The Internal Audit Process from A to Z: How It Works!

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Every successful audit is based on sound planning and an atmosphere of constructive involvement and communication between the client and the auditor. I see quite a few audit organizations that include a Web-based explanation to their clients how the audit process works. The purpose of providing this page is for those audit organizations that have not explained to their clients how, in general, the audit process works. It also is designed to provide a resource for sharing tools and techniques for each of the distinct phases of the audit process. If you have tools or resources that you would like added to these pages please send them to editor@auditnet.org. Thanks to Terry Radke, Director Indiana University - Internal Audit for allowing AuditNet to "borrow" the audit process description they use for their customers. I also added links to other sites to help illustrate or clarify the process. Click here for sample documents used in the audit process. For a brief overview including a summary of types of audits click here.

Audit Process
Although every audit project is unique, the audit process is similar for most engagements and normally consists of four stages: Planning (sometimes called Survey or Preliminary Review), ieldwor!, Audit Report, and ollow"up Review# $lient involvement is critical at each stage of the audit process# As in any special project, an audit results in a certain amount of time %eing diverted from your department&s usual routine# 'ne of the !ey o%jectives is to minimi(e this time and avoid disrupting ongoing activities# Following are some sample flowcharts of the process from other organizations that you may find helpful: Central Queensland University Internal Audit Process European Space Components )nternal Audit Procedure guide includes a flow chart of the audit process# University of Illinois Audit Process Flowchart Top of Page

Planning
*uring the planning portion of the audit, the auditor notifies the client of the audit, discusses the scope and o%jectives of the e+amination in a formal meeting with organi(ation management, gathers information on important processes, evaluates e+isting controls, and plans the remaining audit steps#

Announcement Letter ,he client is informed of the audit through an announcement or engagement letter from the )nternal Audit *irector# ,his letter communicates the scope and o%jectives of the audit, the auditors assigned to the project and other relevant information# Initial Meeting *uring this opening conference meeting, the client descri%es the unit or system to %e reviewed, the organi(ation, availa%le resources (personnel, facilities, equipment, funds), and other relevant information# ,he internal auditor meets with the senior officer directly responsi%le for the unit under review and any staff mem%ers s-he wishes to include# )t is important that the client identify issues or areas of special concern that should %e addressed# Preliminary Survey )n this phase the auditor gathers relevant information a%out the unit in order to o%tain a general overview of operations# S-.e tal!s with !ey personnel and reviews reports, files, and other sources of information# Internal Control Review ,he auditor will review the unit&s internal control structure, a process which is usually time" consuming# )n doing this, the auditor uses a variety of tools and techniques to gather and analy(e information a%out the operation# ,he review of internal controls helps the auditor determine the areas of highest ris! and design tests to %e performed in the fieldwor! section# $lic! here for an annual internal control review plan# Audit Program Preparation of the audit program concludes the preliminary review phase# ,his program outlines the fieldwor! necessary to achieve the audit o%jectives# Top of Page

Fieldwork
,he fieldwor! concentrates on transaction testing and informal communications# )t is during this phase that the auditor determines whether the controls identified during the preliminary review are operating properly and in the manner descri%ed %y the client# ,he fieldwor! stage concludes with a list of significant findings from which the auditor will prepare a draft of the audit report# Transaction Testing After completing the preliminary review, the auditor performs the procedures in the audit program# ,hese procedures usually test the major internal controls and the accuracy and

propriety of the transactions# /arious techniques including sampling are used during the fieldwor! phase# Advice & Informal Communications As the fieldwor! progresses, the auditor discusses any significant findings with the client# .opefully, the client can offer insights and wor! with the auditor to determine the %est method of resolving the finding# 0sually these communications are oral# .owever, in more comple+ situations, memos and-or e"mails are written in order to ensure full understanding %y the client and the auditor# 'ur goal: 1o surprises# Audit Summary 0pon completion of the fieldwor!, the auditor summari(es the audit findings, conclusions, and recommendations necessary for the audit report discussion draft# orking Pa!ers Working papers are a vital tool of the audit profession. They are the support of the audit opinion. They connect the clients accounting records and financials to the auditors opinion. They are comprehensive and serve many functions. Working Paper Documentation Top of Page

