It’s easy for entrepreneurs to get caught up in the day-to-day.

Auditors may deploy a range of analysis techniques, including random testing, inventory counts, and interviews.

That’s why small businesses should perform regular internal audits. They can help you maintain compliance, identify risks, and discover opportunities for streamlining operations.

In this article, we’ll cover what an internal audit is, who performs one, and what the key components are.

What Is an Internal Audit?

Business owners commonly associate the word audit with the IRS or a labor board, and it often connotes some kind of trouble. But audit doesn’t have to be a scary word – and in the case of an internal audit, it’s something that businesses voluntarily initiate to avoid issues that could later trigger a less-welcome external audit.

It’s not just about basic risk management, either. Internal audits are a chance to methodically and objectively evaluate a company’s operations – including finances, records, policies, and controls – to target enhanced efficiency and growth.

Who Performs an Internal Audit?

Large corporations commonly have internal auditing departments staffed by specialists – often holding a Certified Internal Auditor^® designation and subject to rigorous professional standards – who advise the company’s board of directors or a similar oversight body.

The business doesn’t have an internal auditing department. That doesn’t mean that smaller enterprises – or even enterprises of one – can’t conduct an effective and insightful internal audit. Proprietors or team members in finance or office management roles may be able to work with an experienced auditor, accountant, or attorney to set up a workable procedure that can be conducted in-house.

5 Phases of an Internal Audit

The internal audit process can be divided into five fundamental stages:

1. Planning: This is when the scope and objectives of the internal audit are defined, including roles, timelines, and specific focus areas. For example, a retailer might choose to concentrate on inventory management, regulatory compliance, and working capital efficiency.
2. Risk assessment: This phase involves identifying and evaluating the specific threats and opportunities connected to each focus area. For the retailer, key risks might include fines or penalties due to noncompliance or cash crunches due to inadequate liquidity controls.
3. Fieldwork: Auditors may deploy a range of analysis techniques, including random testing, inventory counts, and employee interviews. The retailer might examine a random sample of product codes, do a complete review of HR files, and set up a cash flow dashboard.
4. Reporting: Auditors will then communicate their findings to management and other stakeholders and open an ongoing dialogue. The audit team might produce a draft report and hold a “pre-close” meeting with the company owner before issuing the final deliverable.
5. Monitoring: In this final phase, auditors and management implement needed changes and track progress over a specified time frame. The audit team might decide to hold a “post-close” meeting after six weeks to see if the company is making progress toward its goals.

5 Cs of an Internal Audit

This easy-to-remember framework can help to guide an efficient and productive internal audit process:

1. Criteria: The basis on which performance will be evaluated. For example, a retailer might use inventory turnover rate as a key metric.
2. Condition: How the actual data measures up to targets. The retailer might find its turnover rate is lower than industry benchmarks.
3. Cause: Why the issue has occurred. After conducting additional inquiries, the retailer might realize they overordered certain products.
4. Consequence: How the issue impacts the firm’s bottom line. The overordered inventory might be leading to extra storage costs.
5. Corrective action: How the firm plans to fix the problem. The retailer might decide to invest in a new inventory management system.

Plan for Success

For individualized guidance on moving your enterprise in the right direction, consult your financial institution.