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In a general definition, the term auditing refers to the evaluation of an individual, system, organization, an enterprise, a project a process or a product. In accounting, this is where this term can be frequently found such as internal auditing, government auditing. However not only in accounting but the term is also used in additional sectors such as project management quality and water management among many other areas. People who carry out the process of auditing is known as auditors. Internal auditing 'therefore' is a branch of auditing which is highly prominent in business entities. Internal auditing is an independent as well as objective assurance and consulting activity that is meant to add value or rather make an improvement to the operations in any organization.
The process of internal auditing helps companies and organizations in the accomplishing of set goals and objectives by bringing along a disciplined and systematic approach to evaluate as well as improve the effectiveness of the company management in all the sectors such as the risk management, governance among other areas. Internal auditing is associated with a chain of benefits to business entities at all levels. Today, auditing is the most controversial aspect of an accountants work.
Over the years, auditing has become a vital part in the accounting section. Historically the audits were connected or associated with fetching of financial information and systems of a company or an organization. The process of auditing has in turn developed to an essential exercise in the management of companies and business both small and large business entities. Auditing has grown to accommodate many sectors and also various types 'which can be classified either into legal base, time execution or specific objectives'.
Internal auditing is conducted by firms own accountants and helps organizations to monitor, verify financial records, evaluate, increase in efficiency in the company or the effectiveness of its operation and finally assist in detecting fraud in the business entities. There is a chain of benefits that are associated with auditing and in specific internal auditing in ant business entity, organization or a company. In addition, internal auditing is applicable to all sorts of companies either the privately owned ones or public ones. This also applies to the person who carries out the auditing process (auditors) they are privately owned or st along by the government.
History of auditing
The establishment evolution and growth of the internal auditing are dated back to the 1941 in the United States. It is connected to the establishment of Institute of Internal Auditors (IIA) which was also found in the same year 'in United States'. The IIA organization was dedicate to the promotion as well as developing of the internal auditing process. As far back as 4000bc, there was book keeping in the organization and governments 'in the collection and disbursement of taxes'. The need for audits can 'however' be traced back to the Babylonian Greece and in the Roman Empire. There was a detailed system of checking and counterchecking of documents as the government was worried of incompetent officials who would make book keeping errors 'as well as the corrupt ones'.
In 1494 A.D., there was the emergence of the double-entry book keeping which was established in order to exercise control. For example in the 18th century there was a scandal (tulip scandal) which provided the justification for managers to exercise more control over their businesses and companies. After a couple of centuries, the European bookkeeping system found its way to United States. This is due the growth of business activities among the communities as well as the complexity of the activities in management. This called for accounting that would be able to verify the information that would be vital in decision 'in the running of the business'. Industries management greatly required a means that would give service as the channel for honesty and efficient work.
By the turn of the 20th century, there was needed to come up with the formal establishment that would be able to handle all these responsibilities. In the process, internal audit was introduced which was mandated with careful collection as well as interpreting and reporting of business facts. At the end of the day, internal audit helped keep the truck of a large number of business transactions over a given period of time. As the time moved on, various business entities such the railroad companies and the retail industries recognized the significance of internal audit services.
Different categories of internal audit
'Although internal audit is mainly concerned with internal controls of an organization it is essential for the internal editors to be aware and familiar with various types of audit that are carried out'. One type of audit is the financial Audit which gives assurance that the financial statements that are provided by an organization are the correct ones.. Another type of audit is the attestation Audit. Propriety audit, this is an essential type of audit as it helps verify and clear irregularities and also whatever appears to be an improper version. It helps to avoid waste of public properties. In an addition, there is also the performance audit which is a comprehensive review of projects, programs and schemes in terms of the organization goals and objectives.
