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Advantages of Internal Audit

Last Updated : 07 Apr, 2024
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What is Internal Audit?

Internal audit can be defined as the analysis and evaluation of the business operations conducted by the internal audit staff. There are many advantages of internal audit as it is very important for any enterprise. Internal auditors can be Chartered Accountants (except statutory auditor of the company), cost accountants, or other professionals decided by the Board. It is noteworthy that such audits are limited not only to the financial statements but are also used to comprehensively evaluate the managerial policies and procedures followed in the organization and make a report thereof.

According to Walter B. Meigs, “Internal auditing consists of a continuous, critical review of financial and operating activities by a staff of auditors functioning as full time salaried employees.”


Advantages of Internal Audit

1. Proper Accounting System

An accounting system is a chain of activities in an entity by which transactions are processed for maintaining financial records. In order for the shareholders of an entity to have an appropriate idea of the entity’s financial performance and position, proper channels and measures need to be put in place. Internal audit ensures that a proper accounting system is introduced by way of a continuous and comprehensive evaluation of the accounting practices being followed by the entity and properly reported to the top-level managers, who may then introduce novel and more efficient methods of recording and reporting.

2. Better Management

Internal audit is a review not only of the books of accounts but also of the management policies and practices prevalent in the organisation. As a result, it helps the policymakers to assess whether all practices in place are effective or need some modifications. In other words, internal audit helps point out the weak areas of management. Regular check on the performance of managers serves as a barometer for the overall working and progress report of the entity. Thus, management could rely on internal audits for the best results.

3. Progressive Review

Internal audit is beneficial to review the progress of a business concern. Such progress can be evaluated with the help of two types of comparisons: intra-firm and inter-firm. Intra-firm comparison entails comparing figures of previous financial years with those of the current financial year. Inter-firm comparison implies comparing the performance of similar firms in an industry. The firms left behind may then formulate policies to outshine their competitors in the long run.

4. Effective Control

Internal audit is helpful in establishing effective control over business activities by evaluating the risk management processes in the entity and whether due consideration is given to the standards put up. Control is a management function, which is related to supervision and ongoing activities. The manager concerned can then remove the difficulties in the way of smooth working of the business.

5. Assets Protection

An internal auditor keeps a close watch over all aspects of the business, particularly the assets and their sources(liabilities). As a result, under-reporting or misreporting of assets and liabilities is not possible by any chance. Thus, management can use the assets for the benefit of the business only. Assets cannot be used for private purposes by any means of deception or window-dressing. Similarly, the embezzlement of cash, misappropriation of stock and misuse of other assets is impossible in entities where proper internal audit is conducted.

6. Fixing Responsibility

Management assigns certain roles to the employees and also sets certain performance standards for them. It is important for all employees to act within their designated roles and give their best to achieve the desired results. Internal audit helps in fixing responsibility by evaluating the performance result of each and every employee, thus pointing out the employees with poor performances in a particular financial year and distinguishing them from the dedicated and hard-working employees. Once the separation is done, the shirkers/poor performers can be dealt with as per the entity’s rules.

7. Investigation

Internal audit is very beneficial in cases where any facts or truths regarding any kind of situation need to be looked for. In case of any doubt, the internal auditor can be asked to examine the facts and figures to end any source of confusion. Internal auditors reserve the right to investigate the matter in any matter. Such investigation can be made at any time at the request of management or the owner(s).

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