Why Do Businesses Need Internal Audit?
Businesses that aim to grow and develop constantly in global competition need internal auditing activities to ensure the quality of corporate governance. In small-sized businesses, managers can effectively manage and monitor daily activities and employees.
As the scale increases and operations and market relations become complicated, the need for control increases for effectively managing the organization. The management also has responsibilities regarding the establishment and functioning of the internal audit system.
An internal audit system must be used in a business since this system provides assurance to the management independently and impartially and increases the credibility of the business for investors and creditors.
Management that needs this system should decide how to organize internal audit activities taking into account the scale and type of operations, capital resources, and risk factors of the business. Objectives of the Internal Audit:
- To protect business assets against all kinds of internal and external risks,
- To ensure the accuracy and reliability of accounting data,
- To construct the basis of a healthy financial system,
- To prevent mistakes and misuses,
- To prevent illegal and indiscipline behaviors,
- To ensure the economical and efficient use of resources,
- To ensure achieving the targets set by the shareholders,
Possible Benefits of the Internal Audit :
- Control and traceability of revenues and cost,
- Determination and verification of profitability,
- Identification of known and unknown risky areas,
- Measurable criteria, auto control, and standard reporting system
- Auditable business structure
Possible Consequences of Lack of Control/Internal Audit Function:
- Loss of assets (money, property)
- Wrong decisions
- Misuse, fraud
- Loss of revenue
- Failure to achieve goals
How does the internal audit benefit the organization?
Internal audits provide the following economic contributions to the organization: assisting the management to identify possible risks, ensuring efficiency in business processes by evaluating the effectiveness and appropriateness of internal controls, and minimizing the losses that may be caused by risks.
What is the role of internal audit in combating fraud and corruption? Internal Audit plays an important role in the organization's fight against fraud and corruption. The 'Internal Audit', which is independent of the management, supports the management's efforts to create an organizational culture by identifying the vulnerable areas to fraud and corruption, evaluating the effectiveness of the internal control systems to reduce the risk in these areas, and advocating for ethical values.
What is a risk-oriented internal audit approach?
Risk-Oriented Internal Audit activities, which aim at efficiency, productivity, and specialization in the Business Audit, are based on determining whether the Internal Audit and risk management systems of businesses work adequately, whether they are reliable or not, and identifying their current weaknesses.
Since risk structures of businesses are closely affected, in these identification processes the following issues are controlled:
Compliance with the rules in general,
The accuracy of the information and documents submitted by the businesses and their compliance with the current regulations,
Quality of accounts and how these accounts are used.
Performing compliance audits and determining that the systems used by businesses have a reliable structure are considered an important step, and on-site audit methods are effectively applied in these areas.
The Risk-Oriented Internal Audit approach aims to ensure that audit resources are used most appropriately and effectively, that the risks of each business are managed effectively, thus, minimizing the effects of troubles.
Within the framework of its competence and independence, the internal audit function can objectively evaluate the responsibility of creating control systems for the fight against fraud and corruption.
Internal Audit and SMEs VALURA Team
Managers who are responsible for financial results in SMEs should also carry out the required controls during the quarter and/or at the end of the quarter to accurately and completely reflect the activities in the records. The data obtained from these controls should be reported to the shareholders and company management in a timely, clear, and explanatory manner.
Financial data on company activities and results should be reported quarterly, and these data should allow for making quarterly comparisons. These audits should also help company management evaluate operations and make future decisions. The said controls and financial reports should be guiding for both the shareholders and the company managers and should offer beneficial results.
In SMEs, shareholders and company managers use financial reports, other management reports, internal audit reports, etc. to monitor the results of activities. The scope and frequency of monitoring activities will vary depending on the severity of the risks being controlled and the importance of the controls that mitigate these risks.
Corrective measures regarding the deficiencies identified in the monitoring process should be implemented immediately. The shareholders and managers should be able to monitor all the primary and secondary activities of the company and make their evaluations accordingly.
The internal control system constantly expands and develops depending on the development of the activities. Another important tool used by the management during the development and evaluation of the internal control system for SMEs is the Internal Audit activities.
The existing/possible problems in the internal control system and the issues that need improvement are determined during the internal audits, and these issues together with the suggestions are reported to the shareholders and senior management.
To achieve effective internal control, companies must align their organizational structures and authorizations in the company with their activities, establish written rules within the company, establish human resources policies, ensure the reliability of accounting, budget, and reporting systems.
The fields of activity for SMEs can be listed as follows: management, production/services, stock management, sales-marketing, accounting, and financial control, internal/external purchasing, employee/payroll management, security, quality, and information systems. The principles of the internal control system are applicable to each field of activity and the whole activity.
The effective and efficient functioning of the internal control system directly depends on the fact that all levels, starting from the shareholders, know and fulfill their roles and responsibilities well. The internal control process is created by company owners, managers, and employees.
In SMEs, an effective internal control environment can be achieved when managers and employees understand their responsibilities and authorities and fulfill what is required.
Control is the process of comparing the actions taken in the business organization with the planned ones and determining the deviations, if any, and eliminating the causes of these deviations.