Auditing is an essential part of most organizations, yet it can be incredibly inefficient. Businesses conduct audits because they need audits to find out about problems within their own organization. The question we have now is – can we improve the problems that plague auditing? Is audit management software the answer? Let’s take a look at the role of internal audits and the problems that businesses face in auditing. 

The role of internal audits 

Here is something we all need to understand – no business wants something to go, but all of them accept that something will go wrong. No one can run an organization which has thousands of employees spread across many different branches and expect each and every employee action to be 100% perfect. There are bound to be some human errors. This is why, no matter how much businesses hate mistakes, they accept that there will be a few mistakes. Now, finding out these mistakes is important for businesses for several reasons. 

Businesses do not perform audits simply because they are good natured – even unethical businesses have internal audits. That’s because there is another major reason businesses focus on internal audits – so they can avoid problems in external audits. This is a major cause for concern for businesses operating in heavily regulated industries like the financial sector, the energy sector, and the healthcare sector. These sectors also know that mistakes will happen. Just look at medical malpractice – hospitals know that doctors are humans too, and they may make some mistakes, which may even end up costing some lives. However, from a business point of view, making a mistake is not the biggest issue for businesses. The mistake being caught by an external auditor is the biggest issue. 

How internal audits can save businesses  

We simply need to look at how things work in the financial sector to understand the importance of internal audits. Let’s say that a bank employee partners up with a criminal and tells them that they will help the criminal launder money across borders. Now, realistically speaking, there is no way for management to stop something like this from happening. They cannot read the minds of the people they interview; they cannot predict who may end up working with criminals, and they cannot predict the future.  

Here is how it usually goes – there is a quarterly audit. In most cases, these transactions on the criminal’s accounts will be highlighted during the audit, which will result in an in-depth investigation after which corrective actions will be taken. The breach of banking laws will be reported to regulatory authorities, who will probably levy a small fine on the bank or maybe let them off with a warning. 

The scenario works very differently if the internal audit does not catch the fraudulent transactions. If the mistake is caught by an external auditor, it will result in heavy financial penalties for the business and they may even suspend operations temporarily to ensure everything is working correctly. This is the nightmare of every business in the financial sector.  

Internal audits are controls  

Who would the regulatory bodies levy heavy penalties on the bank if they do not catch it? Simple – the regulatory bodies also understand that management isn’t clairvoyant. They cannot ensure that every person that works in the bank works within the boundaries of ethics and laws. However, if the internal audit catches these transactions, it means that the bank has the right controls (safeguards) in place. The fact that the bank itself caught the fraudulent transactions and took corrective actions shows the regulatory bodies that the management of the bank is committed to following the law. 

However, if the internal audit misses the fraudulent transactions, the regulatory bodies think that management is inept. They are concerned that similar incidents will also occur in the future because the bank does not have the right controls in place. They will then do further audits to find out where the bank went wrong. In extreme cases the regulatory bodies may even take control of the bank away from current management. 

This is one of the reasons audit management software is becoming a common sight in businesses. Paying a small fee for some audit software is much better than paying millions of dollars to regulatory bodies in the form of penalties. Internal audit software solutions are also very inexpensive nowadays. A major advantage of audit software is that it creates an electronic audit trail of every action taken, which makes it easier for regulatory bodies to see how the audit system functions and assures the regulatory bodies that the bank in question has the appropriate safeguards in place. 

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