There is no doubt that businesses are seeing new heights in India right now. India has emerged as the fastest-growing major economy in the world as per the Central Statistics Organization (CSO) and International Monetary Fund (IMF). India’s GDP is estimated to have increased 6.6 percent in 2017-18 and is expected to grow 7.3 percent in 2018-19*.

While several factors contribute towards the success of businesses ranging from favorable government policies to right people being part of organizations to standardized business practices, one such practice that is highly recommended is getting an internal audit on a regular basis. Over the years, several organizations have used it as an instrument to maintain and enhance the quality of their goods or services to meet customer expectation. If your organization does not have an internal audit function, then it is a worthwhile option to think about.

Why should you consider internal audit for your business?

Well, an internal audit function forces you to have a deeper look into your business processes and finances to ensure that they are in proper order and also are there any emerging risks that business should address or not.  While it is very normal for the management to be complacent and think that everything is running smoothly and is in proper order but there might be a case where, by the time you realize that it was not true, it’s too late.

In today’s volatile business environment, where businesses are facing a new challenge every day than whether it be in form of change in government regulation or new operational regulations like GDPR or change in labour related compliances or change in consumer expectation etc. An internal audit function always ensures that businesses are meeting their responsibilities and that the organization’s staff is also working towards organization’s goal.

How can an internal audit help business?

Whether you have a BPO or Manufacturing Facility, an internal audit can help as follow:

Help identify any financial discrepancies – All of us will unanimously agree to the fact that the main objective to undertake an internal audit is to look deeply into financial transactions and records of the company, to rule out the possibility of any malpractice by any person or group of individuals. An internal audit may help you spot duplicate posting of same purchase invoice or identify any dummy vendor or employee in the system, among many other malpractices which might be prevalent right under your nose.

Ensuring adherence to standard operating procedures – Well there is no doubt on the fact that management of any organization lays high emphasis on the adherence of Standard Operating Procedures by its staff, and would like to identify instances where such policies or procedures are being by-passed by its employees. An internal audit function can not only help you to ensure compliance of such policies & procedures, remind the staff of its importance if they are not but can also assist in updating the procedure or benchmarking them with industrial practices.

Help attain Economies – Another great output which business can generate by using internal audit function is to attain economy of scale in every business process. A good internal audit function will show you where you need to invest more in resources and where resources are lying idle or are being under-utilized. It will also help in identifying any redundant exercise which is being performed in any process, which is adversely impacting the working capital of the company.

Ensuring business is fully compliant – Another grave area for the management of any company is to be sure that they are fully compliant with all the legal and regulatory requirements of the land where they are operating. With so many laws ranging from company structure to tax compliances to labor welfare to industrial requirements, it is very difficult for any company to be sure that at any point of time that they are fully compliant to all these requirements. This is where an internal audit function can help you to be certain that your company is adhering to all the laws applicable.

Greater Coverage – Many times, you come across the remark from business owners that “why should we have an internal audit, while we already have a statutory audit in the company”. Well, I have always told them that the scope of the statutory audit is restricted to financial statements of the organization, while through internal audit, you can get those areas audited where you have concerns over and use it in a way you want to.  Thus, you are always in command and can amend the scope of the audit as per the changing the environment of business.

How to Effectively Deploy Internal Audit

In certain cases, we have also seen while businesses see internal audit as a great tool but don’t exactly know how to use it. Well, I totally understand the situation if you have never got it done in the past. In such a situation, I generally advise companies to outsource it to an external professional firm or to hire some expert who has experience of performing it.

To conclude I would like to say that an internal audit is a fantastic tool to not only help business prosper but can also help in identifying new opportunities. Not only will it ensure that you are working in a best possible manner, but will also help you grow in future by identifying emerging risks and opportunities.

Happy Auditing!!!

*Source: https://www.ibef.org/economy/indian-economy-overview (Last accessed on 07th June 2018)

Hi,

This is the first post in the series of posts where I will be sharing my experience on “Different Aspects of Internal Audit Assignment”. In this series of posts, I will be discussing various aspects like steps of internal audit, reporting etc. and how businesses can utilize internal audit as a strategic tool to add more value to the business rather than restricting its utility to the identification of any financial mis-reporting. So, I request you all kindly subscribe to this blog to get notified as & when I post more articles for sharing knowledge and experiences with you.

