in the compliance effort have rapid access to a single source of truth. ZenGRC automates tedious processes, reducing stress, saving time, and generating tangible cost savings as organizations pursue and maintain regulatory compliance.

ZenGRC also eases cross-departmental communication. Task assignments and workflows enable clear accountability. Integrations with third-party tools like Jira and Slack allow for quick adoption across departments.

The platform’s role-based authorization feature provides automated controls over who can edit versus view regulatory compliance documentation. For example, all employees may be required to read the IT security policy; however, only specific individuals should be able to make changes to it.

When you rely on ZenGRC, you avoid compliance issues and achieve full regulatory compliance through a streamlined, cost-saving compliance process, easy audit management, and continuous monitoring. Schedule a free demo today.

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.

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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.