Internal auditors must understand control processes for areas they review.
An internal auditor reviews a business entity's operating activities, controls and policies to ensure that such activities comply with governmental rules, industry practices and regulatory guidelines. This expert also evaluates financial reporting tools to ensure that an organization prepares accounting records and statements in accordance with generally accepted accounting principles.
Review Operating Environment
An internal auditor reviews the operating environment of a corporation's segment or department to understand internal and external factors affecting how such a corporation operates. Internal elements influencing a firm's activities could be human resource policies, employee safety guidelines, top leadership's ethics and management style, departmental mechanisms and technology infrastructure. External factors could include industry practices, business trends, regulatory activities and government actions. For example, Securities and Exchange Commission or Federal Reserve regulations could influence a U.S-based bank's operations.
Understand Controls
An internal audit specialist learns about operating controls and procedures by seeking advice from segment-level and departmental employees, senior management, accountants, risk managers, operations chiefs or human resource staff. This expert also could read prior years' audit reports and working papers as well as industry publications or regulatory rules. For instance, an internal auditor reviewing the operations of Hedge Fund AlphaGamma might read finance articles or books, discuss with the fund's risk managers or seek advice from a mathematical finance professor.
Test Key Controls
An internal auditor reviews a firm's operating environment, controls and processes but only tests "key" controls. A control is a set of instructions that a company's management establishes to prevent technology malfunction and errors due to fraud or unintentional neglect. A control is considered "key" if a process or an activity cannot function without it. An audit specialist tests "key" controls to ensure that they are adequate and functional--that is, they remedy internal problems correctly.
Test Account Balances
An internal auditor reviewing financial reporting mechanisms ensures that such mechanisms help prepare and record "fair" and complete financial statements. An audit expert also verifies that statements do not show any material misstatement--that is, any significant error--and comply with generally accepted accounting principles, or GAAP. Fairness means accurate and objective in accounting parlance. Complete financial statements display four summarized reports: a balance sheet, a statement of profit and loss, a statement of cash flows and a statement of shareholders' equity.
Test Account Details
An internal auditor performs tests of account details--also referred to as substantive tests--when operating controls, procedures or guidelines around financial reporting mechanisms are not adequate or functional. An audit specialist applies generally accepted auditing standards, or GAAS, to account details and verifies that such details are correct and agree with total amounts recorded in account balances.
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