Conducting Internal and External Audits

Conducting Internal and External Audits

10/11/2018

Strategic Planning

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Business

Internal and external audits provide analytical insights about an organisation's finances, operations and governance.

​Internal audits present an overview of an organisation’s current state of affairs, whilst external audits verify internal reports about an organisation’s financial health to its stakeholders and the government. 

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Internal Audit
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1.     Purpose of an Internal Audit 

Internal audits allow an organisation to determine its core competencies, namely its resources and capabilities. This would allow managers to align their leadership techniques and managerial policies with the organisation’s corporate objectives.
 
By creating an internal audit of its resources, an organisation is able to track the availability of its economic, physical and intangible assets, and how it may use such assets to develop and deliver its products and services.
 
In addition, an internal audit also allows an organisation to determine the skills and abilities that its employees require to execute its corporate strategy.
 
They are directly addressed to an organisation’s board of directors, along with an organisation’s audit committee. Audit reports may be requested by regulators, but are often kept from the public.
 

2.     Role of an Internal Auditor 

Internal auditors may be employed by the audited organisation, or may be from an outsourced accounting firm that is hired by the organisation.
 
They gather accurate and factual data that would enable intelligent assessment of an organisation’s strengths and weaknesses. This would enable an organisation to assess its current attributes instead of its perceived competencies.
 
They assist an organisation with the construction of its administrative systems, as well as its risk management framework.
 
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3.     Pros and Cons of Internal Audits 
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Admittedly, conducting these audits may require long-term research practices, and its results may not be immediate.
 
In addition, exercising an internal audit’s insights to improve corporate practices may strain an organisation’s finite supply of resources. Implementing new policies may require additional resources that an organisation would rather invest into activities that would generate immediate gain.
 
In order to keep their businesses afloat, organisations may wish to invest their resources into activities that would generate immediate economic gains, as they may not be convinced that these reports may generate long-term profits.
 
However, organisations are highly encouraged to invest their resources into creating internal and external reports, as these documents may shed insights about an organisation’s current state, as well as its marketplace.
 
These insights may be used to clarify an organisation’s overarching objectives, and to ensure that managers apply leadership techniques that would enable employees to reach these goals. These changes may ultimately allow a firm to increase its productivity.  

​External Audit
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​1.     Purpose of an External Audit 

External audits are compulsory reports that provide accurate insights about an organisation’s financial health to its stakeholders and the government.
 
In order to ensure that external audits are accurate, they are conducted by independent, third party professionals who are certified to verify an organisation’s existing financial records. In the event that an external auditor discovers that the organisation’s reports have been modified, they must justify their opinion with facts.
 
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2.     Role of an External Auditor 
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External auditors must ensure that the organisation’s financial records are prepared according to certified policies, such as those in the GAAP (Generally Accepted Accounting Principles) framework.
Organisations are legally advised to cooperate with their external auditor. As such, external auditors are able to access any necessary financial records that may aid their analysis. 

​Key Differences between Internal and External Audits
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Internal Audit	External Audit
Internal audits are analytical reports that are conducted by employees of an organisation. Although these reports are optional, they may shed valuable insights on an organisation’s operations and governance.	External audits are conducted by third-party individuals or accounting firms. These documents are compulsory reports that must be conducted to verify the organisation’s financial activities.
These reports are directly conveyed to an organisation’s board of directors.	These reports are primarily created for the organisation’s stakeholders to review.
Internal audits outline an organisation’s regular activities, and provide suggestions to improve its operations.	External audits are legislative reports that analyse and verify an organisation’s financial statements.
Internal reports should be conducted on a continuous basis. This would provide management on relevant information about an organisation’s corporate affairs, which may be used to direct the organisation’s strategic goals.	Organisations are legally responsible for conducting external audits once a year.

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Components of a Strategy Map
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Organisations may choose to refer to a historical, yet relevant, guidebook for their research practices.
 
“The Art of War” highlights five critical elements which ensure that a company’s strategic planning strategy is practical and helpful to its business affairs:
 
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Mission 

An organisation’s mission should determine its overarching purpose. It should define the problem that it intends to solve, the solution that it presents to address the problem, and its target audience.
 
Once an organisation has specified its mission, its managers may ensure that their respective departments’ activities are aligned with its key objectives.
 
As such, an organisation’s mission unites those who may significantly influence their corporate activities, such as its employees and stakeholders.
 

Ground 

Organisations should prominent competitors in their industry. This would enable them to identify gaps that have not been addressed by existing products and solutions.
 
An organisation should also determine specific trends that may aid its expansion. They may also determine potential collaborators that may allow them to merge their customer bases or increase their earnings.
 
An organisation should also identify the specific rules that govern its marketplace. For instance, an organisation should determine effective strategies that their competitors and collaborators would adopt, such as emerging business models or increased investments in certain assets.
 

Climate 

Climate considers changes in trends and timing. A corporation’s climate may either impede or bolster its market share.
 
A thorough understanding of their marketplace would allow an organisation to identify emerging trends that they may aid their expansion, or threats that may compromise its competitive position.
 
Using Perceived Value to Analyse Products and Services 

An organisation should also acknowledge its customers’ preferences and perceptions. It should monitor the perceived value of its business solutions, which is measured according to how much a customer values a product and/or service.
 
The perceived value of an organisation’s products and services will influence its pricing strategies, budget for marketing campaigns, and other activities that would involve direct communication with their customers.
 

Command 

Command is defined as the wisdom and skill of a corporation’s leaders.
 
An organisation’s managers should exercise appropriate leadership techniques to delegate tasks and responsibilities, and to lead their employees towards achieving their organisation’s primary goals.
 
Managers may use soft skills (e.g. teamwork and cooperation) and hard skills (e.g. tabulation and scheduling) to motivate their team to meet specific Key Performance Indicators (KPI).
 

Method 
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An organisation’s Method includes the skills and techniques that a team requires to fulfil the company’s strategy.
 
An organisation may establish guidelines for their financial, legal and operational disciplines. These guidelines may include:

• Penalties for deviation or misbehaviour
• Shared values that employees should practice
• Factors for rewards and promotions

• Miscellaneous logistics and metrics to facilitate an organisation’s key activities