The Advantages and Disadvantages of Internal Audit Function - Research Paper Example

The advantages and disadvantages of Internal Audit Function in Small and medium size Organizations. Contents Contents 2 3 Introduction 3 Literature Review 4 Analysis 6 Objective of the internal audit function 7 The do and don’ts of the internal auditors 8 Advantages of internal audit function for small and medium organization 8 Disadvantages of the internal audit in small and medium size organization 9 Findings 10 Conclusion 12 References 14 Abstract The internal audit function in case of small and medium size organizations has a positive and great influence on the operational performance of the small scale firms. It is very difficult to determine the extent of benefit that internal audit function provides to the small and medium size organizations. The main problem with the small business organizations is that they have not realized the importance or the role of the internal auditors. The advantages and the limitations of the internal audit function in case of the small organization are analyzed in this study. Introduction The small and the medium size organization play an important and major role towards the contribution and development of the political and the socio economic infrastructure. The topic mainly focuses on the process of developing the organizational capabilities for the implementation of the internal auditing function for managing the risk effectively and efficiently and achieving the organizational objectives. The research mainly focuses on the two research questions which mainly includes the advantages and the limitation of the internal audit function in case of the small and medium size organization and the barrier or the constraint for developing the capabilities of the internal audit functions. The main objective of the topic deals with how the small and medium size organization implements and formulates the internal audit function and the positive and negative effect of the internal audit function on the organizations. The internal audit performs a wide variety of functions that ranges from the determination of the financial position of the organization to the process of determination of the efficiency and the effectiveness of the internal audit function in case of the small and medium size organization. The internal audit has the ability to deal with the non financial areas of the organization. The small and medium size organization has the need and requirement of internal audit function. The maintaining of accounts in case of small and medium size organization is less complex and critical as compared to the large size organizations and the problem or the obstacle of the small and the medium size organization is that they neither has the capability or ability for affording the services of the auditing professionals in spite of there need and requirement. The paper will also discuss about the various challenges that the small and medium business organization will face for the adoption and implementation of the internal audit function. Literature Review The author (Dauber) in his article has emphasized that internal auditing plays an important and independent audit function for adding value and improving the operations of the organizations. The author emphasizes that internal audit function helps or assist the organization in accomplishing the objectives of the small and medium size organizations and improving and evaluating the efficiency and effectiveness of the control, risk management and governance of the small and medium size organizations. The internal audit function should not only deal or concentrate on providing recommendation and suggestion but it is required that it should communicate effectively its recommendation and suggestion for management of the small and medium size organization (Dauber, 2009). The writer (Griffiths) in his study has focused on the fact that the internal auditors have more responsibilities for strengthening the function of the internal control system and also improving the risk management process of the small and the medium size organizations. The role or the function of the internal auditor is transformation from the traditional approach of the auditors to the pro active approach of the auditors in which the internal auditors take the responsibility or the duty of entering into partnership with the management (Griffiths, 2012). The author (Sharma) in his paper has highlighted on recognizing or identifying the role of the internal auditing in enhancing and improving the corporate governance and financial reporting of the small and medium size organizations (Sharma, 2011).The author (Tritschler) in his article has explained that the internal audit function plays an important role in developing the process which facilitates the business in developing the risk assessment of the small and medium organization. Internal audit function has different stakeholders which mainly include the audit committee, board of directors, the chief financial officer, chief executive officer and the chief information officer. The internal audit function focuses on providing importance and assurance to the stakeholders. The internal audit function in terms of corporate governance is defined as the internal audit function which compels the board to perform or play the role of fulfilling its corporate governance duties and responsibilities (Tritschler, 2013).The writer (Greenwood) in his study has focused on corporate governance which is considered as an important role of the internal audit function in assisting the board of the organization in supervising the efficiency and the effectiveness of corporate governance. The internal audit function has been introduced for focusing on control, governance and risk of the small and medium size organizations. The writer has reflected that there is difference and the lack of cooperation and correlation between the activities that are performed by the internal auditors and the objectives of the internal auditor (Greenwood, 2002).The authors (Roy and Edwards) in their paper has emphasized that the role of the internal audit function has not been effectively determined by the small and the medium size organizations since the financial reporting of these organizations were not given much importance and therefore these were neglected. The authors has emphasized that the best way of improving the internal audit function is outsourcing which is considered useful for increasing the expertise of the small and medium size organizations (Roy and Edwards2014).The writers (Armstrong and Stephens) in their paper has focused on the critical role of the internal auditor in the functioning of the organization and the internal audit function maintains objectivity and independence in case of the small and medium size organization. The internal audit function assigns roles and responsibilities for performing the activities of the small and medium size organization. The growth and the development of the small and medium organization have provided competitive advantage and economic development at the regional, local