Types of Internal Audit and Process

The process of continuous evaluation of activities and documents of an organization by dedicated assigned staff is called Internal audit. It is an important component of corporate governance in organizations.

The main objective of an Internal audit is to guarantee to the directors, company, and investors that the actions or processes of the company are running efficiently, and in line with the applicable rules and regulations.

Internal auditors inspect and evaluate company records, plans, structures, and procedures. They examine the company’s financial accounts. Teams identify issues like compliance concerns, and risk assessments, and examine internal or external fraud.

Types of Internal Audit

There are many types of Internal Audits such as;

• Financial Audit
• Compliance Audit
• Operational Audit
• Information Technology Audit
• Environmental Audit
• Performance Audit

Financial Audit

Public companies are mandatory to conduct financial audits where an independent third party provides a view of the company's financial records by audit. Sometimes, companies want to dive further into audit findings. Many of the tests between an internal or external auditor may be parallel but the scope of individuality splits the two types of audits for financial audits.

Compliance Audit

Compliance audits are another type of internal audit. It assesses compliance with applicable laws regulatory guidelines and actions. Failure to comply with these rules or guidelines results in fines or lawsuits depending on the business sector. The result can be a big impact on an organization’s finances. A compliance audit evaluates control processes and their efficiency.

Operational Audit

An operational audit is an organized process. It examines an organization's operations that focus on competence, efficiency, and economy. It is different from financial audits, which mainly assess the precision of financial statements, operational audits inspect how an organization utilizes its funds or resources to achieve goals.

The main process of Operational Audit involves assessing internal controls, procedures, and systems to classify areas for upgrading and cost reduction.

IT Audit

The audit that inspects a company’s IT infrastructure, strategies, and processes is known as an IT audit. This is one of the important types of Internal Audit to ensure they align with the organization's purposes and fulfill applicable regulations. The IT audit process involves assessing;

• Hardware
• Software
• Networks
• Data management practices
• IT personnel
• System controls
• Backups
• Cybersecurity measures

These must be compliant with major regulations. These regulations include the (HIPAA) Health Insurance Portability and Accountability Act or (GDPR) General Data Protection Regulation. The IT audit findings assist a lot of companies in the purpose of detecting weaknesses, lessening risks, and applying best practices to guarantee robust IT operations.

Environmental Audit

Companies are becoming more environmentally sensible gradually. Environmental Audit aims to classify environmental risks and recommend actions to minimize ecological ways. This results in how a company carefully does some tasks such as;

• Sources raw materials
• Reduces greenhouse gases during production
• Uses eco-friendly distribution methods
• Condenses energy consumption
• The audit process includes gathering and examining data, reviewing facilities, and reviewing records. These inspections evaluate the organization's compliance with rules like the Environmental Protection Agency (EPA) standards or other local environmental rules.

Performance Audit

A comprehensive inspection of an organization's operations to evaluate productivity, efficiency, and economy in accomplishing its objectives is known as Performance Audit. It is one of the important types of internal audit. This audit emphasizes on consequences or results and assesses whether resources are used precisely to deliver good results.

In this audit, auditors examine procedures, systems, and internal controls that offer recommendations to develop performance and liability. Performance audits lead to improved efficiency and better placement with organizational goals.

Internal Audit Process

An internal audit normally includes four stages of operations, including planning, fieldwork, reporting, and follow-up. Let's have a look at the process below:

• Planning: This is where the internal audit team plans the Audit. They will examine industry standards and laws and provide guidance. Examine the audit results from previous years. The audit budget should be established and a timeline. Identify the process owners, and arrange a kick-off meeting.
• Fieldwork: This refers to the actual act of auditing. During this phase, the audit team will execute the audit plan. The audit team will execute the plan through interviews with key personnel, review of documents and artifacts, and testing control over time.
• Reporting: This is when the internal audit team prepares an audit report. The report must be clear and concise to avoid misinterpretation. This will encourage people to read the report and understand it. These findings should be accompanied by actionable recommendations and steps to improve the process. You will need to work with management to draft an internal audit report. After reviewing it, you will then distribute the final report.
• Follow-up: This is the last stage that is often overlooked and forgotten. Follow-up is essential to ensure that all recommendations are implemented to address identified findings. Follow-up should be done with process owners to implement the recommendations. The Board should also monitor the company's progress in addressing internal audit findings. If they don't do this, it is unlikely that an organization will follow the recommendations.

Who Conducts the Audit?

• Internal Audits – Internal Auditors are often employees of the company.
• External Audits - Typically, external auditors are CPA firms in Dubai and UAE

What is the Audit Coverage?

• Internal Audits - Internal Controls related
• Governance
• Risk Management
• Process Improvement
• External Audits - Financial reports and internal controls related to financial reporting

Why Audit is Important?

• Internal Audits: To improve governance, risk management, and control over critical processes. Information and assurance to the Board and management regarding their duties.
• External Audits: To verify or give reasonable assurance about the material accuracy of financial reports sent by an organization to its stakeholders.

Also read : What is  Continuous Internal Audit?

What Are the Results of an Audit?

Internal Audits may report at any frequency the board designs.

As you can see, there is a difference between an internal and external audit. Both are used to ensure that certain activities and controls are appropriately performed. Both internal and external audits are internally reported. External audits are sent to all employees. Each covers the same area.

Thus, we prefer to refer to an internal audit as a pre-test and external audits as the final. A Dubai, UAE company can use its internal audit results to identify weaknesses and then improve them. The results of an external audit will be made public.

Understanding an Internal Audit

Public-traded companies in Dubai and the UAE are now legally responsible for their internal controls and financial statements. Internal Audits can be relied upon by executives to reach their conclusions. Internal Audits can assist in identifying and fixing problems in internal controls. This will help protect against fraud, abuse, and compliance with regulations.

Also read: Internal Audit Checklist For Company

The Importance of Internal Audit Function in an Entity in Dubai, UAE

Internal Audit is technically a cost center in a company and does not generate any revenue. A practical internal audit function is essential for any company to survive and succeed. External auditors don't have the same capabilities as internal auditors. They go beyond financial reporting risks and look at broader issues such as an organization's reputation, its efficiency and impact on society, and how it treats its staff.

Hire a Top Audit Firm in Dubai, UAE

Hopefully, this guide has helped you to understand the role of Internal Audit better. This will help you avoid common pitfalls that fail internal audits. Top Auditors in Dubai can help you meet your compliance requirements. Reach out to us for more information.