Internal Audit Checklist for Small and Medium Enterprises

Internal auditing is essential for small to medium enterprises (SMEs). It’s a measure to keep their finances and regulatory compliance in check, as well as assess the effectiveness of their operations. A well-made audit comes with an internal audit checklist, supported by internal audit management software, to help SMEs keep their business in check while simplifying the process.

What Is the Difference Between Internal and External Audits?

Before we discuss internal audit checklists, it is essential to understand the distinction between the two key auditing processes in a business. Understanding the difference between internal and external auditing helps SMEs prepare accordingly. An internal and external audit differ in the individuals who handle and perform them. Let’s explore in more detail what they actually do.

Internal Audits

As its name suggests, these are audits performed by auditors within the business, who can be in-house or contracted by the company. Internal auditing’s primary goal is to improve a business, focusing on the development of its operations and compliance. Internal audits happen continuously. They regularly occur, depending on the business’s goals and whether they are met or need to be addressed.

External Audits

External audits, also known as compliance audits, are conducted by independent, third-party auditors who are typically not contracted by the business. External audits examine the fine print of financial statements and documents prepared by a business. They are completed every fiscal year or when specific events occur, such as the purchase of new equipment.

What Is an Internal Audit Checklist and What Should Be Included in It for SMEs?

An internal audit checklist is an indispensable way for businesses to keep their growing business goals in check. It helps preserve accuracy and control finances. The primary goal of an internal audit checklist is to provide SMEs with a systematic framework for maintaining accurate financial records, ensuring effective operations, and ensuring regulatory compliance. A comprehensive internal audit checklist should encompass all financial tracking, operational activities, and assurance of regulatory compliance. Here are some of the essential components of an internal audit checklist, per its use:

Financial Audits

For SMEs, financial audits are conducted to verify whether their financial reports comply with the country’s tax laws and regulations. A financial internal audit checklist helps SMEs identify and rectify discrepancies in their financial records, thereby avoiding penalties from their local tax offices. Financial audit checklists focus on preparing documents, internal controls, and adherence to local reporting standards. Here’s a breakdown:

• • Ledger and Financial Books Accuracy: This step ensures that financial entries are balanced and recorded accurately. Reconciliations should be conducted to avoid being questioned for financial misstatements or fraud.

• • Cohesion of Budget and Cash Flow: An SME’s budget and cash flow statements should be compared to assess the business’s financial standing and help plan for more accurate business goals.

• • Reporting Tax Declarations: Filing taxes should be verified and done promptly. Ensure that it complies with local tax laws to avoid penalties and external audits from local regulatory bodies.

Operational Audits

Operational audits evaluate a business’s operational effectiveness, encompassing its processes, systems, and overall management practices. Unlike financial auditing, operational auditing delves deeper than just financial statements. It assesses the effectiveness of a business’s processes to determine if they align with the business’s performance.

• • Checking Internal Controls and Operational Effectiveness: Evaluate past methods to identify which parts cause inefficiencies, enabling improvements and increased work productivity.

• • Assessing Allocation of Resources: Examine resources—human, financial, and material—to maximize their full operational potential and know when and where to cut costs to reduce expenses.

• • Review of Management: In addition to operational methods, auditors also assess the effectiveness of top management in directing their team members. Doing so ensures that the business’s goals are met. They are monitored through evaluation from members, giving insights into their effectiveness.

Compliance Audits

Compliance audits, also known as external audits, are assessments of a business or company’s adherence to regulatory requirements. These kinds of audits are done by independent auditors, with no connection to a specific entity. These audits examine the firm’s accounting frameworks and its operational approaches. Opinions and reports from these audits are always based on compliance regulations, and these audits always have the final say.

• • Local and Industry-Specific Regulations: Ensure your business complies with laws specific to the location where it is registered. Verify that labor, environmental, and financial regulations are adhered to in documents used for auditing purposes.

• • Data Privacy Protocols: Ensure that those handling your business’s data adhere to data privacy laws.

Why is an Internal Audit Checklist Important?

