What Is an Internal Auditor (IA)?
An internal auditor (IA) is a highly trained professional employed by companies to provide independent and objective evaluations of financial and operational business activities, including corporate governance. Their key responsibility is to ensure companies comply with laws and regulations, follow proper procedures, and optimize operational efficiency.
Key Takeaways
- Objective Evaluation: An IA provides objective reviews of a company’s financial and operational business activities.
- Efficiency & Compliance: They ensure the company follows proper procedures and operates efficiently.
- Reporting: Findings are presented to senior management, often with actionable recommendations.
Understanding the Role of an Internal Auditor
The main duty of an internal auditor is to identify issues and recommend corrective actions before these problems are discovered by external audits. This preemptive approach minimizes regulatory risks and enhances operational efficiency.
Core Responsibilities:
- Risk Assessment: Evaluate risks and internal controls within the business.
- Compliance Verification: Ensure adherence to federal and state laws and regulations.
- Recommendations: Provide actionable suggestions for rectifying discovered issues or audit failures.
The Internal Auditing Process
Internal auditors undertake a multitude of comprehensive tasks, such as analyzing financial statements, reviewing expense reports, inventory checks, budget analysis, accounting inspections, and performing risk assessments for each department. This process often involves:
- Detailed Documentation: Take notes and compile detailed reports.
- Interviews: Conduct interviews with employees to gather insights.
- Supervision: Oversee work schedules and tasks.
- Verification: Authenticate physical assets and financial records to ensure accuracy and detect potential errors.
Upon completing their review, internal auditors present their findings in a formal report to senior executives. The audit report includes the audit process, discoveries, and collaborative recommendations. If changes are advised, a follow-up audit may be conducted.
Effective Internal Audits for Public Companies
Publically traded companies routinely perform internal audits to validate compliance with federal and state regulations and ensure their accounting practices align with Generally Accepted Accounting Principles (GAAP).
Requirements for Internal Auditors
The Institute of Internal Auditors (IIA), founded in 1941, sets the global standards, offers guidance, and establishes ethical benchmarks for internal auditors. According to the IIA, internal auditing is an independent, objective assurance and consulting activity aimed at adding value and improving an organization’s operations. It adopts a systematic and disciplined approach to enhance risk management, control, and governance processes.
Internal Auditor vs. External Auditor
It’s crucial to differentiate internal auditors from external auditors:
- Internal Auditors: Employed by company management to improve business efficiency and compliance, offering internal educational insights.
- External Auditors: Appointed by shareholders to verify financial statement accuracy according to GAAP or International Financial Reporting Standards (IFRS). External audits are indispensable for public companies to fulfill statutory obligations.
The Benefits of Employing an Internal Auditor
Many companies voluntarily choose to employ internal auditors even when not legally mandated. Internal audits present several significant benefits:
- Quick Issue Resolution: Identify and rectify issues swiftly.
- Reputation Management: Maintain and enhance company reputation.
- Operational Efficiency: Prevent money wastage by ensuring operational efficiency.
- Preparatory Insights: Ready the company for more efficient and compliant external audits.
Internal auditors serve as an essential expense that pays dividends by ensuring operational excellence and regulatory adherence.
Related Terms: External Auditor, Risk Assessment, Corporate Governance, Compliance.
References
- Institute of Internal Auditors. “About the IIA”.
- Association of Certified Fraud Examiners. “External Auditor”.
- Government Publishing Office. “Securities Exchange Act of 1934”, Page 91.
- Government Publishing Office. “Securities Act of 1933”, Page 72.
- Securities and Exchange Commission. “All About Auditors: What Investors Need to Know”.
