Understanding How Internal Audits Work

The significance of internal audits is highlighted by the substantial resources dedicated to assurance services. For instance, in 2024, Deloitte generated approximately $21 billion in revenue from its assurance segment, leading the market among the Big Four accounting firms.

This highlights the critical role that auditing functions play in the financial landscape.

Moreover, the demand for auditing professionals has been on the rise. In 2023, the United States saw a record number of accountants and auditors, with the workforce totaling over 1.4 million individuals.

This growth reflects the increasing emphasis organizations place on maintaining robust internal controls and ensuring compliance.

For compliance officers, risk managers, and business leaders, understanding the details of internal audits is crucial. This guide takes a closer look at the internal audit process, highlights its key elements, and offers best practices to improve audit effectiveness.

What is an Internal Audit?

An internal audit is an independent, objective evaluation of an organization’s processes, controls, and risk management systems. Conducted by internal employees or audit teams, these audits aim to assess compliance, enhance operational efficiency, and identify vulnerabilities before they become major issues.

The primary objectives of an internal audit include:

• Assessing Risk and Compliance – Ensuring the organization follows industry regulations, legal standards, and internal policies.
• Improving Operational Efficiency – Identifying inefficiencies and recommending process improvements.
• Safeguarding Assets – Detecting fraud, security risks, or financial discrepancies that could harm the company.
• Enhancing Internal Controls – Reviewing financial and operational controls to mitigate risks.
• Supporting Strategic Decision-Making – Providing leadership with data-driven insights to strengthen business strategies.

Now that we’ve established the core objectives of internal audits, let’s explore why these audits are essential for organizations to thrive and stay compliant.

Why Are Internal Audits Important?

Internal audits are crucial for maintaining the integrity, efficiency, and sustainability of an organization. They help businesses stay ahead of risks, avoid regulatory penalties, and continuously improve operations.

1. Ensuring Regulatory Compliance and Risk Management

Failing to comply with legal requirements can lead to hefty fines, reputational damage, and business disruptions. Internal audits ensure that:

• The company is adhering to laws like GDPR, SOX, HIPAA, and ISO standards.
• Risks such as cyber threats, fraud, and operational inefficiencies are identified and mitigated early.
• Compliance gaps are addressed before external auditors step in.

2. Improving Business Processes and Operational Efficiency

Internal audits go beyond compliance—they help organizations optimize performance by:

• Identifying bottlenecks in workflows and recommending process improvements.
• Enhancing resource allocation to boost productivity and reduce waste.
• Assessing whether the company’s strategic objectives align with operational practices.

3. Enhancing Accountability and Governance

Strong governance is essential for an organization’s success. Internal audits:

• Ensure transparency by verifying that financial reporting and business practices are ethical and accurate.
• Hold departments accountable for policy adherence and risk management.
• Provide the board and senior management with a realistic view of the company’s compliance and control environment.

Also Read: Internal Audit and Compliance Management Software Tools

To better understand the importance of internal audits, it’s essential to look at the different types of audits organizations use to ensure compliance, improve efficiency, and address potential risks.

What are the Types of Internal Audits?

Internal audits come in various forms, each focusing on a specific area to help organizations identify weaknesses, improve processes, and ensure compliance. These audits may include:

1. Governance and Compliance Audits
   Ensure organizations follow legal and regulatory requirements, internal policies, and industry best practices.
   • Reviewing corporate policies, ethical guidelines, and governance structures
   • Ensuring compliance with industry-specific laws and reporting requirements
   • Assessing board oversight and internal decision-making processes
2. Financial Audits
   Evaluate financial records, transactions, and reporting accuracy to detect inconsistencies or fraud.
   • Verifying financial statements for accuracy and transparency
   • Assessing risk exposure in financial transactions
   • Reviewing budget controls and expense management practices
3. Operational Audits
   Analyze business processes to improve efficiency and optimize resources.
   • Identifying bottlenecks in workflows and operational inefficiencies
   • Evaluating cost-effectiveness and resource utilization
   • Ensuring adherence to standard operating procedures (SOPs)
   • Measuring performance against key business objectives
4. IT and Security Audits
   Assess cybersecurity measures, IT governance, and data protection strategies.
   • Reviewing network security protocols and system vulnerabilities
   • Evaluating compliance with cybersecurity frameworks (e.g., NIST, ISO 27001)
   • Assessing incident response plans and disaster recovery strategies
5. Investigative Audits
   Conducted in response to fraud, misconduct, or security breaches.
   • Collecting and analyzing digital and physical evidence
   • Identifying control gaps that enabled fraudulent activities
   • Recommending corrective actions to prevent future risks

