Internal accounting audit – how to set up company’s internal audit service

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Accounting – is a system of collection, registration, and analysis of data about company’s business activity in financial terms. Russian legislation requires all companies to keep accounting. Even sole proprietors must comply with these requirements. Accounting data help to assess conditions of company’s affairs, however accounting mistakes may lead to serious consequences such as gross fines from state authorities.

Accounting control – is important part of any company’s activity. It helps to objectively judge about financial condition of company’s affairs, reduce tax base, decrease risks, and exclude sanctions from the side of state authorities. Control may be internal and external. External audit is usually conducted by independent experts or organizations, whereas internal accounting audit is conducted by company’s employees. Actually, it is economic activity control. 

Tasks and goals of internal accounting audit

The procedure of accounting audit is subject to the Law «On accounting». When the external independent audit may be required by state authorities, the company’s owners and managers are usually interested in internal audit. Data received during audit helps to make unbiased conclusion about condition of company’s affairs and to make right decisions aimed at company’s growth and development on the basis of information received. 

Thus, goal of internal accounting audit – is control of significant circumstances and prompt response to them. At the same time, each enterprise is entitled to specify the list of these circumstances at its discretion, since each business has its own specifics and scale.

Besides, there is one more important goal of internal audit – preparation to mandatory audits. In fact, many companies are obliged to pass external independent expertise, results of which may significantly affect company’s affairs. Internal control allows to find out accounting mistakes and inaccuracies before an invited expert will make it.

Internal audit helps to resolve a few important tasks:

• control of factors affecting the company’s activity results;
• detection of mistakes, omissions, and misuses;
• prevention of possible risks.

Internal control is designed to guarantee that the enterprise performs effectively, that its assets are safe and operating and financial indicators are in line with business plan. Audit helps to make sure that company’s financial reports are correct, and it complies with legislation. Moreover, it is separately checked how much the company complies with letter of the law in its economic activities, and how accurately it conducts accounting in particular.

Regular internal control allows to detect factors which negatively affect company’s activity on time. They may concern manufacturing process, products’ quality, staff actions, waste of funds or selection of suppliers.

Moreover, timely audit helps to legally reduce company’s tax base. After analyzing company’s financial documents auditor will be able to make a list of recommendations on how the organization can reduce tax payments, and where it can claim tax deductions. It is almost impossible to determine how to reduce tax payments without preliminary audit. 

Internal control elements 

Elements of control are employment conditions and actions performed by auditors. The main element – is control environment, i.e. the position and actions of business owners or managers aimed at maintaining control. Moreover, specialist assesses risks and the control itself, examines information about company’s activity and communicates with company’s management. Finally, elements of audit include all procedures that are responsibility of the expert. 

Audit always starts from the moment when specialist determines the scope of work and makes a plan for it. This plan is negotiated with the management, after which the accounting audit begins. There are several types of internal audit. Some of them are directly related to control:

• business organization: the work of the administration, subsidiaries, and individual employees;
• company’s compliance with state laws and internal regulations;
• accounting and reporting.

Functions and principles of internal audit

Audit helps to perform a few important functions. These include informing and advising employees, analyzing collected information about business activities, and working out proposals. The list of control functions includes detecting accounting errors as well as preventing their occurrence in the future.

In comparison with external audit, which examines the reports that have already been compiled for the particular period and assesses the activities of the company as a whole, internal accounting audit allows to track important processes in more detail and quickly. It allows to evaluate the company’s performance “in action”, before many procedures are completed and reflected in reports.

Principles of internal audit are familiar to those external experts follow. 

• The company can conduct audits on a schedule or as needed.
• Audit is uniform, objective, and open.
• The auditor should not depend on those whom he checks.
• All actions, results and conclusions must be documented by auditor.
• When detecting accounting mistakes, specialist gives recommendations on how to eliminate them.

How to set up company’s internal audit service 

The most difficult issue is to follow the principle of experts’ independence during internal audits. However, this is a key requirement, and control cannot be considered objective without its compliance. Therefore, the Manager can form an internal audit service by order. After that, it is necessary to develop methodological documents for it. In addition, management has the right to involve third-party experts in the work of the service.

Methodological documents comprehensively describe the activities of the service. Therefore, in addition to information about its tasks and goals, they must also contain a description of service structure and allocation of responsibilities in it. It also spells out the types of documents which service draws, the criteria for assessment of accounting and basic procedures.

Internal audit steps

Planned control is carried out according to a certain schedule. However, audit may also be required outside the plan: if the economic indicators deteriorate sharply, the company loses funds, and the management has doubts about the correctness of accounting. Regardless of whether the check is scheduled or unscheduled, it passes through 3 consecutive stages:

1. Preparatory: defining the range of issues, deadlines, and methods.
2. Basic: direct control of accounting.
3. Final: processing of information and drawing up a conclusion.

The quality of internal accounting audit depends directly on qualification of specialists who perform it. The scope of control is determined by the company itself.