A Quick Guide to Internal Audit Process

Investing time and resources to get an external audit without undergoing an internal audit hint that the organization is operating with a false sense of security. There are chances of oversights, blind spots, and increased exposure to risks. These could be data breaches, misrepresentation of financial reports, compliance penalties, tarnished public perception, etc.

Internal audit processes are the ultimate way to test external-audit preparedness, manage risks, ace compliance management, and improve operations.

This blog is a comprehensive guide for you to get the internal audit process right on the first attempt. Learn what the internal audit process is, why is it important, how to perform one, and who is responsible for it.

What is the internal audit process?

Internal audit process thoroughly evaluate an organization’s internal controls and corporate governance processes. It points out information security and privacy risks and checks if enough controls, policies, and procedures are in place to thwart illegal activity.  

Usually, it happens in a five-phase process, including scoping, planning, assessment, reporting, and remediation.

Now, let’s take a closer look at why your company may need to perform internal audits regularly.

Why do organizations need to perform internal audits?

Organizations need to perform internal audit because they give visibility on control effectiveness, validate the progress and ensure continuous improvement. Going straight for an external audit without performing an internal audit would mean additional audit time and costs, dangers of non-compliance and missed opportunities for growth and enhancement.

Here’s why businesses must perform internal audit:

Helps ensure strategic alignment

Internal audits help make sure that policies and controls implemented are as planned and have no gaps in them. They give an objective insight into organizational trajectory by bringing both thriving and faltering areas into notice. This helps understand opportunities for growth and upcoming challenges.

Proactively identifies potential risks

Internal audits are often seen as a part of risk management plan as they involve revisiting processes, people, documents, and controls to identify vulnerable areas. Risks are identified before they become potential hazards saving time and resources that would have otherwise been spent in firefighting.

Identifying vulnerabilities and addressing gaps is one of the primary components of a security program. Sprinto offers full-fledged compliance security, all in real-time, all from a single dashboard. Get in touch to learn more.

Uncovers compliance gaps

Internal audit require examining any deviations from compliance requirements. This expedites the initiation of corrective action that may be required and improves the organization’s readiness for certification processes. It also results in external auditors spending less time moving back and forth requesting remediation.

Litmus test for internal control effectiveness

Internal audits help test whether the internal controls are working as intended and are effective in protecting against potential threats. It assures the organization that its security muscle is well-trained and helps build trust in the eyes of stakeholders and customers.

Ensures Continuous refinement

Security and compliance are ongoing endeavours. Internal audits help the organization stay vigilant and ensure improvement on an ongoing basis. Well incorporated feedback from internal audits can help the organization adapt to the emerging threat landscape and respond effectively.

Frameworks like ISO 27001 require organizations to plan and implement internal audits at frequent intervals for its own security and continuous improvement.

Where do internal audits and compliance meet?

Internal audit provide a peek into an organization’s culture, policies, and processes. They aid board and management oversight by checking internal controls like operational effectiveness, risk management, and compliance with laws or regulations.

Compliance, on the other hand, involves adhering to obligations derived from applicable laws, regulations, contractual commitments, industry standards, and corporate commitments, policies, and procedures.

Let’s consider the dynamics with the compliance team and without them:

With a compliance team: This centralizes all activities. Compliance teams, closely aligned with other divisions, take charge of achieving compliance. They may work independently without external assistance.

Without a compliance team: Process heads have to step in to lead and report on actions. As an internal audit is a part of the compliance process, it helps to identify non-conformities and fix them before an external audit. Hence, when used together, compliance and internal audits are more effective. That includes coordination of risk assessment efforts and joint planning, coordinated reporting to the board and the management, and shared involvement in compliance-related task forces, committees, and other working groups.

Types of internal audits

The different types of internal audits are financial, operational, compliance, IT, investigative, integrated and environmental. Each of these types have their own purpose and relevance depending on the nature of organization.

Here are the 8 types of internal audit:

1. Compliance audit

A compliance audit is a comprehensive review of an organization’s adherence to external regulations, internal policies, and industry standards. The purpose of the audit is to ensure that the current protocols, documentation, and controls are sufficient to meet the compliance requirements.

2. Penetration audit

In this type of information security audit, a tester simulates an attack from inside an application’s firewall.

Unlike compliance audits, penetration tests mimic real-world attacks to find vulnerabilities that could be exploited. Although they’re pricier and take more time, they provide a thorough assessment of an organization’s security posture.

3. Risk assessment audit

Risk assessment audits concentrate on spotting potential threats and gauging how likely they are to happen. While they’re good at finding possible security issues, they might not capture the full security picture of an organization. Risk assessments tend to take more time and cost more compared to other types of audits.

IT audit is a rigorous evaluation of an organization’s IT ecosystem including policies, processes, controls and systems. During the audit, the capabilities of the entire IT architecture are examined for maintaining the confidentiality, integrity and availability of the organization’s information assets.