and national level (Armstrong and Stephens, 2005). The researchers (Swanger and Chewning) in their study has mentioned about the wide range of responsibility that is performed by the internal auditor by emphasizing on the narrow and the broader aspects of the small and medium size organizations. The performance of the small and the medium size organization audit is likely to affect the account receivable, cash flow, account payable, payroll and profitability of the small and medium organization. Therefore the internal auditing of small and medium size organizations in order to ensure that the small and medium size organization is being able to attain the goal and profit of the organization for generating more profit and revenue. The internal audit function has helped or assisted the organization in achieving the value and corporate objectives of the small and medium size organizations. The internal auditors generally provides the advisory role and consulting service to the organization in the matters related to strategic risk, financial issues and IT systems (Swanger and Chewning, 2001). Analysis The internal auditing cash flow generally involves identification of the receipts of the business and determination of various sources. The internal audit function determines or deals with the various sources from which they are originated and this mainly focuses on the important and vital factors which increases the extent of dependence and also determines the amount of money that is expected to flow out of the organization. The internal audit function of the small and medium size organization determines and evaluates the account receivable of the organization and determines the amount of money that is utilized and realized for the purpose of business. And the result that is derived is reconsidered by the internal auditors in the credit policy. The internal auditor also facilitates the small and the medium size organization in determining the account payable that is the amount that the organization owes to its outside suppliers and therefore it benefits the organization in maintaining and controlling the cash of the organization. The internal auditor also deals in supervising the overall activities of the organization and the determination of profit or revenue of the organization generally enables the organization to generate profit. Objective of the internal audit function The internal audit function must fulfil the objectives in case of the small and medium size organization which includes determining the functions that is required to be implemented in proper sequence and it is required that the internal auditors to consider the riskier or complex units of the small and medium organization more carefully as compared to other departments of the organizations and the complex and the venture units are to be audited taking into consideration various internal as well as external factors of the organization. The rules, regulations, policies and procedures of the small and the medium size organization is required to be focused or emphasized on the improving the performance of work. The internal auditors are required to focus on reviewing various policies and procedures of the organization annually for ensuring that they will reflect the changes in the business environment. The outcome of the internal audit function is that the net income in case of small and medium size organization is very less and the corrective strategies are required to be implemented for rectifying and correcting the problems or the issues for developing and improving the financial health and financial condition of the small and medium size organization. The do and don’ts of the internal auditors The activities that is expected to be performed by the internal auditors in case of the small and medium size organizations mainly includes that the internal auditors are required to act independently and producing the report that is free from bias and manipulation without having any fear and the internal auditors are also required to work or perform its task or responsibilities within the time frame and the stipulated guidelines that is provided to them and also accessing and fulfilling all the requirements of the organization for avoiding the conflict that may exist among the superiors and the departments of the organization. The internal auditors are also required to comply with the legal and regulatory environment. The activities or the functions that the internal auditors are not required to perform in case of the small and medium size organizations includes that the internal auditors must not provide the information that are not required and extraneous in nature in case when the auditor is not aware and confident about the report. The internal audit function has to perform according to the requirement and the activities of the organization and not on the basis of its own judgment. Advantages of internal audit function for small and medium organization The advantages of the small and medium size organization mainly includes the internal audit function in terms of the small and the medium size organization provides assurance for performing its operation effectively and efficiently which mainly requires the activities is to be performed covering various problems or issues. The internal audit function prevents the problems that are related to spot potential and the risk related to the business operation which allows the management of the organization in safeguarding or preventing the organization from the rise or increase in the problems or issues. The internal audit function is able to determine and detect the fraud or manipulation of the information. The internal audit function facilitates in controlling effectively and also performing various task. The internal audit function strives towards maintaining integrity in the organization and recognizing and managing the risk of the organization. Disadvantages of the internal audit in small and medium size organization The disadvantages or the limitations of the small and the medium size organization is to conduct the function of internal audit can consume much of its time, it might be a costly process and the divergence from the important and the prime focus or objective and the internal audit as it involves lots of cost in performing its function or activities therefore it is required to control or mitigate the cost and accessing the financing which includes the poor credit worthiness of the small and medium size organization. Figure 1: Internal audit function of small and medium organization The above figure represents that the main function of performing the internal audit that is combined for analyzing and reviewing the documentation that will improve the effectiveness and the quality of the internal audit function. Although the internal audit function is a costly and critical process or function but the internal audit function plays an important and vital role in case of the small and medium size organization for safeguarding the quality and maintaining integrity of the organization. The Institute of Internal Auditors has the