Time to take control?
Most public interest entities, major institutions and government departments have established an internal audit function.
A greater number of large private companies have recognised the importance of an internal audit function as they grow and become more diverse in their offering, more geographically challenged, and more complex businesses. Many are highly regulated, with significant volumes of transactions.
These companies are early adopters of understanding the benefits gained from internal audit – but should more be following suit?
What is “internal audit”?
Internal audit differs from external audit – it involves the review and testing of the control environment and structures and processes, as opposed to the audit of the year-end financial statements. It tests the operation of key controls, to ensure they are operating as intended, and are effective in managing the company’s risk.
How does it work?
A standard approach would be to:
- Develop and execute business-focused audit plans that are linked to identified risks and company’s objectives;
- Use internal audit staff with the necessary specialisation, skills, experience and personal attributes to meet company requirements;
- Proactively advise management of findings arising from internal audit work and make subsequent recommendations to generate efficiencies; and
- Regularly inform progress on the implementation of agreed internal audit and other relevant report recommendations using clear and concise reporting tools.
What are the benefits of internal audit?
Generate efficiencies & profitability
An effective internal audit not only identifies areas of waste that could be eliminated but considers ways the business can improve its existing processes. Recently a client invited us to review their revenue and debtors cycle. We identified flaws in the existing processes that was costing them significantly in interest expense and working capital. Based on the improvements identified and recommendations, our client was due to save $200,000 annually in interest and cash flow would improve significantly.
Quality of information
By testing the key controls, this ensures they are operating effectively and that the quality of the data and information flowing through the accounting and information system is maintained. The Board and management can have greater confidence in the financial information they are reviewing and basing their decisions on.
Internal audit provides detective and preventative measures against any potential fraudulent activity. The simple fact that there is an internal audit function would make any opportunist think twice!
An internal audit function could potentially highlight any breaches or deficiencies in compliance or regulations through the performance of hindsight reviews. By identifying the issues on a timely basis, these can be remedied before being discovered by an external regulator, therefore avoiding any potential repercussions.
There is the flexibility to vary the scope of the internal audit work performed. There could be a focus on specific streams (revenue, expenses, payroll), certain times and periods, staff members, key controls, information systems (inventory, sales management, budgeting) or locations/branches. The internal audit visits could be over a certain number of visits per year and in quieter periods, at the company’s convenience. The internal audit function can be outsourced or performed by an in-house team.
In recent times there has been greater emphasis and scrutiny on the responsibilities of Those Charged with Governance, being the Board and Management. The internal audit function provides an extra line of defence in the management of risk.
External audit saving
Dependent on the quantity, quality and scope of the internal audit work performed there is the opportunity for the external auditor to place reliance on the internal audit findings, and therefore reduce the level of work they need to perform and their related costs. There should be savings on the external audit fee.
In the current environment, where there are higher expectations of those charged with governance, there is a greater need for a tighter, reliable control environment. Internal audit is seen as an essential component of good governance and would assist in building and maintaining a stronger control environment and generate efficiencies.
For further information on the benefits of an internal audit function, contact PKF on 02 8346 6000.