Internal audit services play a critical role in an entity’s corporate governance.
Corporate governance is the combined name given to policies, rules, practices and processes established by the board of authority to govern an organisation effectively, monitor their application and meet business objectives.
Internal audit has offered additional value to corporate governance by including a review of organisation processes and procedures in areas like corporate culture, how the organisation identifies and chooses to manage risks, sustainability, cyber security, business planning and geopolitical risk.
This guide will cover the basic concept of the importance of internal audit services in corporate governance.
Table of contents
What is an internal audit?
Internal audit in an organisation provides assurance that its risk management, governance and internal control processes are operating effectively
Types of internal audits
● Compliance audits
Your company must meet local laws, government regulations, external policies, or other restrictions. Internal audit is essential to ensure you comply with all these rules. Compliance audits involve reviewing, compiling appropriate data and identifying and reporting breaches.
● Financial audits
Almost every UK-based company needs financial audits once a year as mandated by the country’s regulations.
It usually is performed by an external auditor; however, companies can hire internal auditors to dive further into the external audit findings or execute a financial audit before an external auditor comes into the business.
During the audit, the professional examines your business finances to find inconsistencies and generate authentic reports on their findings.
● Operational audits
An operational audit is performed when an essential employee leaves or new management takes over the business.
Under such scenarios, the company wants to assess how things are done in business and whether resources are used more efficiently. In an operational audit, the internal auditor reviews the business processes and current staff working to ensure they fulfil the business mission statement, values and objectives.
What are the 5 C’s of internal audit?
Internal audit reports must adhere to the 5C’s reporting requirements, which includes
1. Condition: What are the problems in your business, and what is happening?
2. Cause: What was the reason behind such a condition in business?
3. Criteria: How did the auditor know about the problem?
4. Consequence: Why does such a condition matter, and what is its impact? Are the issues limited to internal affairs or have a risk of external effects? What are the financial implications of this condition?
5. Corrective action: How to resolve the condition? What can the company do to fix the issue? What steps will the management take to resolve the problem, and what type of monitoring or reviewing will occur after the solutions are implemented to ensure a fix has been implemented?
What is the role of internal audit in corporate governance?
Internal audit offers assurance by identifying and reporting on the government’s effectiveness, risk management, and internal control processes designed to strengthen an organisation’s strategic, operational, financial and compliance goals.
Internal auditors can do their best when they are unhindered by outside influences. By upholding its independence, internal audit can conduct its examinations objectively, giving management and the board a knowledgeable and unbiased appraisal of government procedures, risk management and internal controls.
Depending on the results, the auditor can suggest process improvement and monitor their execution. Professionals with a firm grasp of the importance of effective governance, a thorough understanding of business systems and processes and the fundamental desire to see their organisation succeed carry out internal auditing independently within the organisation.
Audit insights on governance, risk and control help organisations experience positive change and innovation in their working processes. It builds up organisation confidence and enables intelligent and informed decision-making. Furthermore, successful internal auditing can identify trends and bring organisations’ attention towards emerging challenges before they become a crisis.
Finally, an internal audit can add value to a business by improving governance risk, management and control processes by providing necessary advice and consulting services. Maintaining internal audits’ objectivity and avoiding conflicts of interest is essential.
When choosing the type of audience Services needed in the company, you must consider audit activities’ authority, maturity, purpose, and the company’s needs and problems.
Role of board and audit committee in corporate governance
The board’s primary role is to establish structures and processes that confine governance within the company considering the investor’s perspectives, regulators and management, among others. The board is responsible for overseeing and monitoring the company’s strategic, operational, financial and compliance risk exposure. It works with the management team to set up a risk appetite, risk tolerance and alignment with strategic objectives.
Sometimes it is mandatory for a corporate governance practice for listed companies to use audit committees to provide better oversight of publicly held companies’ financial and ethical integrity. The independent directors in the audit committee can strengthen the independence, integrity and effectiveness of audit tasks by allowing an independent overview of the internal and external audit work, accessing audit resources and maintaining good relationships with the organisation.
Additionally, these audit committees ensure the audit findings are aired, and any suggestions for improvement or corrective actions are immediately performed or resolved. Internal auditors should report formally to the management and functionally to the board or audit committee.
Internal audits play a crucial role in strengthening corporate governance through risk-based audits that offer assurance and insights on the business processes and structures that drive your company towards success. The auditor’s role expands to risk governance, culture and behaviour, and other non-financial reporting measures when the risk in business starts growing and becoming complex.
Surprisingly, an internal audit function is unnecessary for a limited company regardless of its size or whether it is listed on the London stock exchange. As per the FRC’s 2018 UK Corporate Governance Code, companies can have an internal audit on compliance or explain basis.