objective of improving the performance and activities of the organization Findings The findings are based on the above discussion that determines or identifies the advantages and the limitations of the internal audit function in case of the small and medium size organizations. It has been observed from the above study that with the development and progress of the economy the problem and the issues of the small and the medium size organization that is associated with the internal control has increased more and also the increase or the rise in the ineffective supervision and distortion of information which is acting as constraint and obstacle towards the growth and development of the small and medium size organization. Therefore it is required to consider the internal audit function for the development and progress of the small and medium size organization. The internal audit function performs the activities of inspection and supervision of the organization which is required for inspection, controlling, and assessing or evaluating the rationality, viability and effectiveness of the internal control and supervision of the activities of the small and medium size organization. The small and medium size organization can undergo rapid growth and development with the help of control and supervision of the activities of the organization. The internal audit is required to plan a proper and adequate budget and resources for the completion of its work. For performing the internal audit of the organization it requires staff with expertise and skill. The focus on the approach of value creation is considered as the most important change or shift in the role of the internal auditors as the change will facilitate or benefit the internal auditors in acquiring new training and skills and learning. The role and the responsibility of the internal auditors are increasing with the improvement and change in the skill. And with the application and focus on the risk management has improved the process of monitoring and improving the management of risk. This is a important step of the internal audit as the increase in the risk and incidents have influenced and affected the competitiveness of the organization and it is required by the small and medium size organization to abide by the rapid changes in the standards and rules and regulations of the organization. The internal audit has the ability to comply with the improvement in the overall function, performance and activities of the organization and it has the capacity of developing effective relationship along with other stakeholders and accessing and distributing the information which is considered very important. The internal auditor must act independently for providing effective report. The accounting and the controlling function of small and medium size organization are not developed and the application of the financial management alone cannot perform the finance activities of the organization. Therefore the internal auditor is required for monitoring the statement of account and the discrepancies in the accounts and moreover the conversion of information reduces or decreases the quality and therefore it is not possible to establish relation with each department in the organization. Therefore the internal audit function is required to be emphasized. The internal auditors are required to focus on the internal structure of the organization for developing the collective power of the organization as collective power by avoiding the concentration of rights and responsibilities. Therefore the development of the small and medium size organization will facilitate in facing and overcoming the financial crisis that is faced by them. A large number of small and medium size organizations has been closed due to the lack of internal control in case of the organization therefore it is expected that the organization to consider the internal audit function for improving the efficiency and the effectiveness of the organization. Therefore it can be observed that the internal audit function can improve the internal control of the small and medium size organization. Conclusion The above study has focused on the various issues and the problems that are associated with the small and medium size organization and the advantages or the drawbacks in complying with the internal audit of the organization. Therefore it is required to identify the key issues of the internal audit function which includes the communication, training, independence and the staff resources that will help will assist the internal auditors in overcoming the obstacles that is faced by the internal auditors and developing the internal audit capacity of the small and medium organizations and the independence of the internal auditor has not been recognized by the small and medium organization and the small and medium organization also faces the problem in recruiting the internal auditors . The internal audit has the ability and the capacity of complying with the overall improvement of the performance of the organization. The internal auditor is expected to act independently so that the auditor can carry out its duties and responsibilities in an unbiased and proper manner. The main responsibility of the internal auditor is identifying the issues and the problems that are faced by the small and medium size organizations related to the potential irregularities and fraud. The internal auditor is required to have good communication skill since the organization specially the small and medium size organization generally requires and expects guidance and advice from the auditors. Therefore the internal auditor is required to play the advisory role for supporting various decisions taken by the organization and ensuring towards the achievement and attainment of the goals and objectives of the small and medium size organization. Therefore the ability of the internal auditor is establishing the relationship and providing highly relevant and important information to the organization. References Armstrong, M. and Stephens, T., 2005. A handbook of employee reward management and practice. London: Kogan Page Publishers. Dauber, N.A., 2009. The complete guide to auditing standards, and other professional standards for accountants. Canada: John Wiley & Sons. Greenwood, R.P., 2002. Handbook of Financial Planning and Control. New York: Gower Publishing, Ltd Griffiths, P., 2012. Risk-based auditing. Burlington: Gower Publishing, Ltd. Gupta, 2004. Contemporary auditing. New Delhi: Tata McGraw-Hill Education. Roy A.C. and Edwards, J.R., 2014. Recurring issues in auditing: Professional debate. London: Routledge. Sharma, A., 2011. Auditing. New Delhi: FK Publications. Sherer, M. and Turley, S., 1997. Current issues in auditing. London: SAGE. Swanger, S. L. and Chewning, E.G., 2001. The Effect of internal audit outsourcing on financial analysts’ perceptions of external auditor independence. The Journal of practice., 20(2), pp. 119-122. Tritschler, J., 2013. Audit quality: Association between published reporting errors and audit firm characteristics. New York: Springer Science & Business Media. Read More