What Is an Internal Audit, and Who Should Perform It?

Internal audits may have started solely as a way for companies to identify policy violations and ensure compliance with laws and regulations. However, over the years, they have evolved into a more comprehensive and proactive approach to risk management and process improvement that consistently brings value to organizations.

Today, and due ‌to the changing nature of the markets and industry regulations, internal audits have become integral to the success of all businesses.

If you’re unfamiliar with this process and its purpose and need to understand more about who should perform an internal audit, this guide is for you.

What Is an Internal Audit?

An internal audit is an objective-driven, independent consulting activity that evaluates a company’s internal systems, processes and procedures to offer assurances regarding its operations.

Internal audits aid companies in achieving their goals by applying a systematic approach and an impartial perspective to assess and improve the efficiency of internal controls, risk management and governance processes — all of which are set by an organization’s senior management.

Management’s Reliance on Internal Audits

A company’s internal controls are the rules, procedures and mechanisms it implements to ensure it meets its missions and goals. This aspect of corporate governance typically falls under senior leadership’s (executive management and boards of directors) purview, and it includes enacting the following elements:

• Processes for planning, coordinating, directing and controlling operations.
• Systems for measuring, reporting and overseeing performance.
• Actions to enhance risk management and increase the probability that set objectives and goals will be realized.

As an organization’s third line of defense, internal audit plays a key role in supporting senior management’s established internal control structure. It involves:

• Providing unbiased opinions of where a business stands in terms of its reputation, growth, environmental impact and employee satisfaction.
• Offering insights into the effectiveness of current processes and procedures.
• Ensuring an organization’s compliance with applicable laws and regulations, thereby minimizing potential exposure to statutory violations.
• Instilling a greater sense of accountability throughout the organization by promoting transparency, responsibility and ethical behavior among all employees.
• Enhancing internal controls by identifying lapses or weaknesses in current systems and proposing corrective measures.

In the wake of changing compliance requirements, the enactment of pan-national regulatory frameworks, namely, the General Data Protection Regulation (GDPR) and the US’s Sarbanes-Oxley Act (SOX) and the increasing focus on risk management, the importance of internal audits has grown significantly.

In addition to its traditional emphasis on compliance and operational areas, internal audits now also encompass enterprise risk management, information technology (IT) and fraud prevention.

Who Should Perform an Internal Audit?

Given the multi-dimensional nature of this process, identifying  who should perform an internal audit is critical.

Traditionally, the internal audit function was undertaken primarily by in-house personnel.

Through time, this has changed and now many businesses choose to bring in third-party experts either exclusively or as a means of supplementing their internal teams’ efforts.

As to who should perform the internal audit, the answer for most businesses will likely come down to:

• The complexity of their processes.
• Available resources, both in terms of personnel and budget.
• The level of expertise required to conduct the audit.
• The scope of their audits, including the areas evaluated and methods used.

In-house Internal Auditors

In-house internal auditors are salaried employees of an organization. This status grants them institutional knowledge of the company’s culture, operations and processes, as well as a clear understanding of management’s expectations and objectives.

Sometimes, the in-house internal auditor may be part of a larger division or department, such as IT, finance or operations.

However, in exclusively relying on in-house personnel, companies may face the following challenges:

• Costly investments to acquire, retain and develop a competent internal audit team, particularly for smaller organizations that may be required by a funding covenant or a regulatory agency to have an internal audit function.
• Higher risk of collusion with process owners given the tight-knit nature of in-house teams, which might lead to misleading representations of reported facts and findings.
• Lack of expertise in a growing range of skills that are key to some organizations’ industry niches nowadays, such as IT audits and data analytics.
• Lack of familiarity with sector-specific regulatory regimes’ requirements.

Third-Party Internal Auditors

Third-party internal auditors are external consultants commissioned by an organization’s executive management to provide a risk-based, objective review of the efficiency and effectiveness of its operations. These engagements can vary in scope and duration, ranging from short-term assignments to ongoing arrangements.

As the modern internal audit function has grown more sophisticated, so has many companies’ dependence on third-party internal auditors, especially in light of the following benefits:

Cost-effectiveness

Certain organizations may not have the means to maintain a full-time audit staff. In these cases, external consultants offer the necessary expertise to maintain a lean yet robust internal audit function.

Even within large companies, a combination of in-house internal auditors and outside consultants collaborating can significantly manage costs.

Expertise and Specialization

Third-party internal auditors work in multiple industries. They are often aware of challenges, both sector-specific and general, that an in-house team may not be familiar with.

This puts external consultants in a position to provide valuable insights and advice on emerging risks and industry best practices.

During their engagement, they may also generate a set of industry-centric benchmarks and operational standards by which management and employees can measure performance and assess compliance.

Independence and Objectivity

An independent internal audit review offers an unbiased assessment tailored to the business’s industry. It ensures a level of objectivity that may not be fully achieved with in-house internal auditors who could be influenced by organizational factors, such as personal relationships or fear of repercussions.

This, in turn, promotes the flow of new ideas to boost operational efficiency, mitigate risks and enhance internal controls.

Technological Knowledge

Third-party internal auditors will stay informed on technical advancements that affect the businesses they service.

Because such consultancy firms usually specialize in all areas of compliance and risk management, they have a firm grasp on and can comprehensively assess corporations’ IT systems’ capabilities and cybersecurity.

Schedule an Internal Audit Today

Being a third-party provider of internal audit services, Affility Consulting enables clients to fortify their internal audit functions. Our risk-based audit approach is grounded in our fundamental principle of creating value for our clients in every engagement.

Schedule an internal audit with Affility Consulting today and start realizing the benefits of holistic risk management and compliance for your business.