In the internal audit, there are two options that you can choose from. Outsourcing and Insourcing Internal Audit (outsourcing is the most recommended).
Outsourcing Internal Audit means hiring independent auditors for internal audit process while insourcing internal auditing means hiring your staff to work on an audit (basically because of their expertise)
This is how an Internal Audit Process works.
Internal Audit Process
Even though every audit project is unique, they all have a similar internal audit process.
1- Announcement Letter
An announcement letter is sent to the client of the audit from the Internal Audit Director informing him of the audit extend, objectives and the auditors assigned for the project.
It may contain other information regarding the audit.
2- Initial Meeting
In this opening meeting, the client states the unit to be reviewed and also areas of special concern that need to be handled carefully.
The auditors work hand in hand with the senior officer of the unit to be reviewed together with the staff members of that unit (if he wishes to include them)
In this stage, the auditor gathers and reviews all relevant information regarding the unit.
4- Internal Control Review
The auditor reviews thoroughly the internal control structure of the unit.
This helps the auditor identify the areas of high risk and conduct tests in the fieldwork section.
5- Audit Program
This outlines the fieldwork needed to achieve the audit’s objectives.
The main area that the fieldwork concentrates is on the transaction testing and informal communication.
In this level, the auditor determines whether the internal controls are working correctly compared to the description of the client.
The auditor also lists the significant findings in the fieldwork to prepare an audit report draft.
7- Transaction Testing
Once done with the preliminary review, the auditor proceeds to the procedures in the audit program.
The procedures focus on major internal controls and transactions.
8- Advice and Informal Communications
In this field, the auditor discusses with the client on significant findings with the client. The client can work with the auditor on how to go by when solving the findings.
The communications may be oral or written (memos ore emails0.
9- Audit Summary
After the fieldwork is complete, the auditor summarizes the findings, conclusions, and recommendations for the audit report discussion draft.
10- Discussion Draft
The audit management reviews the audit working papers (documents containing records of the audit evidence obtained from financial statements auditing, internal management auditing, information systems auditing, and other investigations) and the discussion draft before submitting it to the client for comment.
The discussion is prepared the unit’s management and submitted to the client for review before the exit conference.
11- Exit Conference
A discussion is held between the internal auditors and the unit management on the findings, recommendations, and text of the draft after the audit draft is approved by the audit management.
The draft is commented on by the client in this meeting.
12- Formal Draft
Any revision resulting from all the discussions is taken to account when preparing this draft. When the changes are approved by the audit management and the client, the final report is issued.
13- Final Report
The final report is printed by the internal audit and distributed to the management body.
14- Audit Follow-up
This is carried out after a period of one year after the final report is issued. This is done to know whether the resolutions were of help regarding the reporting findings.
15- Follow-up Report
This includes all the actions that the client has taken to resolve the findings on the original report. All unresolved findings are also discussed.
All this process requires a team effort and collaboration for it to be successful. Now that you know the internal audit process, here are the pros and cons of internal audit outsourcing services.
Pros and Cons of Outsourcing Internal Audit
Pros of Outsourcing Internal Audit
1- Internal Audit Compliance
This is the major advantage of outsourcing internal audit for it gives an in-depth analysis of the processes and operations, and their compliance with the law’s set the standard.
It gives a better judgment on errors in the process sector that may affect the quality of a product
2- Benchmark Establishment
Outsourced internal auditors create new reference points and standards or may modify the existing benchmarks and standards for a better performance.
The outsourced internal auditors have better knowledge compared to internal auditors. They are capable of finding issues and solutions which the internal auditors may not identify.
4- Unbiased Report
The outsourced internal auditors give unbiased reports which consist of new ideas and proposals for best performance.
Cons of Outsourcing Internal Audit
Outsourced Internal Auditing might be unaffordable for small companies for they are very expensive to maintain.
The outsourced internal auditors might have a higher knowledge of auditing but they don’t have any experience with the organization they are auditing. They might end up giving a misleading audit report.
Every organization/company has its secret about its processes. You have to face the risk of sharing this secret and in order to minimize the risk, you might find an audit management that understands the importance of keeping the procedure of processes a secret.
Outsourced internal auditing is not a good fit for small business which only handles small transactions.
5- Audit Report
The company might get audit reports of poor quality (with no much help to the company) if the company uses the same firm to carry out internal and external auditing.
External auditing does come in handy in evaluating your company thoroughly on the special areas of concern to make sure it’s at its best performance for you get quality audit reports and wise opinions on how to resolve the findings in the audit.
“If you want more professionalism in your audits, take the outsourced one. Compared to the internal audit, it is better. You may still go with the internal audit if your company is few and deals with few transactions.”