Importance Of An Internal Audit

In every company an audit of internal control over financial reporting gives reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. In order to form a basis for expressing an opinion, the auditor must plan and perform the audit to obtain appropriate evidence. An internal audit is used to provide independent assurance that an organization’s risk management, governance and internal control processes are operating effectively.

The overall approach that auditors use in a financial statement audit includes:

1. Plan the audit

In this step auditor must develop an overall audit strategy and an audit plan. Before the start of the audit, the auditor meets with the appropriate staff to discuss the scope and objectives of the audit in order to know any issues or special concerns. The auditor must establish an understanding with the entity and its environment including its internal control. The auditor should ensure that the staff understands the terms of the audit and give the auditor relevant information. Certain risks also are reviewed to ensure that they are controlled and managed in an appropriate manner.

2. Obtain an understanding of the client and its environment, including internal control

In this stage, the auditor must obtain an understanding of internal control, obtain sufficient audit evidence and determining how well a unit is managing the risks identified in the planning stage, and what controls are operating to help them do this.

Examples of how auditors obtain an understanding of the client includes:

• Auditors interview managers in the company and ask them why internal control were created and if they understand the purpose of the controls.

• Auditors ask employees what is their job responsibility as well as how do they protect the company

• Auditors select a few critical operations to observe, focusing on processes that are responsible for the majority of the company

3. Assess the risks of material misstatement and design further audit procedures

In this step, the auditor will assess the risk of material misstatement due to fraud and consider whether it is appropriate to assume that their client will remain as it is. Auditor need to obtain an understanding of internal control first. A client’s corporate policies structure are assessed when planning an audit, the auditor then use their risk assessment to design the nature, timing and extent of further audit procedures.

Examples may include

• Monthly reconciliation of bank accounts

• Auditors

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