Audit Re!ort
'ur principal product is the final report in which we e+press our opinions, present the audit findings, and discuss recommendations for improvements# ,o facilitate communication and ensure that the recommendations presented in the final report are practical, )nternal Audit discusses the rough draft with the client prior to issuing the final report# or an audit report template including an e+ecutive summary clic! here# "iscussion "raft At the conclusion of fieldwor!, the auditor drafts the report# Audit management thoroughly reviews the audit wor!ing papers and the discussion draft %efore it is presented to the client for comment# ,his discussion draft is prepared for the unit&s operating management and is su%mitted for the client&s review %efore the e+it conference# #$it Conference 2hen audit management has approved the discussion draft, )nternal Audit meets with the unit&s management team to discuss the findings, recommendations, and te+t of the draft# At this meeting, the client comments on the draft and the group wor!s to reach an agreement on the audit findings#

Formal "raft ,he auditor then prepares a formal draft, ta!ing into account any revisions resulting from the e+it conference and other discussions# 2hen the changes have %een reviewed %y audit management and the client, the final report is issued# Final Re!ort )nternal Audit prints and distri%utes the final report to the unit&s operating management, the unit&s reporting supervisor, the /ice President for Administration, the 0niversity $hief Accountant, and other appropriate mem%ers of senior 0niversity management# ,his report is primarily for internal 0niversity management use# ,he approval of the )nternal Audit *irector is required for release of the report outside of the 0niversity# Client Res!onse ,he client has the opportunity to respond to the audit findings prior to issuance of the final report which can %e included or attached to our final report# .owever, if the client decides to respond after we issue the report, the first page of the final report is a letter requesting the client&s written response to the report recommendations# )n the response, the client should e+plain how report findings will %e resolved and include an implementation timeta%le# )n some cases, managers may choose to respond with a decision not to implement an audit recommendation and to accept the ris!s associated with an audit finding# ,he client should copy the response to all recipients of the final report if s-he decides not to have their response included-attached to )nternal Audit&s final report# Client Comments inally, as part of )nternal Audit&s self"evaluation program, we as! clients to comment on )nternal Audit&s performance# ,his feed%ac! has proven to %e very %eneficial to us, and we have made changes in our procedures as a result of clients& suggestions# Top of Page

Audit Follow%&!
2ithin appro+imately one year of the final report, )nternal Audit will perform a follow"up review to verify the resolution of the report findings# Follow%u! Review ,he client response letter is reviewed and the actions ta!en to resolve the audit report findings may %e tested to ensure that the desired results were achieved# All unresolved findings will %e discussed in the follow"up report# Follow%u! Re!ort

,he review will conclude with a follow"up report which lists the actions ta!en %y the client to resolve the original report findings# 0nresolved findings will also appear in the follow"up report and will include a %rief description of the finding, the original audit recommendation, the client response, the current condition, and the continued e+posure to )ndiana 0niversity# A discussion draft of each report with unresolved findings is circulated to the client %efore the report is issued# ,he follow"up review results will %e circulated to the original report recipients and other 0niversity officials as deemed appropriate# Top of Page

Internal Audit Annual Re!ort to t'e (oard

)n addition to the distri%ution discussed earlier, the contents of the audit report, client response, and follow"up report may also communicated to the Audit $ommittee of the 3oard as part of the )nternal Audit Annual Report# Top of Page

T'e Process) A Colla*orative #ffort

As pointed out, during each stage in the audit process""preliminary review, field wor!, audit reports, and follow"up""clients have the opportunity to participate# ,here is no dou%t that the process wor!s %est when client management and )nternal Audit have a solid wor!ing relationship %ased on clear and continuing communication# 4any clients e+tend this wor!ing relationship %eyond the particular audit# 'nce the audit department has wor!ed with management on a project, we have an understanding of the unique characteristics of your unit&s operations# As a result, we can help evaluate the feasi%ility of ma!ing further changes or modifications in your operations#
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