System audit is another type of audition. This looks into the in depth analysis of the mechanism such as the controls, and the applicability of any system in a business s organization. Others include; manpower audit, information system audit, fraud and financial audit internal and external audit among others. To conclude on this, auditing can be differentiated on the basis of the focus of the audit. For example, some has financial aspects as their focus. Internal is essentially concerned with verification of the internal controls as well as complying with the law, rules and codes.
The most common audit that is known to the people is the external and internal audit. However all the other are necessary in running of any organization. The main difference between internal and external auditing is that, an internal audit is the one that is conducted by the organization itself 'on the other hand' an external audit is done by an outside agency that gives the report to the firmââ‚¬â„¢s management. External audit is carried out by an outside auditing company such as Deloitte & Touche. An internal audit is conducted by the company itself without outsourcing the services. Finally, external inspect is completed by auditors, not under the authority of the corporation being audited.
Functions of internal auditing department
There are varying functions of the internal auditing from one company to the other. However, there are general functions of the department in all the companyââ‚¬â„¢s such it is the same all over from one business entity to the other. The main purpose of internal auditing is to identify the principal, authority, responsibility and procedures for the Internal Audit Department. On the other hand, its mission is to examine as well as evaluate organizations activities.
Internal audit helps in developing an audit plan that helps in the evaluation of an institution financial operations. This involves identifying the best way for an organization to use its funds by order of priority. In addition to this, it also helps to assess the economic and use of resources in an organization or company. It is through internal audit that organizations forms ways to follow up on the adequacy of their corrective actions or the adoption of the required/ desirable policies that would be of benefit to the business. From the early one of the main functions of auditing is to manage the use of finances and reduce cases of misconduct and fraud. The department was to investigate cases of misconduct and misappropriation of resources hence it was vital in protecting the businesses from all these vices.
Internal management has been frequently used by the leadership or the management of companies. It helps to conduct special projects as well maintain a positive relation with the external auditors. This has been the case in private and public companies whereby the official auditors of the government are supposed to evaluate private companies. In addition to these, internal auditing helps in giving the relevant information to the management about the performance f the company and the businesses. Finally, it is the work of the internal audit to ensure that the business organization complies with the standards of the Professional Practice of Internal Auditing and the code of ethics as promulgated by the Institute of Internal Auditors.
Advantages of internal auditing
Internal auditing is essential as it acts as a source of gives information that is required for essential control and management of businesses. It helps in measuring performance as well as evaluating results such as financial results. The information obtained helps the managers to make the right recommendations for the company. It may also be an instrument for implementing plans. Another merit of internal audit is that it helps in implementation of policies and procedures that are relevant to the attaining of business objectives (it links objectives and strategies of any business). In lesser cases, it is used as the keeper of managerial conscience in the company or business. Another advantage is that internal audit give motivation to the workers in an organization to work avoiding errors of commission or omission. It helps to be the worker to answerable to their actions all the time. Finally, internal audit helps in scrutinizing financial and the accounting data for business this helping in improving of the business. It also helps in finding the root of any problem that may affect the business. It also improves communication within a business as well as motivating workers.
Disadvantages of internal auditing
Despite being an essential sector in the management of business and companies, internal auditing posses some demerits. In many cases, internal audits reports are mostly rejected by the management of companies and instead prefer the report that is given by the external auditors. Despite the presence of internal auditors in a company, in case of government evaluation the external auditors report is the one which is required. Another disadvantage of internal audition is that, since it is carried by the organization employees, the report might be biased hence a company might not rely on such report for its planning. In addition to this, there is a elevated likelihood for an internal auditor to fail and identify errors that might be present.
Continuous internal auditing may also result in alteration of figures hence resulting in fraud. On the other hand, continued visitation of the company auditor my disturb workers in an organization and in turn causing inconveniences and low productivity at work. It calls for availability of funds for n organization to support internal auditors and their process of auditing. It becomes expensive to maintain for the company to keep on sustaining internal editors. Despite the list of disadvantages, the advantages and the resulting impact are more positively effective to the company. This is why numerous companies have embraced the audition process to help the management in the realization of goals.