SMEs have various methods for conducting internal audits, which depend on the nature of their business and other regulatory requirements. The following elements are crucial before an auditing process and reiterate the crucialness of an internal audit checklist:

Ensures Careful Documentation

An internal audit checklist organizes these documents to make it easier for SMEs to prepare an internal audit checklist PDF for sharing with the public or for records. You can compile the necessary financial statements, tax records, and business operational reports systematically—by fiscal year, purpose, and category—so that verification during the auditing process is efficient and effective.

Verifies Regulatory Compliance 

Validate that your business’s compliance with certifications and agencies is adherent to your country of origin’s regulations. Doing so ensures your auditing process is completed smoothly without delays. For the US, ensure that your auditing process adheres to the Generally Accepted Auditing Standards (GAAS). For SMEs that are considered private entities, the American Institute of Certified Public Accountants (AICPA) discloses Statements on Auditing Standards (SASs), which are accepted under GAAS for private entity auditing.

Customization and Automation of Process

It is best to develop an internal audit checklist in PDF format, as this facilitates accessibility and allows for easy updates to the document. Customize the checklist PDF to match the intricacies of your business. For SMEs, adding your business’s goals to your checklist is a great way to see if your different audits align with the key areas you want development in. Industry-specific audit checklists should include parts of their operation that make them unique, for example:

1. 1. Manufacturing Industry: Includes checking of inventory systems, production costs, and risks such as supply chain management.

2. 2. Services Industry: Review operational processes, including work order billing and customer contracts. Also, review the recording system for both new and past clients.

3. 3. Retail Industry: Compare recorded sales with those from Point of Sale (POS) systems used in your business to verify if they match. Identify any discrepancies that require reconciliation.

Follows Internal Audit Risk Approach

When doing an audit, focus on high-risk areas to address and improve. Internal audit risk areas, such as payroll and cash reconciliations, are among the places that almost always require operational efficiency. Frequent audits on these areas, quarterly or monthly, to ensure that these processes are improving and bring less risk to the business. For your audit checklist, adopt a scoring system that enables you to identify which resources or processes require immediate attention.

How Should SMEs Structure Their Internal Auditing Checklists?

An internal audit plan encompasses the scope, auditing schedule, and necessary data to ensure it is an effective audit. It should always cater to the business’s needs, from risk management to strategic goals.

Initial Audit Planning

The auditing checklist for projects should always begin with a clear understanding of what project is being audited. For SMEs, the checklist should be tailored to their specific auditing objective accordingly. SMEs should have clear business goals and objectives. They must define whether the audit they are making is an Operational Audit, a Financial Audit, or a Compliance Audit. These questions should have clear answers before committing to the process:

• • What business concern does this auditing process need to address?

• • What kind of auditing should be done? (Financial, Compliance-based, or Internal)

• • How does this auditing process help my business and its goals?

Before starting your internal audit plan, ensure that your target is clearly defined.

Pinpoint Auditing Risks

Identify the areas of internal audit risks. These are parts of the auditing process that are noncompliant or have incomplete documentation early on; this lessens risk and avoids mistakes during your auditing process. When performing an internal audit, it is best to coordinate with the business’s owners and members of management not handling its finances. These audits are advantageous in gaining insights into operational processes that fall outside the auditor’s area of expertise, but can still help provide valuable internal audit services. While larger firms are the ones most often employing this kind of strategy to ensure fairness, SMEs can also benefit from it to minimize risk in future auditing processes.

Specific Delegation of Roles

To ensure that there will be no questions when it comes to how your business operates, clearly assign members to job-specific tasks in your business’s auditing process. Ensure that the assigned member has sufficient knowledge to perform their task efficiently. For example:

1. 1. Auditing Lead: Assign the business’s Head of Finance, Chief Financial Officer, or a licensed Accountant to oversee the whole internal auditing process.

2. 2. Operations Reviewee: Assign the Head of Human Resources or Human Resources members to review and report on management’s performance.

3. 3. Operations Lead: Assign the Chief of Operations to oversee the business’s processes and review the various aspects of operations.

What Is Internal Audit Management Software and How Does It Enhance Audit Execution?

Audit management software programs refer to the use of applications that allow users to automate their entire auditing process, from documentation to assessing potential risks. These platforms provide a way to simplify the entire audit cycle by integrating tools that facilitate analytics and methods, thereby improving the quality of internal audits, especially for SMEs. They provide services such as task automation, fast and accurate data, and a comprehensive dashboard for all your auditing needs.

