Internal Auditor (IA): Definition, Process, and Example
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Summary:
Internal auditors (IAs) play a crucial role in ensuring the smooth operation of businesses. This article dives deep into what internal auditors do, their importance, and the key takeaways you need to know about this profession.
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What is an internal auditor (IA)?
An internal auditor (IA) is a highly skilled professional employed by companies to provide impartial and objective assessments of financial and operational business activities, including corporate governance. They are responsible for ensuring that companies adhere to laws and regulations, follow established procedures, and operate efficiently.
Key takeaways
- Internal auditors (IAs) evaluate a company’s financial and operational activities objectively.
- They help companies maintain compliance with regulations and enhance operational efficiency.
- Final audit reports are presented to senior management and may include recommendations.
Understanding an internal auditor (IA)
The primary role of an internal auditor (IA) is to identify and rectify issues before they come to light during an external audit by an outside firm or regulatory agencies, such as the Securities and Exchange Commission (SEC). The SEC plays a vital role in regulating how companies report their financial statements, ensuring that investors have access to essential information before investing.
Internal auditing process
To achieve their objectives, internal auditors undertake a range of tasks, including:
- Assessing risks and internal controls within a company.
- Verifying that a company and its employees comply with federal and state laws and regulations.
- Offering recommendations to address issues identified during the audit.
During the auditing process, internal auditors meticulously examine financial statements, expense reports, inventory, financial data, budgeting and accounting practices, and perform risk assessments for various departments. They conduct interviews with employees, supervise work schedules, verify physical assets, and scrutinize financial statements to eliminate errors or falsehoods and identify ways to enhance productivity.
After completing the examination, internal auditors compile their findings into a formal report. This report outlines the audit’s methodology, discoveries, and, if necessary, recommendations for improvements. Typically, it is presented to senior executives within the company. If changes are suggested, internal auditors may conduct follow-up audits to assess the implementation of recommended changes.
Publicly-traded companies, especially well-managed ones, conduct internal audits to ensure compliance with federal and state regulations, including those mandated by the SEC. These companies also ensure that their accounting practices align with Generally Accepted Accounting Principles (GAAP).
Requirements for internal auditors
The Institute of Internal Auditors (IIA) is the international professional organization that sets standards, guidance, best practices, and a code of ethics for practitioners. According to the IIA, internal auditing is defined as “an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations.” It helps organizations achieve their objectives by bringing a systematic and disciplined approach to evaluating and enhancing risk management, control, and governance processes.
Internal auditor vs. external auditor
Internal auditors (IAs) and external auditors have distinct roles. The primary difference is that internal auditors work on behalf of company management, while external auditors are appointed by shareholder votes.
Internal auditors educate management and staff on how to improve the business’s functioning. In contrast, external auditors have no such obligations. They are responsible for reviewing financial statements to ensure accuracy and compliance with GAAP. Their findings are reported to shareholders, not management.
The external auditor’s role includes inspecting clients’ accounting records and expressing an opinion on whether financial statements conform to applicable accounting standards. They must assert whether financial statements are free of material misstatements, whether due to error or fraud.
For publicly-traded companies, it is legally required that all financial statements be audited by a third-party accountant, in accordance with the Securities Act of 1933 and the Securities Exchange Act of 1934.
Benefits of an internal auditor (IA)
Many companies choose to employ internal auditors, even when not legally obligated to do so. Robust internal audits are seen as essential for swiftly addressing issues, maintaining a positive reputation, and preventing financial waste. Reports filed by internal auditors (IAs) contribute to a company’s prosperity and operational efficiency. Additionally, internal auditors prepare the company for a successful annual external audit by catching and resolving issues before external auditors can do so. This proactive approach is viewed as a necessary investment by many executives.
Frequently asked questions
What qualifications are required to become an internal auditor?
To become an internal auditor, you typically need at least a bachelor’s degree in accounting, finance, or a related field. Professional certifications like the Certified Internal Auditor (CIA) or Certified Public Accountant (CPA) are often preferred or required. Additionally, strong analytical skills and attention to detail are essential for success in this role.
What is the difference between an internal auditor and an external auditor?
The main difference is their focus and who they work for. Internal auditors are employed by the company and focus on improving internal processes and ensuring compliance. External auditors, on the other hand, are independent and appointed by shareholders to verify the accuracy of financial statements and report their findings to shareholders, not management.
Do all companies employ internal auditors?
No, not all companies are required to employ internal auditors. However, many choose to do so voluntarily because robust internal audits can help identify and resolve issues quickly, maintain a good reputation, and prevent financial waste. Publicly-traded companies often have a legal obligation to conduct internal audits to ensure compliance with regulations.
What is the role of an internal auditor in risk management?
Internal auditors play a vital role in assessing and managing risks within a company. They identify potential risks, evaluate internal controls, and make recommendations to mitigate these risks. By doing so, they help the organization enhance its risk management processes.
Are there different types of internal auditors?
Yes, internal auditors can specialize in various areas, including financial auditing, operational auditing, IT auditing, and compliance auditing. These specialties focus on different aspects of a company’s operations and require specific skills and knowledge.
Can an internal auditor become an external auditor?
Yes, it is possible for an internal auditor to transition to the role of an external auditor. However, this transition may require obtaining additional certifications and gaining experience in external audit practices. The specific requirements can vary by region and employer.
How can I stay updated on changes in the field of internal auditing?
Staying informed is crucial in the field of internal auditing. You can stay updated by joining professional organizations like the Institute of Internal Auditors (IIA), attending industry conferences, participating in continuing education programs, and following reputable publications in the field.
Key takeaways
- Internal auditors play a critical role in ensuring compliance and efficiency within companies.
- They are independent professionals who provide objective assessments and recommendations.
- Employing internal auditors can help companies avoid costly issues and maintain a positive reputation.
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