Internal Audit – Meaning, Objectives, Advantages And Disadvantages

Internal Audit – The periodic checking of the accounts of an institution or a company from time to time by its internal auditors is called Internal Audit. This implies that the accounts are examined by a person who is on the staff of the company or the institution. An internal auditor functions more like an accountant than an auditor, and many organisations have such auditors on their staff because they want that there should not be any errors or frauds in their books of accounts. An internal auditor gets a salary like any member of the staff and need not necessarily be a Chartered Accountant. The internal auditor examines only the accounts of the employer and need not submit any report.

Advantages of Internal Audit

  • Internal audit defines the policies and procedures of an enterprise and ensures that the same are adhered to in the day-to-day functioning of the enterprise. It draws the management’s attention to the discrepancies, if any, in the defined policies and procedures.
  • It helps in planning the business activities, defining the procedures so that they are profit-oriented, preparing statements with respect to tax payments and helping in the overall control of the business.
  • Because of there being a continuous checking, the prospect of any error or fraud in the books of accounts is substantially reduced.
  • Internal audit helps in the erosion of capital because the Internal Audit Department keeps a constant watch on the factors that lead to capital erosion.
  • Internal audit makes the internal control of an organisation easier and more effective.
  • It provides the necessary and useful data to standardise the functions of the organisation’s employees by underlining such functions and making suggestions from time to time so that the performance of employees is improved.

Disadvantages of Internal Audit

  • If the employees doing the internal audit are unhappy or not satisfied with the organisation’s management, or if the work-environment is not good, their services shall not be helpful
  • Internal Audit Departments can only be established in big organisations because of the cost factor. Small enterprises cannot afford to have such departments.
  • It has been observed that internal auditors might connive with the management to the detriment of the financial position of the organisation.
  • There is specified qualification laid down by law for an internal auditor. As such, the possibility exists that those appointed as internal auditors may not be qualified for the job.
  • Internal audit is not as detailed and comprehensive as statutory or external audit. The auditors are the employees of the organisation and, as such, function according to the wishes of the management.

Objectives of Internal Audit

The main object of internal audit is to maintain the working capability of accountancy. It is meant to ensure that the principles of accounting are followed adequately and reasonably and all actions are done as per the laws of accountancy. The main objectives of internal audit are:

(1) To examine the work done by employees who are responsible to maintain the accounts.

(2) To immediately detect errors or frauds in the accounts.

(3) To ensure that all actions are carried out as per the accepted principles, rules and procedures.

(4) To locate the shortcomings, if any, and take the necessary steps to set them right.

(5) To ensure that the enterprise functions smoothly and according to the stipulated plan.

(6) To keep an eye on the performance of the employees

(7) To make suggestions for improvement in the organisational structure. The Internal Auditor must ensure that

  • the internal structure of the organisation is effective to the optimum.
  • the defined management policies are being followed.
  • there is adequate protection for the assets and accounts of the organisation.
  • the expenses incurred by the concerned staff on their activities is reasonable  and fair, and
  • the accounts maintained give a fair and true picture of the state of affairs.

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