Fraud and wrongdoing, including accounting errors, cost businesses $1.1 billion in penalties through the first nine months of 2019, according to the U.S. Securities and Exchange Commission (SEC). That number underscores the need for companies to periodically conduct internal audits of their financials.
An essential part of risk management, the internal audit procedure could have dire consequences if not handled properly. Therefore, accounting professionals should develop an organized, focused auditing strategy that can help them efficiently spot errors in financial data and weaknesses in legal compliance. An online Master of Accountancy program allows professionals to hone the skills to achieve that goal.
Why Internal Audits Are Important
Conducting an internal audit helps a business confirm its books are accurate and legitimate. The practice can be instrumental in uncovering fraud, financial misappropriations, noncompliance with government agencies and egregious accounting errors. These errors could produce false data that misleads investors and clients into thinking a company is more economically buoyant than it is. If left unchecked, these activities could create larger and potentially devastating issues over time. In addition to possibly facing hefty fines from government agencies, businesses could take a serious hit to their market value, customer base and reputation.
Finding fraud and errors isn’t the only reason internal audits are important. Audits can discover weaknesses in a company’s financial processes or economically wasteful activities that impact its bottom line. By catching these types of issues, internal auditors can help companies operate with a greater sense of economic efficiency, which could lead to greater profitability.
Companies may also initiate an external audit. Unlike an internal audit, which is conducted by an individual employed by the company, an external audit is performed by an independent person or group with no connection to the business. A periodic external audit may be useful because it allows an unbiased party to review a company’s financial records and processes, which could enable greater transparency. However, an external audit isn’t necessary every time the need for an audit arises.
What Are the Key Steps to an Internal Audit?
A successful internal audit procedure consists of smaller components that must be precisely executed. Collectively, these steps ensure a thorough audit that optimizes efficiency and minimizes the chance of oversight.
Preparing for the Audit
Some of the most vital steps an internal auditor can take occur before they even open a book or analyze a spreadsheet.
One of these steps is determining a consistent auditing schedule. A larger company, for example, may schedule different auditing sessions throughout the year so each session can focus on a specific department or financial element. In this case, it’s important for the auditor to work with department managers or executives to determine the optimal times for a specific segment to be audited. The level of potential financial risk a department carries may also play a role in determining these times.
Once the company has determined a schedule, it’s important to confirm the primary objective behind the audit. Confirming the objective can help narrow the audit’s focus and make the process flow more efficiently. Efficiency is especially vital if the auditor has multiple audits to conduct within a compact time frame.
Finally, the auditor must determine the various data-gathering techniques that they will utilize. This could involve software-driven tools that help access vital data stored electronically, such as payroll records or ledger spreadsheets, or surveys and interviews to get information on how a business or department handles key procedures and methodologies.
Conducting the Audit
Each step in an audit requires precision. One of the key methodologies internal auditors use to ensure accuracy involves the creation of the audit trail, a step-by-step account that traces every financial transaction back to its source. This step is critical to determining the legitimacy of a transaction, as it ensures the amount of money moved aligns with the amount reported.
Another key part of the auditing procedure is data testing. This typically entails matching transactions to their reported numbers and recalculating reported numbers to make sure they add up correctly. These methods can help the internal auditor spot smaller mishaps in an organization’s accounting, such as a good-faith miscalculation.
Additionally, internal audits can show how an organization carries out specific financial procedures. The information derived from this strategy could align with the information culled from other data-gathering methods, such as surveys or interviews, to provide a comprehensive overview of a financial process. This could potentially make it easier to spot process inefficiencies.
The Future of Internal Audits
Big data is increasingly influencing business operations and strategies, and the internal audit procedure is no exception. Data mining and predictive analytics, for example, have made an unprecedented amount of information available to internal auditors, potentially allowing them to paint a more comprehensive picture of where a company is now and where it might be heading.
These powerful tools have made it more vital than ever for internal auditors to develop strong technical skills. Having subpar tech competencies could limit an auditor’s ability to conduct the most precise audit possible and leave them unprepared for the future of accounting. Fortunately, many advanced accounting degree programs offer courses that concentrate on the development and utilization of technical skills in the context of accounting.
Discover the Benefits of an Online Master of Accountancy
Ensuring financial accuracy in a business will always be necessary. Without it, a company may experience severe or even irreparable damage. Professionals equipped to conduct a precise internal audit can play a major role in ensuring a business doesn’t have to worry about misreporting or falling out of compliance. Discover how University of North Dakota’s online Master of Accountancy program can provide the knowledge and skills needed to conduct effective and precise internal audits.