Internal Controls can be defined as the procedures, rules, and mechanisms implemented by an organization to ensure the integrity of financial information, encourage accountability and prevent fraud. It is one of the basic and essential factors for efficient management of an organization, both financial and non-financial.
Internal controls also keep a check on whether the law and policies are being complied with or not and prevent the employees from stealing assets or committing fraud. A timely audit both internal, as well as external, is conducted to examine the accurate reporting of financial data and to maintain operational effectiveness.
Audits of Internal Controls play an important role in corporate governance
Since the year, the managers of any company are legally responsible for the accuracy of its financial statements. It is considered that companies with a few thousand employees in various different offices may be the ones facing a tough time protecting themselves by the same issues and challenges arise for small businesses.
Sometimes these small businesses are relatively prone to suffer disproportionately large losses due to internal fraud. Hence having an effective auditing system is of utmost importance to all corporate organizations. Making the auditing system flawless involves overcoming the following challenges that you may have faced at some point in time.
First, understanding your company’s cash flow
This is listed as the top challenge because it is the most critical step in planning an effective audit. You have to know how the money exchanges hands because without this information the engagement team will not be able to identify all the existing risks and select the appropriate internal controls to test for.
If you do not have the proper facts, then the controls that you select for testing will not be responsive to the risk of material misstatement that the engagement team has recognized. This is a very common issue faced by auditors while reviewing revenue and hence you should tread carefully along this path.
Second, testing system-generated data or reports
If the team selects an internal control for testing that uses system-generated data or reports, its effectiveness then partially depends on the controls over accuracy and completeness of the system-generated data or reports. You need to sources every information that is being used as an input and being subjected to tests that are essential to your final report.
This is often overlooked by some less experienced audit staff and creates loopholes in your report. As an auditor, you have to check how the quality of the issuer’s processes and internal control affect your audit.
Third, examining the management review controls
Management review is more of detective control and is intended to check and help the management to identify errors, inaccuracies or fraudulent behavior. Some deficiencies caused in this are due to the lack of documentation of the management’s processes and workflow. Which in turn does not help the engagement team to slack in the tasks they are performing. It renders the auditors helpless and the management unaccountable and the management review control then does not heed accurate results.
Last, avoid these missteps for a smooth auditing procedure
Several firms have taken actions to eliminate these challenges. These missteps can be avoided in order to ensure that you do not add on to the existing difficulties during the auditing of internal controls. Do not assume the client has no controls and always try to understand which controls are relevant to the audit.
Follow through the process of testing control and don’t stop after the point of determining whether it exists or not. Another major mistake that should be avoided is improperly assessing the control risk and failing to link further procedures to control-related risks