If you prefer not to outsource internal audits for reasons best known to you, here’s your crash course on how to set up an internal audit department, easily and quickly.
If you think internal audits are overemphasized, then think again. These well targeted and independent activities give you objective and unbiased information on key business issues, systems, processes, requirements and more. The information helps you get a handle on internal controls, ensure procedural and regulation compliance, streamline financial reporting and data gathering processes, achieve operational efficiency, and identify issues and weed them.
Outsourcing internal audit services is recommended to drive home the advantage while warding off troubles and expenses. However, if you persist with the idea of establishing an in-house internal audit department, here’s what all you need to know and implement.
Step 1: Get approval:
An approval from the top management and the board is the first step towards instituting an internal audit department. The department operates independently within an organization and typically reports to the top brass with findings and suggestions. The top brass will approve the reporting structure, framework, authority and scope of the department. Upon approval, the department is in a position to fulfil its responsibilities while maintaining autonomy and neutrality. Plus, approvals are required for employee acquisition and onboarding, resource allocation and more. It’s advisable to have a proper plan in place before seeking approvals.
Step 2: Create an Audit Charter:
Audit Charter is a benchmark, against which the success of the department will be measured. It’s a key document that defines and validates the department’s core functions and responsibilities, authority, scope and status within the organization. Think of it as a constitution of your internal audit department. A document of such importance should be created with foresight and caution. Here’re a few factors to consider when creating the Audit Charter.
- Determine what you wish to achieve with the department and include it in the charter.
- Decide on the type of assurance activities the department will be carrying out.
- Chalk out the department’s responsibilities and functions, including GST Audit.
- Define ways to maintain the department’s independence and neutrality.
- Validate how the department will access records and classified information.
- Be clear on the reporting lines and structure.
- Ensure proper quality assurance measures the department will undertake.
Once created, get the audit charter approved from the competent authority.
Step 3: Budgeting:
Once approvals and audit charter out of the way, it’s time for budgeting. The budget is largely based on the department’s staffing model, objectives and the risks and issues faced by an organization. As these factors typically vary from one organization to the other, the budget will vary accordingly. Both over-allocation and under-allocation are counter-productive. So, factor in everything that’s required for smooth and efficient audit functions and allocate the budget accordingly. Don’t neglect your company preferences when deciding on the right budget.
Step 4: Formulate reporting lines:
The integrity, independence and objectivity of the internal audit department largely depend on who will it report to. Hence, formulating the reporting lines upfront should be prioritized. However, there’s no unanimity on this issue. For many Fortune 500 companies, reporting to a CEO or CFO is the optimal reporting line. Conversely, others feel reporting to a full board or an audit committee is a way to go. Reporting administratively to the top boss is a preferred ploy to keep the department’s integrity intact but it can cause implementation delays.