Importance of Conducting an Internal Audit in Your Organization

Learn about internal audit, its functions, and how it’s conducted in assessing organizational operations.

a manufacturing supervisor checking inventory controls in a warehouse during an internal audit

What is an Internal Audit?

An internal audit is a systematic and independent examination process conducted within an organization to evaluate and improve its internal controls, risk management practices, and governance processes. It’s an integral part of an organization’s internal control mechanism and is typically carried out by a dedicated internal audit function or department.


The primary objective of an internal audit as part of an organization’s audit program is to provide assurance to management and the board of directors regarding the effectiveness and efficiency of the organization’s operations. Also, this helps ensure that internal controls are in place to mitigate risks, prevent fraud, and safeguard the organization’s assets.

Further, it contributes to enhancing operational efficiency and effectiveness. Internal audits identify areas where processes can be streamlined, costs can be reduced, and operational performance can be enhanced.

In a nutshell, here are the key functions of an internal audit:

  • Risk Assessment
  • Internal Control Evaluation
  • Compliance Review
  • Financial Audit
  • Operational Audit
  • Fraud Detection
  • Consulting and Advisory Services
  • Continuous Monitoring and Improvement
  • Reporting

How Do You Conduct an Internal Audit?

Performing an internal audit involves a systematic and structured approach to evaluate and assess the effectiveness of an organization’s internal controls, risk management processes, and compliance with applicable laws and regulations.

Internal Audit Process

Internal Audit Process

Generally, here’s what an internal audit process looks like:

  1. Planning – This includes defining the scope and objectives of the audit, identifying the key areas and processes to be audited, and developing an audit plan and schedule.
  2. Gathering Information – This may include financial records, policies and procedures, previous audit reports, and any other relevant documentation. Internal auditors may also conduct interviews with personnel to gain insights into the operations and controls in place. To help streamline this step, using an internal audit checklist is a must.
  3. Risk Assessment – This is to identify and prioritize potential risks and areas of concern within the audited processes. The internal audit risk assessment evaluates the likelihood and impact of risks and helps focus the audit activities on high-risk areas.
  4. Testing and Analysis – To assess the effectiveness of internal controls and processes, internal auditors review transactions, examine supporting documentation, and conduct sample testing. This is to determine whether controls are operating as intended and identify any control weaknesses or deviations from established policies and procedures.
  5. Findings and Recommendations – Internal auditors compile their findings and document any control deficiencies, non-compliance issues, or areas for improvement. In addition, they can also provide recommendations to address the identified issues and improve the effectiveness of controls and processes.
  6. Reporting – Internal auditors prepare a report summarizing the audit results, highlighting areas of concern, and presenting actionable recommendations for improvement. The report is typically shared with management and the board of directors.
  7. Follow-up and Monitoring – After the audit report is issued, internal auditors may follow up on the implementation of their recommendations and monitor the progress made by management in addressing the identified issues.

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What are the 5 Cs of an Internal Audit?

A complete and in-depth internal audit report typically ends with a summary of the findings, following these 5 Cs:

  1. Criteria – This refers to the standard (e.g., ISO 9001, ISO 14001), policy, procedure, or benchmark against which the condition is being evaluated. It serves as the reference point or expectation that is used to assess whether the observed condition meets the desired or required level.
  2. Condition – This describes the current state or situation observed during the audit. It identifies the specific issue, deficiency, or non-compliance.
  3. Cause – This involves an analysis of the underlying factors or root causes that have contributed to the condition being present.
  4. Consequence – This describes the potential impact or effect of the identified condition on the organization. It highlights the risks, implications, or negative outcomes.
  5. Corrective Action – This outlines the recommended or required steps to address the identified condition and prevent its recurrence. It provides specific actions or measures that should be implemented to resolve the issue and improve the current state.


Here are some practical internal audit examples on how it is conducted and reported in various industries:


Revenue Management

  • Assess the effectiveness of revenue management processes, including pricing strategies, reservation systems, and revenue recognition practices.
  • Review the accuracy of revenue records, analyze pricing discrepancies, and evaluate controls over discounts and promotions.

Food and Beverage Controls

  • Review controls related to food and beverage inventory purchasing, receiving, storage, and usage.
  • Assess compliance with food safety regulations and standards like ISO 22000, evaluate inventory tracking systems, and examine controls over wastage and spoilage.


Inventory Management

  • Evaluate the accuracy and effectiveness of inventory management controls over receiving, storage, and distribution of raw materials and finished goods.
  • Assess inventory valuation methods, review physical inventory counts, and analyze inventory turnover ratios.

Production Efficiency

  • Examine the efficiency of the utilization of resources, quality control measures, and adherence to production schedules
  • Test the effectiveness of production planning and scheduling, review production variance reports, and identify opportunities for process improvements


Cash Handling and Point of Sale (POS) Systems

  • Verify controls over cash handling, cash register reconciliation, and the accuracy of sales transactions recorded in the POS system.
  • Review cash handling procedures and assess controls over discounts and refunds.

Inventory Controls

  • Audit the effectiveness of inventory controls, including receiving, storage, and inventory reconciliation processes.
  • Evaluate inventory counting procedures, assess shrinkage controls, and analyze stock movement and turnover rates.

Common Mistakes When Conducting Internal Audits

When conducting internal audits, it’s crucial to be aware of common mistakes that auditors may make. Being mindful of these can help auditors improve the effectiveness and efficiency of their audit processes.

With that, here are some common mistakes to avoid:

  • Lack of Proper Planning
  • Inadequate Risk Assessment
  • Insufficient Evidence Gathering
  • Lack of Independence and Objectivity
  • Ineffective Communication
  • Inadequate Follow-up and Monitoring
  • Insufficient Professional Development


To guide organizations from various industries on how to conduct an internal audit, standards and regulations can be followed and complied with. These help ensure consistency in performing internal audits that follow a systematic approach.

The Institute of Internal Auditors (IIA) has established a set of standards known as the International Standards for the Professional Practice of Internal Auditing (Standards). These standards provide guidance and best practices for conducting internal audits. The current edition is the International Professional Practices Framework (IPPF), which includes the following core standards, among others:

  • Purpose, Authority, and Responsibility
  • Independence and Objectivity
  • Proficiency and Due Professional Care
  • Performance of the Internal Audit Engagement
  • Managing the Internal Audit Activity

Internal auditors need to familiarize themselves with these standards and apply them in their audit practices. Adhering to these standards helps ensure the credibility, effectiveness, and professionalism of internal audit activities and contributes to the value provided by the internal audit function within an organization.

Patricia Guevara
Article by

Patricia Guevara

SafetyCulture Content Specialist
Patricia Guevara is a content writer and researcher for SafetyCulture. With her extensive content writing and copywriting experience, she creates high-quality content across a variety of relevant topics. She aims to promote workplace safety, operational excellence, and continuous improvement in her articles. She is passionate about communicating how technology can be used to streamline work processes, empowering companies to realize their business goals.