How to Audit Internal Controls

Internal controls are the safeguards a company implements to protect their business or financial information. While internal controls are a business practice in common use for the past several decades, financial control became more important with the accounting scandals of 2001 and 2002. Publicly held companies must hire external auditors to review and test internal controls to ensure they provide accurate protection for the company’s information. Auditors will use a mix of standard auditing principles and specialized ones when auditing internal controls.

Things You'll Need

• Accounting manual

Instructions

1. Create an audit plan. Audit plans outline which internal controls auditors will focus on during the review process. Internal controls relating to cash management, inventory, prepaid expenses and petty cash are typically more important than others. The number of controls and audit scope is also part of the audit plan.

2. Review the client’s accounting policies. Auditors will typically start the internal control audit process by reviewing the company’s internal accounting policies. This provides information about how well company management understands the importance of controls and how to implement them.

3. Test information related to the internal control. Audit tests include observing how employees handle financial information, interviewing employees to determine their understanding of job tasks and controls, or recalculating information from the accounting function.

4. Compare internal controls to accounting standards or government regulations. Most internal controls follow a specific set of rules depending on the company and the industry in which it operates. Auditors will compare the company’s internal controls to ensure they follow these external guidelines.

Tips & Warnings

• Requesting company information during the initial audit meeting or soon thereafter can help auditors avoid spending too much time gathering these items during the fieldwork. This saves auditors time and lessens the financial liability of the client.

• Internal controls audits must have an audit scope that is an accurate representation of the company’s operating procedures. Failing to create an accurate and sufficient audit plan can skew the results and provide a better picture of the company regardless of internal control deficiencies.

References

• Google Books: Auditing—Principles and Practice