Introduction:
Many people believe that Internal Audit is only required in larger, more complex entities and that the cost/benefit of an Internal Audit function would just not be there for them. However this can be a very short sighted conclusion, especially when you consider the high volume of transactions and the regulatory compliance issues. I believe that the Management of these entities should take a closer look at three important factors with respect to risk management and internal controls before dismissing the need for internal audit: Management’s responsibility for internal control, the role of Internal Audit in fulfilling that responsibility and the benefits of Internal Audit.
Benefits of Internal Audit:
(1) Internal Audit serves as an ‘Early Warning System’.
A regular and thorough Internal Audit function serves as an Early Warning System for the organization, which could be a very useful tool for the Management.
(2) Identification of weakness in controls established in an organization.
In any organization, Internal Controls serve as the ‘First Line of Defense’ against fraud and violation of laws, Regulations and Provisions of Contracts and Agreements.
(3) Improves the ‘Control Environment’ of the organization.
With the help of Internal Audit function the management can establish control over every activity which is being done in the organization and hence it will improve the overall Control Environment of the organization.
(4) Makes the organization ‘Process Dependent instead of Person Dependent’.
In the absence of Internal Audit function the organizations are generally Person Dependent and they do not understand the benefits of getting Process Dependent instead of Person Dependent.
(5) Identifies redundancies in the system
The Internal Audit function identifies the redundancies in the operational and control procedures and provides recommendations to improve the efficiency and effectiveness of the procedures.
(6) Increases Accountability
The Internal Audit Function focuses Internal Controls which ultimately improves the accountability within the organization.
(7) Report submitted to the Management
If process deficiencies, irregularities and violation of laws, regulations etc. is brought to the knowledge of the Management in a timely manner, the management can take the necessary corrective action to avoid any major financial loss to the organization.
(8) Cost Effective
The Internal Audit function can be easily outsourced to Professional Audit firms and there is no need for an organization to hire an entire inhouse Internal Audit Department. And hence the Independence of the Audit observations can also be assured.
Conclusion:
With the above mentioned benefits the Management will be well served with the Risk Assessment Process and in ensuring the responsibility for maintaining a system of Internal Control within the organization.
CA Alok Kumar
Date: July 13, 2020