Formal examination of organization’s records, procedures and activities by an internal auditor.
An audit is a formal examination of an organisation’s records, procedures and activities, resulting in a report containing the findings. As a systematic and disciplined approach to evaluate and improve the effectiveness of risk management, control and processes, an internal audit helps an organisation accomplish its objectives.1 Internal audits are carried out by the designated internal auditor and are ideally based on an audit checklist that contains a list of tasks that need to be completed when performing an audit.2,3,4
PURPOSE & LINK TO INTEGRITY
Internal audits increase the organisation’s credibility and are a crucial instrument to demonstrate transparency and accountability.5 Being based on sampling, an internal audit is not designed to provide absolute assurance to detect errors or – worse – fraud. However, these checks are an established preventive tool against fraud in organisations. They also play a pivotal role in preventing corruption.1 By enhancing the quality of internal audits, audit checklists greatly contribute to integrity. Using an audit checklist provides a documentation process for the audit that helps to shape the specifics of what needs to be looked at and how to measure the results. The goal of audit checklists is to add organisation and structure to audits and to ensure complete coverage.2,3,4,6
- Does your organization have an adequate accounting and reporting system in place to ensure that the accounts can be audited? (also check tools Accounting & finance manual and Asset management)
The following steps need to be taken for developing an internal audit system:6
- Define what you want to audit, how it can be done and what outcomes are desired.
- Document the questions that can yield measurable answers.
- Develop measurements (and respective scoring methods) that correspond to the audit’s objective.
- Develop a checklist document that captures the results of the audit.
- Perform quality assurance testing in order to find out if the criteria in the audit are valid and make sense for the desired outcomes.
A number of aspects should be considered when developing an internal audit system:2
- Accounting policies exist, are kept current, and are communicated to the appropriate personnel.
- Close procedures, including due dates, responsibilities, disclosure updates, and account classifications are defined, communicated, and implemented.
- Access to accounting and reporting applications is limited to the appropriate individuals.
- There is a checklist of the standard closing journal entries made at month-end, quarter-end, and year-end.
- Pre-numbered vouchers are used to ensure that all non-recurring entries are processed only once in the system.
- Write-offs and reserves are clearly defined, consistently applied, and monitored in accordance with company policy.
- All account balances are reconciled prior to closing the books, including confirming that balances agree with related parties.
- Significant variances in reconciliations are investigated and resolved in a timely manner.
- Fluctuation analysis of actual to budget or prior periods is performed.
- The financial reporting package is reviewed by management before submission to corporate offices.
- Duties are appropriately segregated in the closing process.
KEY GUIDING DOCUMENTS
OECD, 2011, Internal Control and Internal Audit Ensuring Public Sector Integrity and Accountability, Organisation for Economic Cooperation and Development (OECD), France
Approva, 2006, Audit Checklists & Continuous Auditing for Financial Close and Sarbanes-Oxley (SOX) Audit Procedures, Approva, USA
Westfall, 2011, From audit requirements to checklist items to evidence gathering plans
UN, 2009, Audit Manual, United Nations, USA
- OECD, 2011, Internal Control and Internal Audit Ensuring Public Sector Integrity and Accountability, Organisation for Economic Cooperation and Development (OECD), France
- Approva, 2006, Audit Checklists & Continuous Auditing for Financial Close and Sarbanes-Oxley (SOX) Audit Procedures, Approva, USA
- Westfall, 2011, From audit requirements to checklist items to evidence gathering plans
- WiseGEEK, no year, What is an audit checklist?, http://www.wisegeek.com/what-is-an-audit-checklist.htm, accessed 02.12.2015
- MANGO, 2012, Financial Management Essentials – A Handbook for NGOs, Management Accounting for Non-governmental Organisations (MANGO), UK
- Richards, no year, How to design an audit checklist, http://www.ehow.com/how_6565214_design-audit-checklist.html, accessed 02.12.2015