The severity of the current global economic downturn has left organizations around the world searching for ways to contain costs, improve efficiencies, maintain customer satisfaction levels and protect their balance sheets. This unprecedented economic crisis has been nothing short of an urgent call to action for more robust risk management practices in global organizations of every size and industry.
In retrospect, the role of the internal audit (IA) function may have been somewhat ignored in the economic storm. As organizations struggle, we see more of them recognizing that IA is positioned to play a critical role in helping to manage the change that must come. These organizations are looking to IA to provide assurances that existing and emerging risks are identified, monitored and managed so that they can move forward with confidence in executing their business model. This issue explores how IA can contribute to organizations as they recover from the crisis and what management and boards should expect of IA going forward.
However, let’s begin with what exactly is an IA.
Take a fresh look at the role of IA
The role of an IA is to provide independent assurance that an organization’s risk management, governance and internal control processes are operating effectively.
When done right, an IA will answer to questions like whether you have any gaps in your company policies and procedures, does you company meeting compliance goals, comply with laws and regulations and much more. Plus, it will provide you with useful insight into your organization’s culture, policies, procedures and more.
The process involves the board of directors or the board of trustees, the accounting officer or the audit committee. And the evaluation and reporting will be done to the highest level in the organization.
Let’s have a look at why IA are essential for an organization.
Why IA are essential for an organization?
Increase in productivity
The goal of IA is to add value and improve the operations of the company. Thus, it will help with strategic objectives achievements in an organization helping you with risk management, control, and other governance processes with its highly disciplined approach to evaluation.
Confidence to stakeholders
One of the main benefits of IA for a company is the confidence it can bring to your stakeholders. Internal auditors report to the highest management of the organization on significant risks that they have evaluated with necessary improvements to improve the situation thus the administration and the boards can take necessary actions to ensure the company is being managed effectively on behalf of all stakeholders.
Detection of frauds
Another important benefit of IA is it helps you uncover evidence of waste, fraud and abuse. Here you will have to be strategic of how frequent you need to do IA in each of your departments, as every department is different in nature. For example, manufacturing will need daily audits as for HR annual audits is sufficient.
IA also play a crucial role in combining assurance and consulting. Here it helps with informing the management how effective the system, processes and procedures of the company are in keeping company goal achievement on track. And it also provides advice on room for improvements to attain better efficiency.
Good corporate governance
IA are also crucial in ensuring compliance with government laws and regulations, evaluating the internal controls such as corporate governance and accounting process.
When your internal control isn’t working as intended…
Internal controls are essential to manage business operations and to ensure the accuracy of your financial records. Yet many companies struggle with maintaining an effective internal control system.
Top reasons for internal controls to fail
There can be many reasons for your internal controls to not to work. Here are the top 4 reasons for companies’ internal controls to fail.
01. Deliberate circumvention
Internal controls put limits for individual employees on what they can do. However, they can go around these limits through loopholes in your internal control system like by teaming up with other employees. To give you an example, your two employees can make fake cheques easily if one is allowed to enter cheques to the system and the other have clearance to print the cheques.
02. Incorrect judgement
Incorrect judgement on your employees’ character, skill set, competencies and loyalty to the company is one of the main reasons for internal control systems to fail. Here the main issue is management’s inability to assess employees’ character right and assign the right task for the right employee.
03. Failures to train employees
This is one of the most common reasons for company internal controls to fail. Lack of knowledge in their duties, limitations, the consequences if they overcome these limits, general practices on how to uphold internal controls can massively affect the internal management system negatively.
04. Management override
Control overrides are a common practice among organizations. And it is essential for the organization to carry out operations in certain circumstances – Like in an instance where you need to approve an invoice for AED 6000 when the person responsible for approving invoices over AED 5000 is on vacation, the other person may decide to skip certain steps in the process to approve the invoice. Although in this situation, it doesn’t affect the organization severely, it certainly affects the consistency of the internal control process.
How to assess internal control to optimize the internal control process?
Assess the control environment – Evaluating employee credentials related to performing controls is one of the best steps that you can take to optimize your internal control system. Here it would be best if you made sure employees have received adequate training and education to ensure their capability to maintain an effective control system.
Investigate control activities – The effective control system can translate to easily implementable policies and procedures. Here key control activities such as performance reviews, physical controls, informational processing controls, and segregation of duties should be taken in to account.
Examine accounting information system – Efficiency of your accounting information system affect massively to the efficiency of your internal control system. Thus, checking the operational efficiency in data entry, record generation and report generation and reviewing the speed and efficiency is essential.
Evaluate the quality – Monitoring your internal control system when it’s absolutely necessary or for an audit is not enough to maintain an effective internal control system Thus; it’s important to put processes in place to encourage the management to monitor the system continuously.
Rethink, revise and revalidate
Risk assessments are not static processes, they must be revised and revalidated to ensure they are relevant in a changing business environment.
Risk assessment is the core of every IA function. A comprehensive risk assessment process will identify the organization’s existing and emerging risks, and help determine how these risks are controlled and where gaps exist within the operations of the business.
If you don’t know where to start your internal auditing process, our experienced internal auditors at Crevaty is here to help you. Get in touch with us today for more details.