Do you want to know the purpose of internal audit and why it is so important for the survival of the firms? If yes, the answer to these questions is in this article.
What is the Purpose of Internal Audit?
The purpose of an internal audit is to ensure that the business is running effectively and there is no ambiguity regarding risk management, governance, and internal control. Frauds, forgeries, and misstatements can undermine the business’s success, and an internal audit aims to eradicate them.
Internal audit is essential for organizations, managers, shareholders, stakeholders, and the business’s survival. Therefore, this article will discuss the purpose of internal audit and its related topic in detail. Let’s start.
Table of Contents
Explanation of the Purpose of internal audit:
An internal audit is conducted to disclose management’s weaknesses, which can be helpful for business owners. The internal auditor is responsible for conducting the internal audit.
The scope of an internal audit includes evaluating a firm’s corporate governance and accounting processes.
Internal audits must comply with laws and regulations. Internal audit helps management achieve operational efficiency and allows them to correct the lapses before they are discovered in external audit.
Internal audit and risk management
No business is free of risk in this world. Some main problems that your companies are going to face are as follows:
- Compliance problems
- Agency problems
- Outdated policies
- Accounting errors
- Failure to accomplish objectives
Internal audit helps business owners detect these factors and solve the problems before they blow severe damage to the business’s existence and lead to insolvency. That’s why the internal audit is integral for the company’s survival.
Internal audit and poor governance
Internal audit adds value to the business and helps achieve its objectives, and the hidden motive is to add value to the company. Internal audit is conducted to avoid poor governance. The management uses internal audits to compete in the business world.
Internal audit and internal control
Internal audit is a part of internal control, which is essential for the business to last long in the industry. The purpose of an internal audit is to provide insight into the business activities and compliance procedures being followed by management.
Internal audit and forgeries
The purpose of an internal audit is to avoid misstatements, frauds, and forgeries on the part of the accounting staff because it can leave a wrong impression on the investors. Therefore, internal audits let business owners have fair statements, which attract more funds.
Categories of the Purpose of Internal Audit
The primary purpose of internal audit has already been discussed above. Internal audit is not restricted only to a single purpose, but there are many categories of the purpose of internal audit as follows:
Proper control is required to achieve maximum efficiency, and an internal audit is a key to achieving this control. The purpose of an internal audit is to enable management to control business activities properly and make the business more attractive to its shareholders and stakeholders.
The purpose of an internal audit is to ensure the checking of proper authority for transactions like purchase, retirement, and disposal of fixed assets. Internal audit also provides the facility to compare vouchers with entries to determine the correct figures.
Management assistance is one of the primary purposes of internal audits. The internal auditor is responsible for pointing out the weaknesses of management so they can avoid the interrogation of the external auditor. Therefore, an internal audit is mainly used to correct the dire situation.
Detecting fraud in the books of accounts is also one of the main purposes of internal audits. The internal audit starts as soon as the working of accounting staff ends. Therefore, frauds and forgeries are less likely to occur because of no time gap between recording and checking.
A company’s assets are crucial for a business, and an internal audit’s primary purpose is to protect those assets. The internal auditor requires the proper record of assets to conduct an internal audit. Internal audit provides insight into asset valuation, verification, and possession.
Management is liable to achieve some fixed targets in budget and plans. The problem arises when there is no method to assess their performance. Therefore, an internal audit’s purpose is to assess management’s performance, which is vital for the organization’s existence.
Errors can occur while preparing accounting records. Internal audit prevents these errors and informs accountants about their mistakes. The purpose of an internal audit is to detect and rectify those errors so the report can be attractive to shareholders and stakeholders.
Business activities are necessary to achieve sustainable growth. Poor management performance can be a stumbling block to achieving this success. The purpose of an internal audit is to provide suggestions to management and means to remove the difficulties.
Statements can only be fair and true if the accountant has followed all the accounting principles. The purpose of an internal audit is to remove false statements and directs the accountant to prepare the statements according to the accounting principles.
Annual working can be undermined by either management, lack of interest of employees, and incompetent advisers. Therefore, the purpose of an internal audit is to provide in-depth insight into the detailed working of the whole staff and review for the sake of business owners.
An internal check is a system necessary to maintain the smooth running of the business. One person cannot be responsible for every work in the company. The purpose of an internal audit is to re-check and examine the internal check system to stop any misconduct.
Help independent audit:
External audit relies on the information provided by the internal audit through the internal audit report. The purpose of an internal audit is to help the independent/external auditor. Therefore, an internal audit gives an in-depth and detailed review of the work done through an internal audit.
Businesses must not be outdated in policies, business matters, and strategies, or this primitiveness can severely blow the business’s success. The purpose of an internal audit is to suggest new ideas, policies, and strategies that can be helpful for a company to cope with recent advancements.
Employees can be incompetent to work diligently without a proper system. Internal audit is helpful because it can adequately enlighten the employees about their liabilities. Therefore, an internal audit aims to inform the workers about their responsibilities.
Use of resources:
Determining the proper use of resources in the best way is also one of the primary purposes of internal audits. The misuse of resources can be damaging to the business and can also increase the cost of doing business. The internal audit ensures the proper use of resources to avoid bankruptcy.
Importance of the Purpose of internal audit
The purpose of an internal audit is to let your shareholders, stakeholders, other business partners, and investors know that your business is more competitive and less risky. Therefore, the business can attract more customers for your firm in return.
In addition to the important functions performed by the internal auditor, the presence of an internal auditor gives investors and organization owners an indication that the organization’s work is in progress as required. So they can invest more in this organization.
The purpose of an internal audit is to ensure that your firm must not go bankrupt or insolvent. Frauds, forgeries, poor governance, and lack of interest in management can be detrimental to the business in the long run.
An internal audit aims to eradicate all the problems and make the business successful for consumers, shareholders, and investors.
Internal audit is compulsory for different firms and optional for others. However, an internal audit can be helpful in many ways because its absence can damage the company and lead to its extinction.
The purpose of an internal audit is to let business owners save their business from imminent threats like management scams, tempering in statements, and asset protection. To protect the company from sudden collapse due to governance failure is also an essential purpose of an internal audit.