Internal auditing fits in an aspect of audits. Internal auditing is an autonomous assessment function that is created by an organization’s management to evaluate its internal systems of control (Pickett, 2013). The main purpose of the audit is to check, review, appraise as well as report on the sufficiency of the internal control in steering effective and efficient use of organization’s economic resources. Internal audit is concerned with analyzing all the information related to functionality of the organization ranging from the organization’s structure, its information systems as well as the human behavior. The internal audit process has got various advantages and disadvantages within the course of its operation (Millichamp, 2012).
Advantages of Internal Audit
According to Pickett (2011), internal audit improves the capabilities of the workers. The workers of an organization are vigilant in their work since they know that their work will be evaluated by an auditor. The employees hence maximize their abilities in their respective work dockets in order to minimize errors. Millichamp (2012) indicates an organization that has a tendency of conducting constant internal auditing s, workers exhibit great sense of responsibility and fewer errors are identified. Internal auditing challenges the workers to maintain high work standards to avoid negative feedback after the audit process. The workers ability is also improved where the internal auditing facilitates identification of improvement areas. Through the audit process, opportunities for the workers to improve efficiency and effectiveness are identified. This challenges the workers to utilize these opportunities hence improving their competence in the long run.
Another crucial advantage of internal auditing is that it’s the swiftest mechanism to identify misappropriations or fraud in the company. Internal auditors have got immediate access to an organization’s records and can perform audits within the shortest timeframes possible. This enables them to get wind of fraud and misappropriations of funds at the earliest stage. Performing an internal auditing is the most efficient and reliable means the management may use to establish mistakes in the company’s account records (Moeller, 2004).
Internal auditing boosts the confidence of the mangers as well as the other workers in an organization. Managers and workers morale is improved through constant and regular audit process. It enables the managers and workers to be confident at what they do because they are fully aware of an impending audit. Constant positive review of the workers improves their confidence in their work hence generating admirable output for the organization. This also serves as motivational factor to the employees as they strive for admirable results after the audit (The Institute of Internal Auditors, 2009). According to Ridley (2008), the internal audit system ensures early identification of errors and possible means of eliminating them. This lessens the work of the final auditor. Internal auditors check the books of accounts from time to time. They are hence able to identify and correct errors as they arise. This makes the final audit process less time consuming and cheap for the organization.
Another major advantage of the internal auditing process is that the process is cost effective. Internal auditors are employees of the company and conduct the audit process as normal obligation without additional remunerations. Therefore, there are exists no additional costs for the company while carrying out the internal auditing process. This is opposed to the external audit where the organization invests a lot of resources to the process (Moeller, 2013). Gramling, Rittenberg and Johnstone (2012) purports that internal auditors are conversant with the company’s books of accounts as well as the filling system. They are hence able to conduct the audit fast enough saving time and overall cost associated with the process. Finally, the audit process directs the mangers attention to important issues in the organization. It enables the manager to know various sectors that need improvement. The audit report provides improvement recommendation for various sectors in the organization which the manger makes use of.
Disadvantages of Internal Auditing
The process of internal auditing is also coupled with various disadvantages which limits its ability to achieve the desired outcome at all times. One disadvantage is that internal auditing can lead to unfair consequences. This may happen where incompetent personnel are hired to perform this activity. For example, a company may hire a person with an auditing diploma to conduct an internal audit. This may experience resistance from within the organization citing incompetence of the auditor. Connectively, internal auditors are workers of the company and there exists a significant probability of bias. This may generate unfair consequences where the internal auditors may try to make some of the employees look bad or negligent in their work. The company cannot therefore entirely rely on the internal audit report to make changes in the organization. For conclusive evidence, an organization has to invite an external auditor to avoid possible unfairness (Millichamp, 2012).
Internal auditors may produce varying results which can spurn arguments among the staff members of the company while making inferences. The staff members may have low capabilities of interpreting the audit reports. Workers may disagree on various interpretations of the audit report by their colleagues since they do not have sufficient knowledge on particular inferences made by the auditor (Basu, 2006). According to Whittington and Delaney (2013), the audit results of an internal auditor may lead to confusion due to possibility of errors in the report. Internal auditors are not as professional as the external auditors hence their work is questionable. They may produce an erroneous report which may lead to wrong interpretation. Additionally, the auditors may not be in a position to detect all possible errors in the organization hence providing inadequate report.
The internal audit is too narrow and other companies may not rely on the information it provides. Internal auditors have a limited scope and usually do not offer information on a wide range of issues (Vallabhaneni, 2005). Other than inadequate communication with other companies, other parties such as tax authorities and the shareholders do not rely on internal audit report. Since internal audit may be manipulated by the company to make it look good to the outsiders, external parties are less interested the report while making assertions about the company. External audit report is considered to be more superior and wide than the internal report which is considered narrow and less informative (Hollenback, 2007).
Internal auditing process is an important and reliable aspect of auditing. This has been identified through the outlined advantages of internal appraisal system in an organization. It is visible that an organization needs internal audit system for efficient operations. The system also has a couple of disadvantages which limits its performance and reliability. Internal auditing aspect needs to focus on increasing its knowledge base to facilitate more reliability. This would also enhance easier understanding of the information users.