Internal Audit: The Importance of an Assurance Process for Directors and Shareholders
July 17, 2014

Internal Audit: The Importance of an Assurance Process for Directors and Shareholders

internal auditHardly a week goes by without news of a high-profile corporate collapse or fraud. The public must wonder: how could this happen?

The answer is simple: a lack of corporate governance. A key factor to any organization’s corporate governance is an effective and efficient internal audit function. It aims to address the following points:

Do the systems work as expected?

Internal audits provide assurance that the internal control environment is operating effectively and efficiently and mitigates basic business risks.

Directors have a fiduciary responsibility to ensure an effective internal control environment. For nonexecutive directors, the internal audit conveys how the organization functions, and can emphasize areas of weakness.

Is the design of the system appropriate?

Most importantly, internal audits allow for a new set of eyes to review the entire business process. This will improve efficiency and effectiveness, and potentially prevent significant amounts of time and money potentially spent for system improvements in the future. An internal audit promotes and inspires an organization to think about why they do things a certain way and if an alternative approach is more effective.

The importance of an internal audit from a governance perspective has mandated the disclosure of:

  • How the internal audit is structured, functions and what role it performs.
  • If it lacks an internal audit function, and the process it employs for evaluating and continually improving the effectiveness of its risk management and internal control processes.

Despite corporate structure, business owners and directors should consider the following questions in respect of a company’s operations:

  1. Procurement: What practices do we have in place and are they functioning as planned in regard to the purchase of stocks and services? How do we know we are getting value for money?
  2. Revenue and Debtors: Are we billing our customers the correct amount? What practices do we have in place to collect our debtors efficiently?
  3. Payroll and HR: What recruitment and retention strategies do we have? How do we know there aren’t any ghost employees on the payroll? Are our employees being paid the correct amount? Are their leave balances correctly calculated?
  4. IT Access and Security: What IT security controls do we have in place to prevent unauthorized access of confidential information?
  5. Disbursements: Who authorizes the distribution of funds by check or EFT? What delegation levels are in place for the payment operating and capital expenditure? Are they being adhered to?

It’s usually unlikely for business owners and directors to be involved in the everyday operation of a business or to review all transactions. If owners and directors are too secluded from the operation to know the answer to these questions, then an internal audit can provide the assurance to satisfy their fiduciary responsibilities.

An effective internal audit function can play a crucial role in the governance of any organization and provide assurance that a company’s system is working as efficiently and effectively as possible. Contact Verdeja, De Armas & Trujillo, LLC today for more information.