Internal audits are among an organization's most critical functions. All ISO standards, including 9001:2015, 45001:2015, 14001:02015, 17025:2017, and 22000:2018, require companies to conduct regular internal audits with thorough documentation and precision.
Internal audits play a central role in the growth of a company. To put it simply, they ensure that your organization's operations are truly aligned with your business objectives and that all departments and teams are on the same page.
In this article, we take a comprehensive look at internal audits, how they differ from external audits, why they're essential, and how you can select the right internal audit software for your company.
What Is Internal Audit?
An internal audit is an organization's methodical review to evaluate and improve its operations. It usually encompasses risk management, internal control, inter-departmental communication, governance, and more. An internal audit is one of the company's most crucial control mechanisms. A dedicated internal audit team or department can conduct this examination.
Internal audit processes thoroughly evaluate a company's accounting processes, internal governance processes, controls, and more. They ensure compliance with international and national regulations, maintain proper financial data and reporting documentation, and more. Internal audits can also serve as a tool to improve operational efficiency, maintain quality, and help you identify issues and close gaps before they impact your organization's growth or are flagged by external audit bodies.
What's The Difference Between an Internal and External Audit?
Regardless of the industry, audits are a must. Broadly speaking, there are two main types— internal and external audits. But do they differ?
1. Internal Audits
An internal audit team typically conducts internal audits. This could be a department within your organization, a co-sourced squad, or even an outsourced team that performs audits on behalf of your company. These teams are often led by a Chief Audit Officer who reports the findings to management executives and the Board of Directors. The results found by the internal audit team are usually used to improve business operations and processes.
2. External Audits
An audit firm outside your organization conducts external audits. External auditors typically report on an organization's financial processes and, in some cases, are required to be Certified Accountants. In contrast to an external audit, the findings of an external audit are used by outside investors.
Internal Audit Applicability
As per section 138 of the Companies Act 2013, along with rule 13 of the Companies (Accounts) Rules, 2014, internal audits are applicable to certain companies and organizations. These companies must appoint an internal auditor for improved risk management and better compliance.
| Company type | Internal audit applicability |
|---|---|
| Listed companies | All listed companies on a stock exchange in India |
| Unlisted public companies |
|
| Private companies |
|
Why Internal Audits Matter
Internal audits can be the backbone of risk management and growth. They help with risk assessments, compliance reviews, fraud erection, reporting, continuous monitoring and improvement, reporting, objective insights, and more. This can help mitigate risks, reduce costs, and streamline and enhance performance. Some of their core functions include:
1. Evaluate Risks
One of the primary functions of internal audits is to assist management and stakeholders in identifying, assessing, and mitigating risks. This is usually done through a systematic risk assessment process, followed by prioritization. Audits help find gaps in the organization's processes and environment, allowing for the development of a remediation plan. Regular monitoring also ensures that significant hazards are caught before they harm the organization.
2. Improve Efficiency
By objectively assessing your organization's policies and procedures, you can ensure that your business practices are aligned with your objectives. Regularly monitoring your processes means improving and adapting them according to changing conditions.
3. Comply with Regulations and Laws
Regular internal audits are essential for several industry-specific, international, and national regulations. These include ISO standards, OHSAS, EMS, and more. They help an organization stay prepared for external audits and foster trust among investors, stakeholders, and customers. Internal audits can also help avoid costly penalties, fines, and litigation.
Types of Internal Audits
The types of audits vary based on a company's industry, organization, and unique requirements. Some popular types of internal audits include:
1. Performance and Operational Audit
Performance audits determine whether an organization is meeting its targets and goals. If internal goals are not being met, audits can also help find the underlying cause of the issue as well as develop strategies to overcome it. In the same vein, operational audits are used to assess a company's control mechanisms. These also evaluate the reliability and efficiency of an organization.
2. Financial Audit
Financial audits are among the most popular audits. They confirm a company's financial reports, including its overall business, assets, budget, expenses, and reimbursements. Audits are also often used to recalculate these metrics in case of discrepancies.
3. Compliance Audit
Compliance audits are crucial for most organizations. They assess whether your organization adheres to the relevant laws and regulatory policies. This is vital since failure to comply with specific regulations may lead to fines and penalties or even open your company to litigation. These could significantly impact your company's finances and reputation.
4. Environmental Audit
Today, there is a growing awareness surrounding environmental practices. Customers prefer companies that take steps to minimize their impact on the environment. Environmental audits assess how well a company aligns with ecological laws and regulations. With the growing emphasis on ESG, environmental audits should be high on the list of priorities for organizations.
5. Security and Technology Audit
Another important type of internal audit is the security and technology audit. This assesses an organization's IT infrastructure and how secure your company's data, intellectual property, and customer information are.
How Can Internal Audit Software Help?
Internal audit software is an efficient way to conduct and document internal audits regularly. Unlike manual methods, it is less time-consuming, minimizes human errors, and is a modern and reliable way to conduct audits. It allows organizations to analyze data in real time, provide a regularly updated picture of compliance risks, and ensure audits are streamlined and efficient. It also ensures they are performed on a regular, timely basis.
Some of the key features of Effivity's Internal Audit software include:
- Clearly defining a regular audit management schedule
- Defining an audit plan including the auditor, auditee, date, time, and location of the audit
- Automates alerts to ensure all teams are aware of the audit schedule
- Captures internal audit findings using an internal audit report
- Identifies and captures any non-conformities in a separate module, where roost cause analysis, evaluation, and corrective action can be taken
- Define master internal audit schedule for various departments and processes.
- Generates alerts and reminders in case internal audit processes are not conducted on time so that audit compliance is adhered to
- Captures and centrally documents procedures and forms related to internal audits in the information module
These features allow organizations to streamline their workflows and improve efficiency. Additionally, risk assessment tools help identify and correct compliance problems before they escalate.
The Bottom Line
Internal audit software can be a game changer for your organization. Unique regulatory challenges are bound to arise whether your organization is in the manufacturing industry, healthcare, food, or beyond. Audit management software helps your company meet these challenges confidently and quickly.
Choosing the right management software is vital. If you are looking for an audit management system, consider Effivity. Along with the above-listed functions, Effivity's various modules ensure that you can meet multiple requirements applicable to your services or products. To learn more, visit our website today!
