When you hear the word audit, what comes to mind? Sharp-eyed accounting nerds digging through business records and interrogating staff? Disruption of your routine at the busiest time of year?
Although audits by external accounting firms can be time-consuming and sometimes difficult, firms often reap substantial benefits by identifying and correcting problems before outside auditors arrive.
The best companies—even those with minimal staff—incorporate some form of internal audit function as a way to improve operational efficiency, pinpoint accounting errors and make sure the business is in compliance with various industry and government regulations.
Here are several actions for conducting an effective internal audit for your business.
- Plan. If your company has recently introduced a new product line, for example, a quality control review might make sense. If you’ve experienced turnover in your accounting department or skilled staff have retired, an audit of record-keeping procedures might be warranted. List priorities—in terms of both risk and efficiency—then develop audit procedures directed toward those areas.
- Notify. Unless you suspect fraud or unethical conduct, it’s acceptable to give advance notice to department managers of an upcoming internal audit. Letting staff know about an upcoming review provides time to pull together relevant documents and ensure that workers are available for interviews.
- Prepare. Before conducting the actual audit, re-examine the company’s policies and procedures for each area to be reviewed. If new regulations have been issued, read those as well. Again, focus on risk. Ask the following questions:
- If these procedures are not followed, what’s the worst case scenario? Will non-compliance lead to customer complaints, a damaged reputation or lawsuits?
- Is every company rule or procedure necessary? Some procedures may be outdated and irrelevant, while others may diminish productivity.
- Which interview questions will best highlight an employee’s understanding and competence? In some cases, your review might identify a need for additional training.
- Perform. If departments have assembled relevant documents and the audit team doesn’t discover major problems, completing the actual review shouldn’t significantly disrupt operations. That said, internal audit schedules should contain enough wiggle room to adapt to unforeseen issues.
- Document. For each internal audit, prepare a brief report that clearly discloses findings and makes practical recommendations. Ensure that each solution adds value by mitigating risk, increasing operational efficiency, or improving data accuracy.
- Repeat. Some parts of your business may benefit from more frequent audits. Some segments may need only annual reviews, while others may benefit from an internal audit when warranted by changing conditions such as opening a new location or complying with recently-issued regulations.
A well-planned internal audit can pay huge dividends in operational efficiency and risk mitigation. It’s also a great tool for identifying and correcting problems before external auditors come knocking.