Regular Internal Audit to Improve Profitability

In the previous article we had demonstrated how having effective controls in for of Standard Operating Procedures (SOPs) help in controlling frauds and reducing losses.

Once the effective controls are implemented in the business same has to be monitored through Internal Audits. Internal Audits are independent, objective consulting activities designed to evaluate and improve the effectiveness of risk management, control and governance processes of an organization. The auditors analyse the data and business processes of the organization and give insights to the management regarding smooth functioning of the organization.

The scope of internal auditing within an organization is broad and may involve topics such as effectiveness of operations (including safeguarding of assets), the reliability of financial and management reporting, and compliance with laws and regulations. Internal auditing may also involve conducting proactive fraud audits to identify potentially fraudulent acts; participating in fraud investigations under the direction of fraud investigation professionals, and conducting post investigation fraud audits to identify control breakdowns and establish financial loss.

The internal audits should cover all the cycles of the business like

  • Revenue Cycle
  • Purchase/Expenditure Cycle
  • Payroll Cycle
  • Inventory Cycle
  • Treasury Cycle
  • Fixed Assets Cycle

It is advisable to have external team/agency conducting internal audit to which objective of the audit has to be detailed. These objectives could include audit of following of the SOPs, quality of raw materials, quality of finished goods etc.

The management must take the internal audit report seriously as it can uncover frauds and help in plugging the potential losses for the company. If it is found that SOPs and control mechanisms are not being followed then the management can take steps to ensure that the procedures are followed. This will lead to increased profitability for the organization.

As shown above Internal Audits are not just statutory requirements; they can also help in preventin frauds and improving the profitability of the organization. It is highly recommended to conduct regular Internal Audits of the organization – atleast once a year so that any slack in the processes can be found and corrected.