Understanding the different types of internal audits highlights their specific focus areas, which ultimately contribute to realizing the full range of benefits that internal audits can bring to an organization.

Benefits of Internal Audits

By regularly conducting internal audits, organizations can see a range of advantages, including:

1. Regulatory Compliance: Ensures that businesses adhere to all applicable laws and industry standards, avoiding penalties or legal action.
2. Improved Efficiency: Identifies inefficiencies in processes and operations, enabling companies to streamline workflows, reduce waste, and improve productivity.
3. Risk Mitigation: Helps to detect and address risks—financial, operational, or cybersecurity—before they escalate into significant issues.
4. Enhanced Accountability: Strengthens governance by ensuring that all departments follow established policies and procedures, boosting transparency and accountability across the organization.
5. Informed Decision-Making: Provides leadership with data-driven insights that enhance strategic decision-making and drive business growth.

The benefits of internal audits highlight their importance in organizational success, which brings us to a closer look at how they differ from external audits in terms of purpose and scope.

How do Internal Audits Differ from External Audits?

While both internal and external audits evaluate an organization’s processes and controls, they serve different purposes:

Aspect	Internal Audit	External Audit
Purpose	Improves internal processes, risk management, and compliance	Provides an independent assessment for regulatory compliance and financial accuracy
Conducted By	Internal employees or dedicated audit teams	Independent third-party auditors
Scope	Ongoing evaluations of internal operations, compliance, and efficiency	Focuses on financial records, legal obligations, and regulatory requirements
Reporting To	Management, board of directors, or audit committee	External stakeholders, regulators, investors
Frequency	Conducted regularly (monthly, quarterly, or yearly)	Typically conducted annually or as required by law

Understanding the differences between internal and external audits sets the stage for exploring the specific services that internal auditors provide to enhance organizational performance and compliance.

Services Provided by Internal Auditors

Internal auditors do more than just compliance checks—they help organizations enhance efficiency, security, and risk awareness. Their key services include:

• Risk Assessment – Identifying financial, operational, and cybersecurity risks that could impact business objectives.
• Compliance Audits – Reviewing adherence to regulations, industry standards, and internal policies to prevent legal or financial penalties.
• Process Audits – Analyzing workflows to uncover inefficiencies, improve productivity, and optimize resource allocation.
• Fraud Prevention – Detecting irregularities, strengthening anti-fraud controls, and minimizing financial losses due to fraud.
• IT & Cybersecurity Audits – Evaluating data security, access controls, and system vulnerabilities to protect against cyber threats.
• Advisory Services – Offering strategic insights on governance, risk management, and internal controls to support decision-making.

Also Read: Internal Audit Report: Tools, Templates and Practices

The Internal Audit Process: Step-by-Step Guide

A structured internal audit process helps organizations identify risks, improve controls, and ensure compliance. Here’s a step-by-step breakdown:

Step 1: Planning the Audit

Before starting, auditors define the objectives, scope, and key focus areas. They identify potential risks, select the processes to review, and develop an audit plan. This phase ensures a clear roadmap for the audit.

Step 2: Gathering Evidence & Testing Controls

Auditors collect data through document reviews, process walkthroughs, and interviews with employees. They test internal controls to assess their effectiveness and compliance with regulations. This step provides factual insights into operational strengths and weaknesses.

• Reviewing financial and operational records
• Observing processes in action
• Conducting sample testing of transactions

Step 3: Analyzing Findings

The collected data is assessed to identify inefficiencies, risks, and control gaps. Auditors compare findings against industry standards and company policies to determine areas that need improvement.