While some companies have an in-house team of professionals who conduct the internal audit for the company, many other companies believe in outsourcing internal audit function. Thereby maintaining the independence of the auditors & also reducing the possibility of any biases or influence by or over internal audit function. Internal audit has grown over the years to not only be seen as a function to ensure fulfillment of regulatory compliances and/or accuracy of financial records but to a more strategic function to evaluate the performance of the business & manage risks.

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Over the years, often I have come across people who ask me, “How should they perform an internal audit- to add value to the business by enhancing performance and/ or managing risks”. And I have always told them that it is difficult to generalize steps in internal audit function as it depends on several factors like scope of work, industry type, how big is the organization, periodicity of audit, what all internal controls have been defined, what all documents are made available during audit etc. Having said that, following are some of the key steps involved in internal audit-

1.    Initial briefing Meeting

This is the preliminary step of any internal audit, where the company and management lay down the broad scope of work and expectations from internal audit function. The scope does not need to be limited to providing the management with assurance over the controls implemented by management and can head towards a ‘consultancy’ role, providing strategic support to the management and company.

2.    Planning an internal audit

Any internal audit function which aims to add value to the organization shall commence the internal audit by preparing a proper strategy, considering controls deployed by the management and the risk environment of the organization. Audit plan so prepared should be flexible enough to identify any new emerging risk. If any internal audit function wants to be a strategic advisor to the management, then it should be aware of the risk appetite, capacity & tolerance and same shall be covered in the internal audit plan.

3.    Conducting Fieldwork

While commencing any internal audit review, the internal audit function should be aware of “How a Process to be reviewed Works” and “What all controls have been deployed by the Management”. Post answering such questions, an internal audit program should be developed stating what all checks will be reviewed by the auditor. While conducting an on-site review, the auditor can use techniques like an interview for gaining information and/or evidence to form an opinion. There are several sub-steps involved in this step, some of which are highlighted below-

•    Audit Program Preparation

•    Scheduling Audit Testing

•    Analytical Reviews

•    Document Handling

•    Interviewing Personnel

The internal audit function must analyze and assess the facts drawn from the internal audit evidence, obtained during the review, to decide upon the efficiency and effectiveness of structures, processes, and controls. The internal audit function should also consider the efficacy of the structures, processes, and controls that are in place.

4.    Document Findings and Evidence

As the name suggests, in this step one shall document the findings noted during their review exercise and shall highlight any policy violation or financial misrepresentation. This shall also include any scope of process improvement or lack of control in any of the process or activity.

5.    Preparation of Audit Report

If you ask me, this is the most crucial step of any internal audit assignment as the report is the document basis which is decided whether an audit was conducted properly, and did it cover all major risks as identified by the management and the audit committee. A good report should very clearly state the following-

•    Title Page

•    Index (Recommendatory)

•    Report Distribution List

•    Background

•    Executive Summary

•    Scope of Work

•    Audit Limitations

•    Audit Methodology (Recommendatory)

•    Detailed Audit Findings

An internal audit report writing is the skill that needs to be discussed in a more detailed manner and I will be doing this in my future posts. So Please keep following this space as I will be explaining the content of each & every bullet point as stated above.

6.    Closure Meeting

Internal audit report which was prepared & presented to the Management & the concerned stakeholders is discussed in this meeting to assess whether findings, as highlighted in the report, are correct and if they are then future action plan is defined. Basically, how the organization will implement the recommendations made by the auditor in his report is decided and a timeline within which action will be taken is decided.

Auditor while doing any follow-up audit will have to check the implementation of Future Action Plan.

Ultimately, any organization can be successful only if it is able to deliver the product or services to its clients in a smooth, seamless manner. Internal SOPs & management directives are how an organization tries to establish a uniform practice across processes and domain to ensure smooth delivery of quality product or service. Internal audit is one such tool that organizations should use to ensure their business achieves its ultimate objective by identifying all risks and recommending measures to mitigate such risks.

Hi Everyone!

Welcome, the topic of this post is “How Data Analytics is Proving to be a Game-changer for Internal Audit”. All of us, who have been performing internal audits or are getting it done, would vouch for the fact that it has evolved enormously over the years. Internal audit, which was perceived as a process to review financial records in a more detailed manner, when compared with statutory audit, has now evolved with times, to play a more strategic role by laying down a cohesive approach towards risk management. With the evolution, there has been a clear shift from a document-based audit to a data-based audit, whereby internal audit function is deploying modern technologies and techniques like data analytics to create more value for businesses.

