In order to understand the term ‘Internal Audit’, let’s first understand what an “Internal control system” is. Internal control system means the policies and procedures adopted by the management of an entity to assist in achieving management’s objective of ensuring orderly and efficient conduct of its business. It includes the reliability of management policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.
Internal audit is a function that constitutes a component of internal control with the objective of determining whether the internal controls are designed, managed, and operated in the best possible manner.
Assessing and managing enterprise risks have become a primary concern for CFOs, Directors, and audit committees. Stakeholders are increasingly demanding a higher degree of transparency and ethical behavior. In today’s global economy, organisations must be able to demonstrate that they have adequate controls and safeguards in place.
Consequently, organisations are introducing risk-based internal audit plans, which are designed to focus on critical areas. Managing loss potential while consciously taking acceptable risks directly enables the management to provide fair returns on investment.
As chartered accountants, we are no longer expected and are limited for hazard avoidance or compliance with Companies’ policies. There is a need to demonstrate knowledge of risk management and business process improvement, which is a characteristic of a consultant rather than a classical internal auditor. We need to provide value-added support to management across all areas of operation, such as the Purchase-to-Pay process, possibilities and limitations of the IT system being used, regulatory compliance, etc.
Potential benefits of Internal Audit include:
- Gaining access and knowledge of highly skilled and experienced professionals within the relevant field
- Timely and effective management of risk and hazards
- Managing Risk with a fresh perspective
- Added level of scrutiny and caution in the organisation
- Cost-benefit approach by reducing cost/overheads and managing the key ratios effectively
- Reducing procedural complexity and participation in developing strategies and governance process
Internal Audit is no longer considered an additional cost to organisations. In fact, due to the ease of business operations in UAE, it is crucial for the management to understand the risks and possible hazards, which are looking for an opportunity to pierce the shield of internal controls and paralyze the growth of any organisation. Stakeholders prefer to have a transparent approach by reviewing the internal audit reports submitted by experienced professionals.
Written by Nihar Kothari, Partner, Affiniax Partners