Internal Audit Procedure | Various Steps involved in the Audit Process

How the Process of Internal Audit works?

Internal Audit Procedure:

The internal audit conducted in every organization is unique in its sense and nature, but the internal audit procedure used for the audits is same in most of the engagements. The Internal Audit Procedure consists of four stages namely;

  • The basic step of Planning
  • Doing the Fieldwork
  • Preparation of Audit Report
  • Follow-up Reviews

Internal Audit Procedure

What is important in all these mentioned steps is the involvement of the client company wherever and whenever possible. This article provides a detailed overview about the procedure involved in the Internal Audit Service undertaken by an Internal Auditor. Here we have also discussed the key steps involved in the above mentioned stages of Internal Audit Procedure.

Stage One- Planning

In the planning process the auditor has to follow through the below steps in order to more accurate and focused for detailed evaluation-

During the planning portion of the audit, the auditor notifies the client of the audit, discusses the scope and objectives of the examination in a formal meeting with organization management, gathers information on important processes, evaluates existing controls, and plans the remaining audit steps.

  1. Letter of Announcement: The auditor has to provide a letter of engagement or announcement for informing the client company about the commencement of the Internal Audit Procedure. It must also contain the objectives and scope of the audit and other important information.
  2. Initial Meeting: In the very first meeting or conference the company provides a detailed description about the organization’s working, processes and resources.
  3. Preliminary Survey: At this phase of the Internal Audit Procedure the auditor has to gather all the required and relevant information about the entity and its unit for getting a general viewpoint about its operations.
  4. Internal Control Review: The auditor has to review the Internal Control System in an Organization for getting a grip on the company internal structure information.
  5. Audit Program: The audit program is to be prepared outlining the necessary fieldwork to be done for achieving the objectives of the audit. With this step, the preliminary phase for review also gets concluded.

Stage Two- Fieldwork

The second stage of the Internal Audit Procedure is the fieldwork which has to be done in the following order for achieving the goals and objectives of the conducted internal audit-

  1. Testing the Transaction: the auditor performs various procedures as per the audit program for testing the propriety of the done transactions, major internal controls in the company and their accuracy. Methods such as sampling are used for this.
  2. Informal Communications and Advice: All the significant findings in the audit process are to be discussed by the auditor with the client to provide them an insight about the workings of the company. Such communications can be in oral form or even in written formats as well.
  3. Audit Summary: Once the fieldwork phase of the Internal Audit Procedure completes, the auditor has to summarize the findings of the audit along with conclusion and necessary recommendations. These are utterly important for discussion draft of the audit report.
  4. Working Papers: For the internal auditor, the working papers serve as an important and vital tool for supporting the opinions made by them in the report. Working papers can be really comprehensive due to their multiple functions.

Stage Three- Audit Report

The Internal Audit Procedure gets on its third stage when the fieldwork is completed by the auditor. It is the preparation of the audit report for which the following steps must be fulfilled by the auditor as well as the client company-

  1. Discussion Draft: The auditor has to draft a report known as Internal Audit Report after the fieldwork is concluded. The audit management reviews the working papers and the discussion draft thoroughly before presenting the same to the client. It is basically prepared for the operating management of the different units in the organization.
  2. Exit Conference: Once the management approves the discussion draft prepared during the Internal Audit Procedure, the auditor has to meet the management team of the units for which the draft was prepared. It is called the exit conference where the audit’s findings, recommendations and drafted texts are being discussed to reach on a common agreement about the findings.
  3. Formal Draft: A formal draft has to be prepared by the auditor keeping in mind all the revisions and discussions made for the discussion draft in the exit conference.
  4. Issue of Final Report: Once the auditor makes the necessary changes in the formal draft and the same has been reviewed by the management and the client company, a final report is to be issued by him. The same has to be distributed to the management, supervisor of the unit concerned, etc.
  5. Client Response: The client company for whom the Internal Audit Procedure is being performed is given an opportunity to respond to audit findings before the final report is issued in the stipulated time line. Such response has to be attached along with the final report.
  6. Comments from the Client: The client is given an opportunity to comment about the whole Internal Audit Procedure as part of evaluation.

Stage Four- Audit Follow-Up

As part of the Internal Audit Procedure, the fourth stage is to follow-up the audit after its conclusion. This is a very important point in the Internal Audit Checklist prepared by the auditor. The following is to be done under the said stage-

Within approximately one year of the final report, Internal Audit will perform a follow-up review to verify the resolution of the report findings.

  1. Follow-up Review: The audit Committee reviews the response letter of the client and considers all the actions taken by them to resolve the problems stated in the audit report.

The client response letter is reviewed and the actions taken to resolve the audit report findings may be tested to ensure that the desired results were achieved. All unresolved findings will be discussed in the follow-up report.

  1. Follow-Up Report: The Audit Committee after review has to provide thorough views on the findings that are still unresolved in the organization. This is done in the follow-up report.
  2. Providing Internal Audit Annual Report to the Board: A detailed audit report and its contents along with response of the client and the follow-up report has to be communicated to the Board of the company.

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.