Does Internal Audit Indeed Add Value to an Organization?

2021-05-07 13:28:58
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Introduction

The good performance of an organization depends on how the internal control system manages all the factors of production (Edwards, 2004). There are several measures taken to ensure the internal control system of firms is reliable. One of the actions includes setting up of an internal audit team. Internal audit performs duties such as evaluating and monitoring the effectiveness of accounting and other internal control systems (Rogers, Marsh and Ethridge, 2004, p. 33). It works towards improving the current situation in an organization by reviewing policies and procedures and recommends the best course of action. It acts as a watchdog of the companys internal controls though it can be viewed as part of the controls. The internal audit should be carried out with a lot of independence to allow the auditors to come up with a report that reflects the actual image of the internal control systems. The internal auditors lack authority to ensure the current management implements their recommendations and they are also answerable to the management. As a result, many scholars try to discover if it adds value to an organization. The importance of the internal control system to the success of the organization motivates this study to find out the contribution of internal audit in its strength. In this paper, research on the contribution of the internal audit in the adding value of an organization is done. The study collects information from scholarly materials of the past research done using different methods on the success of internal audit in enabling the success of a firm. The contribution of the internal audit in the implementation of the objectives of the firms and utilization of the resources is as well examined.

Arguments for importance of internal audit

Internal audit prevents possible internal fraud and theft that may take place in business. Small enterprises that do not have internal monitoring units lose a lot of money through internal theft and frauds. Staff members identify and sometimes create loopholes in the internal control system so that they can embezzle funds. Since there are no monitoring measures that help in prevention and identification of unacceptable business practices, the small enterprises tend to experience failure more often (Dumitrescu and Calota, 2014, p. 19). Organizations that have strong internal audit tend to have reduced the risk of internal frauds and theft taking place. The internal control system is assessed and any possible sources of theft and fraud identified and corrected. Comparing firms that have an internal audit system in place and those who do not have, the risk of losing funds through internal embezzlements and theft is higher for those that do not have it. Internal auditors do regular and frequent monitoring of the organizational assets, processes, and procedures utilized in the everyday running of the business. The regular checks enable them to identify potential theft and frauds. Since staff members are aware of the internal audit controls, they are also not likely to get involved in practices that of fraud and theft because they know management can quickly identify them. Organizations that do not have internal audit system find it difficult to trace the origin of fraud and theft because employees involved in the practices take the time to hide the vice.

Internal auditors identify risks that may affect an organization (Spira and Page, 2003, p. 655). Organizations that have internal auditing are characterized by good internal systems that are efficient and effective. The internal auditors recommend the necessary change that needs implementation for better performance of an organization. They monitor the efficiency of the current operating systems in all the departments and assess the viability of the systems. Because of their familiarity with the business, they are in a good position to identify any needed changes. When a system reduces its operating rate, they can notice quite fast and recommend the best remedy. Since internal audit staff is made up of professional, they can appraise different situations and make the best decision that may help an organization in making a decision about future business operations.

Organizations that have an internal audit tend to succeed for long time in the market because they make the appropriate decisions to meet the market demand. They tend to carry out research and developments more frequently, and the market needs are often studied. Once there is new technology in the market, most organizations with internal audit teams realize fast enough and adopt it (Jokipii, 2009, p. 136). For example, the audit teams through monitoring the sales department quickly notice a reduction in sales and other negative customer perception of a product. As a result of the identified market performance reduction, the internal auditors report the matter and new market research concerning the particular product are done. The knowledge of the internal auditors in the business helps them in knowing the specific factors that affect the company (Boyle, DeZoort and Hermanson, 2015, p. 712). For example, in the sales department, they can differentiate when an internal or external factor is affecting performance. Organizations that do not have internal audit team takes a lot of time to identify risk factors because the only team concerned with monitoring and assessment of the systems are the management team. The duties of the management team are often many limiting their time to monitor and assess the performance of an individual department. Mostly they use reports prepared by the sub-sections, and they may not get the real picture of things on the ground. The risk identification tends to be slow and at times, the business may miss vital changes in the environment that may affect the company negatively.

