What would be the purpose of an internal audit? Does an external audit take care of all problems and weaknesses a company might have in its business functions and financial accounts?
An internal audit can be designed to serve various problems a business might want to solve, such as wanting to improve on an accounting process, rectify accounting control issues, to advise a business efficiency improvement and so on. Whereas the procedures of an external audit are designed to give an opinion, on “truth and fairness “of a business’s books of accounts.
Scenario 1 – A company’s cash in hand amount does not match with the amount shown in the books of accounts. In this case an internal auditor will try to understand the reasons why this is the case and recommend suitable actions to avoid mismatch of these amounts.
Scenario 2 – The accountant of a company files the Value Added Tax (VAT) to the tax authority, however, the owners of the business are skeptical in the manner the VAT is filed. In this scenario, an internal audit can be assigned to go through the process of VAT filing and check on whether reasonable steps were done by the accountants to do the VAT filing. For example, has the supplier tax Invoices been collected and archived? Are Tax Invoices compliant to laws and regulation of VAT?
Scenario 3 - The debtor/ trade receivable balances are not accurate in the business’s books of accounts. For this issue, an internal auditor will document and understand the existing way the revenue invoicing is done and how the amounts are collected by the business. One reason could be that the owner is collecting cash from customers and not informing the accountant of the cash collection. For this issue, the internal auditor will recommend the cash be banked immediately and the receipt sent to notify the accountant.