Step 4: Reporting & Recommendations

Auditors compile their findings into a report, highlighting risks and areas for improvement. Clear, actionable recommendations help management address issues effectively. Reports are shared with key stakeholders to ensure transparency.

• Summarizing key audit findings
• Providing corrective action suggestions
• Presenting reports to leadership and relevant teams

Step 5: Follow-Up & Continuous Improvement

After the audit, organizations implement recommended changes. Auditors may conduct follow-ups to ensure corrective actions are effective. Continuous monitoring helps maintain compliance and minimize future risks.

Once the internal audit process is clearly understood, it’s crucial to implement best practices to ensure audits are conducted effectively and deliver maximum value to the organization.

Best Practices for Conducting Effective Internal Audits

Following best practices ensures that internal audits provide valuable insights and drive continuous improvement.

1. Regularly Schedule Internal Audits – Establish a consistent audit schedule based on risk levels, regulatory requirements, and industry standards. Proactive audits help detect issues before they become major problems.
2. Use a Risk-Based Approach – Focus on high-risk areas that could significantly impact business operations, financial stability, or compliance. This ensures audit resources are used efficiently.
3. Ensure Objectivity and Independence – Auditors should remain impartial and free from conflicts of interest to deliver accurate assessments. Independent audits enhance credibility and trust in findings.
4. Utilize Technology for Audit Management – Utilize automated tools for data collection, analysis, and reporting to streamline the audit process, improve accuracy, and enhance decision-making.
5. Encourage a Culture of Continuous Improvement – Promote audit transparency, provide regular training for employees, and integrate audit insights into business strategies to foster long-term growth and compliance.

While following best practices ensures effective audits, organizations must also be prepared to tackle common challenges that may arise throughout the auditing process.

Also Read: Audit Procedures and Internal Controls

Common Challenges in Internal Auditing (And How to Overcome Them)

Internal audits often face hurdles, from employee resistance to resource constraints. Addressing these challenges is key to maintaining an effective audit process.

1. Resistance from Employees
   Employees may perceive audits as intrusive or associate them with negative consequences, leading to reluctance in cooperation. Building a culture of transparency and open communication can help. When employees understand that audits are meant to improve processes rather than penalize individuals, they are more likely to engage positively.
2. Limited Resources for Auditing
   Organizations with small audit teams or budget constraints often struggle to conduct audits. Leveraging technology—such as automation tools and data analytics—can make auditing more efficient and less time-consuming. In some cases, outsourcing specific audits, like IT security assessments, can provide deeper insights without overburdening internal resources.
3. Keeping Up with Changing Regulations
   Regulatory requirements frequently evolve, making it difficult for organizations to stay compliant. Continuous training programs for auditors and employees ensure that everyone is aware of new requirements. Additionally, using compliance tracking tools can help businesses stay updated and adjust their audit processes accordingly.

Also Read: Top audit management software in 2025

Strengthen Your Internal Audits with VComply

Managing internal audits can be complex, but VComply simplifies the process with its powerful audit management features. Whether you’re ensuring compliance, identifying risks, or improving operational efficiency, VComply helps you stay on top of every audit.

How VComply Supports Internal Auditing:

• Plan and schedule audits with ease across multiple departments
• Automate evidence collection to improve accuracy and efficiency
• Monitor compliance gaps and receive real-time insights for corrective action
• Generate audit reports instantly, saving time and reducing manual effort

With VComply’s centralized dashboard, audit teams can track progress, collaborate seamlessly, and ensure regulatory adherence—all in one place.

Take the next step in optimizing your audit process. Request a demo today and experience how VComply can transform your internal audit function.

Conclusion

Internal audits are essential for maintaining compliance, improving efficiency, and mitigating risks. A well-structured audit process helps organizations identify gaps, strengthen internal controls, and foster a culture of continuous improvement. However, managing audits manually can be time-consuming and prone to errors.

That’s where VComply makes a difference. With its automated audit management tools, real-time risk tracking, and seamless reporting, VComply empowers businesses to streamline their internal audit process effortlessly.

Take the next step toward smarter, more efficient internal audits. Start your free trial of VComply today!