Enterprises that have internal audit team tend to have a more efficient management team. The teams find decision-making process more favorable. They often have detailed data that is used to make a more informed decision that solves the current problems better. The internal auditors assist management in the monitoring and control duties. Organizations that have a good internal audit team have their managers concentrate on more critical tasks, and they use the information provided by the internal audit team to make important decisions. The concentration of the internal auditors in the internal matter enables the management to explore the external environment for any possible opportunities available. The time created by internal auditors for the management team explains why most firms with internal audit team typically have a competitive advantage than those without (Mamah and Ussahawanitchakit, 2014, p.138). Firms with internal audit have a strong internal control system with procedures and processes that reflect the current business requirements.

Internal audit helps organizations to make innovations and discover some problems within systems that may lead to losing a lot of income. They carry out an extensive analysis of the internal systems and perform mock tests that can discover places where automated systems may not automatically count all factors involved (Zalata and Roberts, 2015). For example in a billing machine that can carry out different procedures to find out whether all transactions are captured. They take more time in the systems and try to evaluate almost all the systems functions. The problems identified are fixed and if there are better machines that can improve the current ones recommended. They ensure that they make the internal control system of an organization a perfect one for ordinary transactions. Internal auditors take the time to carry out all systems tests to ensure they function properly for maximization of resources hence they are of value addition in an organization.

Good records are kept in firms with a proper internal audit. All records concerning financial deals are properly kept, and it is easy for anyone to prove any transactions that took place (Mihret, 2014, p. 780). Firms with the internal audit system rarely have issues with accounting records when the external auditors review them. The reasons for the good record can be attributed to the constant checks done by internal audits and the improvements recommended throughout the accounting period. The support documents for the accounting records are well kept in these organizations. The accounting records of these firms are also up to date, and they are updated on daily a basis where applicable. They are done to eliminate all the issues that may arise because of unrecorded transactions. For example, they ensure that firms avoid problems such as leading and lagging found in the cash departments (Miller, 2015, p. 516). Enterprises with the internal audit in place tend to have fewer problems with the cash officers and the levels of payments in cash lost are minimal. Where an internal audit is not in place, cases such as leading and lagging are common, and the management finds it hard to trace such behaviors. Sometimes, the practices hurt the organization financially and may lead to losing of money when one increase the amounts in the leading and lagging. The records kept in the firms without the internal control system are often not properly kept, and they are not up to date. There are backlogs of records that need to be done creating loopholes in the organizational financial systems.

Corporations that have internal audit rarely have qualified audit reports during auditing of their books of accounts by external auditors (Moeller, 2016, p. 162). The reports boost the public image of the organization. In the eyes of the investors and other stakeholders, the organization is viewed as a good business to trade with as it has transparency. The shares of the corporate tend to attract more popularity because of the trust assured by the external auditors. The good public image created also helps the organization in the attraction of stakeholders such as financiers, suppliers, and even customers. Most clients tend to shy away from businesses with non-transparent dealings. The products and services from a company that has unqualified reports gain more trust than the one of organization with qualified reports. The consumers losses trust on firms with qualified audit reports and the products offered are treated with a lot of suspensions. The way a company has misrepresented its financial reports is viewed as the same, they are not disclosing the quality of their products. Since internal audit works towards ensuring good accounting records and clear filling of support documents, the firms that have it enjoy the benefits of having proper records. It also explains why most companies with internal audit system do not have cases of qualified reports. The qualified reports accompanied by other strong internal control measures, the stakeholders of corporates with internal audit have a better public image as compared to the ordinary organization without it (Moeller, 2016, p. 151). The better public image results from the fact that the internal control systems are often revised to reflect the current market demand. The better the service delivery, the more a firm gains popularity and positive public image. Organizations that do not have an internal audit in place have been found to have a less good public image because of inconsistencies and slow adoption of the modern ways of doing business. The enterprises tend to have a slow adoption of new business practices since they have limited monitoring of the current market trends and internal operations. Service delivery may not...

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