Digitalized Internal Audit Checklists and Templates

Internal audit management software, such as Jadian, offers customizable auditing tools tailored to your business needs. Internal audit checklist PDFs can be reused throughout the auditing process and across departments. Jadian, for example, offers audit solutions such as auditing dashboards that provide a systematic view of all your business’s financial records and documents. This internal audit software serves as a documentation log, securing confidential data that can be used for future auditing services.

Prioritizes Internal Risks

Internal audit tools incorporate technologies into their software that include risk matrices, which help businesses score events based on their perceived risk levels, distinguishing between those with higher risk and those that are manageable. This tool helps businesses, especially SMEs, to focus on high-risk areas first and then manage the rest afterwards. It’s a great way to keep situations from spiraling into harmful scenarios.

Historical Auditing Reports

Auditing tools can store essential documents and analyze them to help you in your business in your following internal auditing process. Internal audit software programs, such as Jadian, provide auditing solutions that include historical data of past internal audits, enabling the improvement of overall business monitoring. They save costs and decrease risks.

How Can SMEs Benefit From Internal Audit Management Software?

Automation of auditing processes, such as planning and reporting, reduces errors that occur when tasks are performed manually and enhances collaboration and visibility across departments within a business. Here is how internal audit management software helps SMEs to make their auditing processes easier:

Simplifying Internal Auditing

We have learned that various types of auditing occur within a business’s annual cycle. The auditing lifecycle, which goes from scheduling to reporting, becomes centralized with the help of internal audit software programs. All tasks, across various auditing types, are properly designated, deadlines are met, and findings are tracked accordingly.

Provides Internal Audit Data

The best internal management software programs integrate the use of data analytics technologies to discover trends and anomalies in the provided company data. They uncover risk and reliable patterns that are useful in business operations. These patterns are usually overlooked during manual auditing reviews.

Team Collaboration and Accountability

An auditing plan involves different departments in a business. Internal audit software provides access to auditing leads by department, making it easy to track who is accountable for specific tasks. It also fosters team collaboration. Since everyone works together to keep the auditing process as smooth as possible, no document or record is missed from the internal auditing checklist.

How Does Internal Audit Data Analytics Help in Internal Auditing?

Audit data analysis transforms auditing data into insights. For SMEs, it’s a helpful tool for detecting risk patterns and preventing their business from falling into a risk trap. Here are some aspects where audit data analytics help in internal auditing:

• • Trend Analysis: Auditing, when paired with internal audit software programs, identifies trends by presenting historical auditing data and comparing current findings to past ones to identify recurring issues that require improvement.

• • Foreseeing Risks: Advancements in technology enable the detection of patterns that can forecast potential risks in a business, based on historical data and external factors.

• • Visualization of Data: Graphical presentations of auditing data provide an interactive way for management and members to understand the metrics presented, aiding in informed decision-making.

What Is the Best Internal Audit Management Software for SMEs?

Choosing the perfect software to support your business’s auditing process depends on the size of your business, the amount you are willing to allocate, and the complexity of your auditing process. The following are the top internal audit management platforms that will support your business as of the present:

• • AuditBoard: It offers an intelligent dashboard that provides collaboration tools for SMEs. Perfect for businesses that often do financial and compliance audits.

• • Resolver: An ideal software for businesses looking for risk modeling. This application integrates internal audit checklist PDFs for business insights.

• • Jadian: Provides audit services ideal for SMEs. They offer customizable work solutions, supporting operations, financial, and compliance auditing. Valued by the public sector for its compliance-focused audits.

• • MetricStream: Internal audit management software that provides compliance tools and is an ideal fit for SMEs who are looking to launch into the mid-market.

Each of these internal audit management software platforms supports internal and external editing. They enable SMEs to organize in-house auditing while preparing them for external ones. Internal audits are an exercise of a business’s compliance with laws and regulations. For SMEs, it is a great way to track their growth trajectory and identify areas for improvement. With the right internal audit software programs, checklists, and tools, SMEs can build a system that is resilient and transparent.