As businesses scale, processes that worked with a small team can start breaking under volume. Errors increase, approvals become inconsistent, and compliance risks rise. Internal audit is a structured way to identify control gaps early, strengthen governance, and improve operational efficiency.
For many companies in India, internal audit is also a stakeholder expectation for investors, lenders, and boards. Even when not mandated, a well designed internal audit program helps management stay ahead of surprises.
What Internal Audit Covers
Internal audit is an independent review of processes, controls, and compliance. It typically covers:
- Financial processes and reporting controls
- Operational processes and efficiency
- Statutory and regulatory compliance
- Fraud risk and preventive controls
- IT controls and data integrity
- Vendor and customer master governance
Step 1 Define the Audit Objective and Scope
Start by clarifying what you want internal audit to achieve. Common objectives include:
- Reduce leakage and prevent fraud
- Improve accuracy of financial reporting
- Strengthen compliance discipline
- Improve process efficiency and accountability
- Build audit ready documentation for stakeholders
Define the scope by entity, location, and process. For multi location businesses, prioritize high volume and high risk sites first.
Step 2 Perform a Risk Assessment
A risk assessment helps decide where to focus. Practical approach:
1 List key processes such as revenue, procurement, payroll, inventory, fixed assets, treasury, and compliance 2 Identify risks for each process such as unauthorized discounts, duplicate payments, fake vendors, inventory shrinkage, and tax mismatches 3 Rate risks by impact and likelihood 4 Identify existing controls and whether they are preventive or detective 5 Prioritize processes for audit coverage
Deliverable: a risk heat map and a process wise audit plan.
Step 3 Create a Risk Control Matrix
A risk control matrix links risks to controls and testing steps. For each key control, document:
- Control objective
- Control owner
- Frequency such as daily weekly monthly
- Evidence expected such as approvals reports reconciliations
- Testing approach such as walkthrough sample testing re performance
This becomes the backbone for consistent audits and repeatable testing.
Step 4 Conduct Walkthroughs and Understand the Process
Before testing, perform walkthroughs with process owners to confirm:
- How the transaction flows end to end
- Where approvals happen
- What system reports are used
- What exceptions are common
- What evidence is retained
Walkthroughs help validate whether the documented SOP matches actual practice.
Step 5 Test Controls and Transactions
Testing typically includes:
Control design testing
Check whether the control is capable of preventing or detecting the risk. Example: maker checker exists but both roles are assigned to the same user.
Operating effectiveness testing
Check whether the control actually operated during the period. Example: review whether approvals were obtained before payments.
Substantive transaction testing
Select samples and test supporting documents. Example tests:
- Revenue: pricing approvals, credit notes, dispatch proof, GST invoice validity
- Procurement: vendor onboarding, PO approvals, GRN matching, duplicate payment checks
- Payroll: attendance controls, salary revision approvals, statutory deductions accuracy
- Inventory: stock counts, scrap controls, movement approvals
- Treasury: bank reconciliations, payment authorization, cheque controls
Step 6 Report Findings Clearly
A good internal audit report is actionable. Include:
- Observation and what was noted
- Risk and impact
- Root cause
- Recommendation
- Management response and owner
- Target closure date
Classify findings by severity such as high medium low and track recurring issues separately.
Step 7 Track Remediation and Close the Loop
Internal audit adds value only when issues are fixed. Set up a remediation tracker:
- Finding reference number
- Owner and department
- Action steps
- Due date
- Evidence of closure
- Validation by internal audit
Review the tracker monthly with leadership to ensure closures happen on time.
Common Internal Audit Gaps Seen in Growing Companies
- Weak vendor master controls leading to duplicate or fake vendors
- Manual overrides without documented approvals
- Missing reconciliations or late bank reconciliations
- Poor segregation of duties in finance systems
- Inconsistent credit note approvals and revenue leakage
- Inventory counts not performed or variances not investigated
- Compliance calendars not followed leading to late filings
How Perfect Accounting Can Help
Perfect Accounting and Shared Services supports internal audit and controls strengthening:
- Risk assessment and annual internal audit plan
- Process mapping and SOP documentation
- Risk control matrix and control testing
- Internal audit execution and reporting
- Remediation tracking and closure validation
- Advisory to strengthen controls and governance