4. Investigative audit

This is a special type of audit that is only carried out when situations like fraud, misconduct, complaints etc. arise. Investigative techniques are applied to find out the truth about the allegations and the impact of the situation. This is then followed by corrective actions and recommendations. (also check for limitations of internal controls in audit)

5. Performance audit

Performance audit measures the performance of the organization against the set performance benchmarks. It evaluates the effectiveness of invested resources, set practices and the current processes in achieving better results for the organization.

6. Integrated audit

An integrated audit is the combination of two or more types of audits for a consolidated and unified review. For example, a compliance audit may be combined with an IT audit to examine the strength of internal controls from both security and compliance point of view.

7. Environmental audit

Environmental audits look into the direct and indirect impact of organization’s activities on the environment. This could include checking the waste generation, disposal methods for hazardous materials, habitat destruction, polluting activities etc.

How to conduct an internal audit process?

The internal audit process is conducted in 5 phases: selection, planning, conducting fieldwork, reporting and monitoring. It begins with picking out the area that requires internal audit followed by checklists, preparations and investigations. The final report includes recommendations and there’s surveillance for conforming feedback adaptation.

Here are the 5 steps to conduct an internal audit:

1. Choose what to audit

Decide which department, area, or process to audit—like finance, compliance, or IT. Consider factors such as:

• Critical areas for organizational growth
• Problematic areas limiting scaling opportunities
• High-risk potential areas
• Compliance requirements
• Any other critical needs of the organization

Also, ask these questions to decide why the audit project got approved:

• How does this project help the organization reach its goals?
• What risks does the audit tackle?
• What’s the overall audit schedule, and where does this project fit in?

2. Planning and preparation

Under the planning phase, the attention is directed at laying the foundations for future fieldwork. This stage acts as a manual on how to assess the internal processes in an exhaustive manner and determine action points. The key components of this phase involve:

• Clarifying the scope of internal audit
• The setting of standards that will be used to measure the performance audit
• State clearly what you intend to achieve through the audit and indicate target areas
• Deciding the external standards or regulations that will act as a guide in evaluating
• Develop a schedule for the audit and determine how frequently it will be performed
• Determining the steps and procedures to be followed in carrying out the audit
• Determining the duties and functions of every participant participating in an audit process

3. Create an audit checklist

The next step involves creating an audit checklist based on the defined audit scope. This checklist outlines tasks to be performed and questions to be addressed during the audit. 

Examples of questions that may be included include adherence to documented protocols, the effectiveness of internal controls in ensuring asset confidentiality, integrity, and availability, evidence of operational effectiveness, identification of non-compliant areas, and evaluation of resource allocation.

4. Notify relevant departments

The second significant initiative for proper planning and implementation is informing the concerned departments and employees of an approaching audit.

This should be given to them with enough notice to give them a lot of time to collect the needed evidence and documents necessary during an audit.

5. Fieldwork

The fieldwork phase is the focus of investigation and testing to identify weaknesses within the system. This phase includes:

• On-site Examination

The on-site examination includes physical inspections, observing processes, reviewing documents and policies, and testing internal controls. The process involves thorough data analysis, and the gathered information becomes key findings in the final report.

• Employee Interviews

Conducting interviews with employees gives you deeper insights into several aspects. Hence, knowing the level of personnel understanding of policies, identifying gaps in policy implementation, pinpointing areas in need of better employee training, and assessing adherence to policies and standards are key considerations during employee interviews. 

6. Reporting and recommendations

In most cases, the internal audit program is charted in a way that provides an outline of the objectives. After that, the report presents some crucial observations and findings highlighting some potential risk areas in the organization.

Also, the report offers helpful suggestions and recommendations for improvement. This stage is essential for issue identification and providing recommendations that can improve the proficiency of internal processes

7. Surveillance for feedback incorporation

The next step involves surveillance for feedback incorporation, which serves as a follow-up to verify the accomplishment of desired objectives. 

Your company should ensure that the recommendations outlined in the report have been implemented through surveillance and monitoring. 

This ongoing oversight fosters a culture of perpetual vigilance, where the organization remains attentive to improvements and responsive to feedback, ultimately striving for continuous enhancement of business operations.

Find out what is the audit process for SOC 2

What should you do post-internal audit?

Following the completion of an internal audit, you need to deal with any identified gaps immediately. To stay organized after the audit, create an efficient corrective action and monitoring plan. This post-audit plan will include the internal audit findings, their priority, current status, corrective action, completion schedule, and the party responsible.

However, you need to hold a follow-up audit after the first one to increase the chances of success in external auditing.

After the internal audit, here’s a simple checklist you can follow:

• Auditors meeting: Invite the internal audit team to talk about the nonconformances or missed aspects
• Timely audit report: Get the audit report
• Encourage corrective actions: Motivate the employees to correct the identified mistakes
• Guidance on corrective actions: Get advice on the corrective actions and make realistic timelines

How to automate an internal audit?