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When we talk about data, it is something which is everywhere, from a mouse click to a tap on the mobile app, to a phone call, to a punch-in at office gate. The reason for the availability of such huge volume of data can be attributed to the change in the mindset of the consumers & easy accessibility of technology to them. Consumers, where some years ago, were not willing to share their personal details, are now with a change in their aspirations & needs not worried about sharing them. Thus, giving birth to the huge volume of data, which businesses are using to understand the customer need and the changes in their needs. Taking advantage of the availability of such huge volume of data & applying data analytics, internal audit function can create more value for businesses than ever before by providing valuable business insights, a greater degree of assurance and predicting emerging risks. Given below are some of the advantages that internal audit function can reap by using data analytics- 

Increase in Effectiveness of Internal Audit.

By using data analytics, internal auditors can audit the entire population instead of auditing a sample of transactions to form a judgment. Data analytics also empowers auditor to conduct several audit checks just by applying a program to generate exceptions which auditor needs to check in detail.

Enhancing the Efficiency of Audit Function.

Data Analytics also help in increasing efficiency of an audit function, as an internal auditor can always re-use the same data analytics script for periodical reviews, saving a lot of time & effort on the part of the auditor. Auditor can deploy the same in some other areas, resulting in higher effectiveness as well.

Mitigation of Risk & Fraud Detection.

Data Analytics also enables internal audit function to identify trends, that are appearing in datasets over a period of time indicating a potential threat to the organization. Data analytics also enables auditors to identify & uncover any fraudulent activities that are happening in the organization. Thus, audit function can create a greater value for the organization, by using data analytics, whereby they can ensure the organization is prepared for emerging risks and is secure against any type of fraud.

Greater Assurance.

Data Analytics also helps in delivering a higher sense of assurance to all stakeholders in relation to operations of the organization and ensuring that company does have proper controls in place to mitigate emerging risks in the organization. The higher assurance is achieved by the fact that internal audit can virtually review entire population to identify risks and frauds, by using data analytics.

Greater Focus on Strategic Risk

By deploying Data Analytics & combining it with machine learning, internal audit function can automate the routine audit checks of similar transactions and can shift their focus towards the strategic risks that might challenge organizations in future.

CASE- STUDY

Given below is the case study where internal audit function deployed Data Analytics to identify potential risk, which otherwise would have been a real daunting task for the auditors-

Background

ABC Private Limited was a big FMCG company having headquarters in New Delhi & 5 plants across India employing more than 3000 people.

Majority of staff strength comprised of workers & supervisors. The hiring was done by each Factory Department respectively.

The company had biometric devices installed across all locations to monitor daily in & out time of each personnel.

At each month end, HR Department generated the attendance report from biometric software and basis such attendance report, payroll was prepared.

Scope

Internal audit function was required to conduct payroll audit to ensure that –

• Employees are getting paid for the actual number of days worked by them.

• There are no ghost employees in the system.

• All statutory dues pertaining to employees are duly deducted & deposited.

Approach

Internal audit team deployed Data Analytics to -

• Ensure all employees were paid in accordance with the biometric record by plotting paid days as per biometric record and comparing it with paid days as per salary sheet.

• Review employee master to highlight missing key data points in it like PAN Number, Bank Account Number, Aadhar Number, Date of Birth etc.

• Identify any duplicate employees being created in the system and to check for duplicate payments being made to a single person.

• Review of employee records to check for any incorrect data being recorded in the system.

Results

Following observations were noted –

• In case of 17 employees, joining date was a Sunday (weekly off in the company), which was wrongly entered in the system resulting in the excess pay of Rs. 113,000.

• 78 employees were noted who were not recording attendance in Biometric System on a regular basis. Out of the same, 50 employee records were not properly filed in ERP & out of this, 23 employees were found to be fake.

• Excess overtime amounting to Rs. 337,000 was paid to the employees due to wrong calculation of overtime hours in case of 327 employees.

• The scope of process improvement in human resource management was identified to reduce fraudulent records and transactions.

While Data Analytics offer abundant possibilities in internal audit function, one should first understand the scope of using it. Further, like any other business function, internal audit’s forte lies in the adoption of new techniques & the use of Data Analytics is no different. The scope of using Data Analytics in internal audit is further widened when it is combined with Machine Learning to automate routine procedures.