The Need for Internal Audits for Small Businesses

Internal audit is important for the success of any organization. Regardless of the type or size of your business, internal audits can benefit your business in many ways.

Carrying out regular  internal audits will help identify risks in your company. In addition, it will also help monitor threats and leverage synergies to improve the overall profitability and efficiency of your company.

What Exactly Are Internal Audits?

Internal audits are an activity of inspecting accounting information. The action involves performing an objective evaluation of the company’s financial reports, ledgers, and bookkeeping entries. The objectives of an internal audit may vary from one organization to another:

• Ensuring compliance with accounting standards and regulations
• Identifying risks and threats
• Evaluating risk control strategies
• Improving governance processes

Internal audits are necessary to ensure that the company’s financial reports are accurate. It allows the management and other stakeholders to know that the ledger entries, the profit and loss statement, the balance sheet, and the cash flow statement present an accurate financial position of the company.

Scope of Internal Audits

Small businesses hire an internal auditor to perform internal audits. The internal auditor reports to the company owner or the manager.

Larger organizations generally hire a team for internal auditing. The auditors report to the audit committee which typically consists of the directors. Some large firms also contract the internal auditing task to a third-party firm. The auditing firms carry out an audit with a team of certified internal auditors (CIA) or certified public accountants (CPAs).

Businesses carry out internal audits with different scopes. Internal audits are carried out to know whether the best accounting practices have been followed in making accounting entries.

Internal audit lets business owners and managers know if the business operations are efficient. Moreover, it helpsreduce the risk of fraud and theft of company resources.

Benefits of Internal Audits

Internal audits are carried out for different reasons. Here are some of the main responsibilities of the internal auditor.

1. Identifying Risks

The foremost reason for carrying out an internal audit is to identify the risks inherent to a company. An internal audit helps indicate to the management of a company about the risks of online attacks, theft, fraud, and more. The results of the internal audit allows companies to develop a good governance framework in order to reduce the risk of fraud.

Internal audits allow businesses to implement checks and balances. It reduces the chances of misappropriation of company funds for personal benefit. The internal audit team can identify weaknesses within the existing system that increases the chances of tampering with checks, wrongful allocation of funds, and inflated vendor payments.

With a proper internal audit, businesses can reduce the risk of cash theft that cost companies millions of dollars each year. It allows business owners and managers to create a risk control policy to reduce the chances of theft and misappropriation of funds. You can create a policy of monitoring the activities of staff and preventing them from misusing company resources.

2. Compliance

Internal auditing also ensures that your company’s bookkeeping and accounting comply with local laws and standards. It involves examining all accounting entries to make sure that they follow the generally accepted accounting principles (GAAP).

Carrying out internal audits ensures reliable governance that conforms with legal and ethical obligations. The audits ensure that the company’s operations comply with the relevant regulations regarding the record of financial transactions. With an internal audit, you avoid paying fines for nonconformance to rules and regulations. An internal audit also helps prepare for the mandatory external auditing that is required for registered businesses.

Internal audits also help a company to ensure that its operations comply with the relevant accounting and related standards. As an example, an internal auditor will check the company’s operations to ensure that they comply with the standards for information security such as ISO 27001 and NIST 800-53.

Carrying out internal audits helps ensure that the organization won’t have to pay a fine due to non-compliance with statutory requirements. For instance, the audit will allow the company management to know that the operations of the company comply with the California Consumer Privacy Act (CCPA) or the General Data Protection Regulation (GDPR).

3. Gain the Trust of Stakeholders

Ensuring compliance with accounting laws and regulations also helps gain the trust of stakeholders. Creditors and investors would want to know if the company’s accounting records represent an accurate picture of the financial position of the company.

4. Assess Internal Controls

Internal audits also help company owners to carry out internal risk control assessments. The risk control strategies help company owners and managers to assess the effectiveness of operational strategies. It lets them evaluate the efficiency of internal operations.

Internal audits allow business owners to determine if the company’s cost control policies are effective. This helps the management in improving the control environment of the organization.

An internal audit involves an objective review of the company’s internal control policies and procedures. It involves reviewing the policies to ensure that they help mitigate threats.

Internal auditing also allows monitoring of the control processes. This allows the management to know about the operational gaps that can be plugged into to improve the overall efficiency of the company’s operations.

5. Gain Insight into Company Operations

Internal audits involve a comprehensive and detailed analysis of the company’s operations. It allows the management to know whether the asset protection and risk mitigation strategies can effectively reduce the risks.

The senior management can know about prioritizing and identifying risks. They can also know about strategies to mitigate the risks inherent to the organization. Internal auditors using governance, risk, and compliance (GRC) can help the management to monitor and prioritize risks and also keep track of any changes to ensure compliance.

6. Enhance Operational Efficiency

Regular internal audits help in improving the operational resiliency of a company. It allows the company to know about ways to improve operational efficiencies. The management can know about opportunities to cut costs and boost profitability.

Optimizing internal operations helps businesses gain competitive advantages. It allows them to boost profitability without raising the prices.

Conclusion

Internal auditors examine your company’s operations to ensure that they comply with relevant rules and regulations. They also examine the accounting records to identify errors in recording financial transactions.

Maxim Liberty is a premium outsourced bookkeeping provider. Hiring accounting services from an external bookkeeper helps improve the efficiency of recording accounting data. Our experienced accountants can make sure that the transactions are recorded in compliance with relevant standards and regulations.