What is an 'Internal Audit'

An internal audit is the examination, monitoring and analysis of activities related to a company's operations, including its business structure, employee behavior and information systems. Internal audit regulations, such as the Sarbanes-Oxley Act of 2002, have increased corporate requirements for performing internal audits. Audits are important components of a company's risk management as they help to identify issues before they become substantial problems, such as attempts to steal intellectual property.

BREAKING DOWN 'Internal Audit'

A daily, weekly, monthly or annual internal audit assesses the effectiveness of a company’s internal control system and helps uncover evidence of fraud, waste or abuse. Some departments may be audited more frequently than others. For example, a manufacturing process may need daily audits for quality control purposes, while the human resources department may need an annual audit of records and processes.
Scheduling audits on a calendar helps ensure they are performed consistently. Departments should be given notice so they can have the required documentation and materials available for the auditor. A surprise audit may be conducted if suspicion of unethical or illegal activity exists.

Internal Audit Procedure

An internal audit begins by an auditor assessing current processes and procedures. The auditor then analyzes and compares the results to internal control objectives. He determines whether the results comply with internal policies and procedures as well as state and federal laws. Finally, the auditor compiles and presents an audit report to the business owner.

Assessment Techniques

Assessment techniques ensure an internal auditor completely understands internal control procedures and determines whether employees comply with internal control directives. An auditor avoids disrupting the daily workflow by beginning with indirect assessment techniques. For example, he may review flowcharts, manuals, departmental control policies or other existing documentation, or he may trace specific audit trails from start to finish. He may conduct one-on-one interviews and process observations with staff if document reviews or audit trails do not fully answer all of his questions.

Analysis Techniques

Substantive procedures such as transaction matching, physical inventory count, audit trail calculations and calculating already-reconciled financial statements help determine whether work products contain data entry errors or whether financial statements contain misstatements. Analysis techniques may test random data or target specific data if an auditor believes an internal control process needs work.

Reporting Procedures

Internal audit reporting always includes a formal report and may include a preliminary or memo-style interim report. An interim report typically includes sensitive or significant results the auditor feels are pertinent for immediate sharing with the business owner. The final report is more formal than the interim report. The final report includes a summary of the procedures and techniques used for completing the audit, a description of audit findings and suggestions for improvements of internal controls and control procedures.

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Benefits of Strategic Management

    There are many benefits of strategic management and they include identification, and exploration of opportunities. For instance, newer products, newer markets, and newer raids into business lines are only possible if firms indulge in strategic planning. Next, strategic management allows firms to take an objective view of the activities being done by it and do a cost benefit analysis as to whether the firm is profitable.

Just to discriminate, by this, we do not mean the financial benefits alone (which would be discussed below) but also the assessment of profitability that has to do with evaluating whether the business is strategically aligned to its goals and  preferences.

The key point to be noted here is that strategic management allows a firm to orient itself to its market and consumers and ensure that it is actualizing the right strategy.

Financial Benefits :

    It has been shown in many studies that firms that engage in strategic management are more profitable and successful than those that do not have the benefit of strategic planning and strategic management.

When firms engage in forward looking planning and careful evaluation of their  preferences, they have control over the future, which is necessary in the fast changing business landscape of the 21st century.

It has been estimated that more than 100,000 businesses fail in the US every year and most of these failures are to do with a lack of strategic focus and strategic direction. Further, high performing firms tend to make more informed decisions because they have considered both the short term and long-term effect and hence, have oriented their strategies accordingly. In contrast, firms that do not engage themselves in meaningful strategic planning are often bogged down by internal problems and lack of focus that leads to failure.

Non-Financial Benefits :

    The section above discussed some of the tangible benefits of strategic management. Apart from these benefits, firms that engage in strategic management are more aware of the external threats, an improved understanding of competitor strengths and weaknesses and increased employee productivity. They also have lesser resistance to change and a clear understanding of the link between performance and rewards.

    The key aspect of strategic management is that the problem solving and problem preventing capabilities of the firms are enhanced through strategic management. Strategic management is essential as it helps firms to rationalize change and actualize change and communicate the need to change better to its employees. Finally, strategic management helps in bringing order and discipline to the activities of the firm in its both internal processes and external activities.

Closing Thoughts :

     In recent years, virtually all firms have realized the importance of strategic management. However, the key difference between those who succeed and those who fail is that the way in which strategic management is done and strategic planning is carried out makes the difference between success and failure. Of course, there are still firms that do not engage in strategic planning or where the planners do not receive the support from management. These firms ought to realize the benefits of strategic management and ensure their longer-term viability and success in the marketplace.

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