At Sprinto, conducting an internal audit is very simple. You will be assigned an infosec officer to complete this process. All you need to do is upload evidence to the dashboard showing how active your controls are.

Hence, before initiating the procedure, ensure you have the necessary role as an Infosec officer on Sprinto. Also, make sure you are logged in as an administrator on Sprinto.

Procedure:

• Login to Sprinto Dashboard
• Go to “Security Hub” and then navigate to “Reviews”. 
• Click on “Internal Audit”
• Click on “Run” process
• Choose the date for the evidence record
• To upload the internal audit report from your computer, click on Upload Evidence

For more details on the procedure, get in touch us our compliance experts.

Here is a video that dives deeper into this:

What is the difference between internal and external audit?

An internal audit is a self-examination of an organization’s internal controls and processes by its own employees for identifying improvement areas and enhancing performance.

External audit is an independent and objective assessment of an organization’s systems, processes, controls, and documents by an external auditor to ensure conformity with applicable regulations.

They both align in purpose when it comes to ensuring the accuracy of financial reporting, robustness of internal controls and compliance with regulations. But there are other considerable differences worth noting.

Here’s how internal audits and external audits differ:

Basis	Internal audit	External audit
Who conducts it?	Internal auditors who are also employees of the organization	External auditors who are independent third-parties
Auditor selection	The management can choose the internal auditors based on expertise and experience.	The management can select an audit firm but not decide the members
Focus	The focus is on reviewing the current policies, processes and controls for operational efficiency and preparing for external audits	The focus is on evaluating the strength of internal controls in meeting the compliance requirements
Objective	Improving internal practices and controls	Meeting reporting requirements of regulatory bodies
Mandated by law	No	Yes
Formal opinion	Internal audits may not result in formal opinion	A formal opinion is given in external audits
Report use case	Management	Stakeholders and regulatory bodies
Period	Could be conducted on an ongoing basis or frequently	These are conducted annually in most cases

What are the 5 C’S of the internal audit process?

The 5 C’s of the internal audit process are criteria, condition, cause, consequence and corrective action. They dictate the requirements of internal audit reports and are crucial in answering all the what, why and how.

Here’s what each of them lays out:

1. Criteria

Criteria refers to the standard or the basis for internal audit. It answers the following question: What is the benchmark against which the performance evaluation will take place? Details on the purpose of conducting the audit and the party who requested the audit are also specified under the criteria.

2. Condition

Condition pinpoints the current state of affairs in the organization that demand an internal audit. The auditor will evaluate the conditions with respect to the set criteria to provide insights on where the organization falls short and where it meets the criteria without fail.

3. Cause

Cause highlights the underlying source of the conditions. What led to the deficiencies or non-adherence in the first place, it aims to answer. Identification of the cause is critical for eliminating the core issue and solving at a deeper level.

4. Consequence

Consequences are the current repercussions or possible implications of the identified conditions. These could be financial, operational, reputational, legal or environmental consequences. The severity of these conditions is then analyzed for prioritizing and deciding the future course of action.

5. Corrective action

Corrective actions are the recommendations for solving the underlying issues. It talks about the collective efforts that will be required from people, processes and technology to remediate the prevailing conditions and meet the set criteria.

Who performs Internal audit?

Internal audits are performed by Internal auditors. Internal auditors are skilled professionals hired by organizations to provide an unbiased view of organization’s current controls and highlight areas of improvements.

The internal auditor is a part of the internal audit department which is answerable to the Board of Directors or Audit Committee.

Acing internal audits with Sprinto

A meticulously planned and executed internal audit can be a great tool for risk management, ensuring continuous compliance and improving operations. But it can be difficult to manage the detailed steps involved along with everyday business challenges.

Sprinto, with its ready compliance checklists, automated checks for risk assessment, quick remediation and evidence collection ensures continuous internal auditing. There’s real-time visibility of security status which can also be shared with the stakeholders when required. Security compliance internal audits take only a few hours a week with Sprinto.

Hear it from our auditor network–how Sprinto makes the audit process easier

Our super-professional and responsive team will help you get started. Talk to them today.

FAQs

What are some challenges faced by organizations in conducting internal audits?

Some challenges faced by organizations in conducting internal audits include lack of expertise, difficulty in determining scope, budgetary constraints, implementation of feedback and keeping the audits unbiased and independent.

How often should internal audits be conducted?

For high-risk industries and organizations handling large-scale operations, internal audits should be frequent ie. every quarter or in 6 months. For small-scale organizations these can be done annually.

What are some audit techniques used in the internal audit process?

Audit techniques used in the internal audit process include inspection, observation, documentation review, testing of internal security controls, analytical procedures, inquiry and interviewing of employees.