Over time, there has been the development in the line of audition. Various trainings have been offered to people in order to become competent auditors in the companies or an organization. Institutions have also set standards that should be achieved by an character for him/her to be a recognized editor in organizations. Colleges and universities have embarked in educating students who have chosen their careers to be an auditor. Day in day out firms is being established which offers external auditing services if an n organization n chooses to outsource the services. In today's community, internal auditing 'in an organization or business entity' has become necessary as it evaluated the performance of the organization as well as achieving of the companies goals and objectives.
For an individual to be an effective internal editor, he/she is supposed to achieve some qualities. One of the qualities is that he is supposed to bright alert and also an engaging person. He is also supposed to be able to communicate frequently as well as being consistence in his work. Communication means the ability to adapt in any situation as well as being a good listener helps one to an effective auditor. Another important attribute for an effective auditor is that he or she should be business acumen. This is having the adequate knowledge for an auditor and depth knowledge of the business. In connection with this, he is also demanded to be able to craft good and sound decisions. In addition to the above characteristic, a good auditor should be truthful and reliable so as to maintain a reputation as professional. On top of all these, he should be experienced with his work of audition. Lastly, auditors (both internal and external) should be courageous. Part of the job is delivering the analysis even if it means bad news to business.
The future of auditing
Auditing is a complex but also important function within the world of business. It contributes in making accounting as well as organizations function well in their operations. From its inception, there has been different crisis in which the auditing knowledge is needed. This has contributed to the expansion of the auditing so as to help in solving of varying cases. The cycle has been continuing since the early twentieth century. In recent times, there has been several rounds and reactions that have called for auditing knowledge hence the continued development to adopt new measures.
Through globalization, auditing has improved in the 21st century. However scandals continue to occur, and hence oversight and inspection are critical issues. In this world of jurisdictions, audit firms pose quality issues in regulation of the occurring problems in businesses. Day in day out new forms of auditing is being demanded such as the environmental auditing which has developed to a mainstream activity in the society. Other forms of auditing introduced include privacy auditing for solving private issues 'which has become contentious issues'.
'When the future of auditing comes into question various issues' comes along. One of the findings that I can propose is the establishment of research based auditions. This will demand the auditors and the auditing firms to come up with more innovative auditing techniques. This would help in solving the more upcoming problems rather than looking backward to already accepted techniques. The firms should also come up with relevant and also regulated measures that would deliver effective auditing services to the organizations and companies all over the world. All of these proposals are aligned with the fundamental difficulties of auditing and hence there needs to have consistent developments from the approaches of dealing with those issues.
It is clear that internal audit is an integral part of an institution such as financial institutions, companies, and 'private business' entities among others establishments. It helps these establishments have a control of weaknesses that are experienced. It has become a key component in providing an institution with the ability to take corrective action so as to maintain profitability and integrity of the institution. With proper implementation of internal audit, there can be massive benefits to the company or business. The audit department varies from one organization to the other. Proper execution of an audit plan is highly critical in the achievement of the organization targets. However it is clear that each and every audit department must perform in accordance with the values that are put by the Professional Practice of Internal Auditing.
Organizations are encouraged to carry out auditing after a specified period of time. However in most cases detailed audit are carried out when massive fraudulent activities occurs in an organization. Auditing 'therefore' helps in establishing preventing measures that assist in monitoring the financial activities in a given business entity or company. As the business complexity has risen, there has also the rise of risk based auditing hence making auditing more efficient and economical than the earlier times. In general auditing has turned to be a relief for many businesses as they are able to plan for the future and also reduce risks that can be encountered.
Auditing has become the method of assessing many of the businesses financial statement which gives information on the success of a company. However, it is a truly tedious as well as involving profession that is in high demand in various sectors and especially the business sectors. Auditing is intended to offer organizations a line of corrections as well as give them notes on how to avoid financial mismanagement in the future.