Internal audit 101: Understanding the process

Published Friday 13 June 2025

Table of contents

• What is an internal audit?
• Why internal audits are important for small businesses
• Key areas of focus in internal audits
• Types of internal audits
• Key roles in an internal audit

Key Takeaways

• Internal audits are examinations of internal processes or reports for accuracy and efficiency.
• The results of internal audits are used internally to strengthen the business and reduce its risks.
• Internal audits may be required for compliance with certain insurance policies or industry standards.
• Although you handle the process internally, you can hire outside consultants to help.

What is an internal audit

An internal audit is an analysis of a business's finances, processes, and systems to identify risks and areas for improvement. The auditors often work for the company, but they may get help from outside consultants or auditors. In both cases, the results are generally kept within the company and used internally.

For example, you may audit risk management strategies to identify how your company can reduce risks. Or,you may audit compliance with an insurer's policy – for instance, cyber insurance policies often have requirements related to firewalls or network access.

Someone outside the company, in contrast, conducts external audits, and the results are for outside stakeholders. For instance, all publicly traded companies must undergo external audits of their financial records every year. Audit firms conduct these audits and release the results to investors.

External audits generally focus on a company's financials, while internal audits tend to focus on operations. But there are definitely exceptions to that rule.

Why are internal audits important for small businesses?

Internal audits give businesses a chance to step back and look carefully at their processes so they can improve efficiency and reduce risks. Internal audits can also help ensure compliance with financial regulations and insurance policies.

For example, an internal audit may review a company's internal control systems for preventing fraud. The auditors review the company's controls, compare them to actual workflows, and identify potential risks. Then, the business can use the results from the audit to improve its controls.

Key areas of focus in internal audits for small businesses

Internal audits look at the effectiveness of internal controls, compliance with regulations, and the accuracy of financial reports. They often focus on:

• Financial records: Are the numbers accurate? What are the processes for entering financial data? Who's responsible? Who has access? These audits examine financial reports as well as the processes for creating them.
• Operational processes: What are the steps of each workflow? Who completes the steps? These audits look for redundancies, inefficiencies, and areas for improvement.
• Fraud prevention: What are the risks? What is the company doing to minimize the risks of internal fraud (employee theft)? What about external threats like phishing emails or cyberattacks? These audits look at financial records and internal processes designed to prevent fraud.
• Risk management: What are the biggest risks facing the company? What is the company doing to reduce these risks and prepare for a crisis? These audits look at how a business manages risk and prepares for disaster.

Types of internal audits

The focus of an audit determines the type of audit. For example, financial audits focus on financial records, while compliance audits focus on a business's compliance with regulations or policies. Here are the different types of internal audits:

• Operational audits: Evaluate internal processes to assess efficiency and the use of resources
• Compliance audits: Ensure the business abides by laws, industry regulations, and internal policies
• Financial audits: Examine the accuracy of financial reports and how they're affected by internal control systems
• IT audits: Assess cybersecurity, data protection, network access, tech controls, and team training

Key roles in an internal audit

A variety of people may be involved with internal audits, including:

• Internal auditor: Leads the process, evaluates the processes or records being audited, and tries to minimize [US: minimize] bias to ensure objectivity
• Audit committee: Identifies the type of audit to be done, approves the audit plan, and reviews the audit findings report
• Management: Allocates staff and resources for the audit and implements audit recommendations

Publicly traded companies or large corporations may have a chief audit executive who reports to the audit committee and the chief executive officer (CEO). In smaller companies, a variety of people may play different roles. For example, a bookkeeper might audit financial reports, while a team manager might audit workflows.

Tips for success when implementing internal audits

Consider these tips to ensure your audit goes smoothly, and even more importantly, that it helps you make your business safer, more efficient, and compliant with necessary regulations:

Focus on the benefits of the audit: Internal audits have the power to improve your business. Don't look at the audit as a chore – instead, see it as an opportunity to be more successful.

Get the whole team on board: Make sure your team understands the purpose of the audit and why it's important. Remember, company culture comes from the top down. Management needs to wholeheartedly support the audit if you want the team to carry it through.

Plan the audit in advance: Identify the scope of the audit – what are you looking at? Then, identify a goal – what do you want to accomplish or find out? Finally, outline a plan – how are you going to assess things and who's handling the process?

Make sure you have the right experience: You can hire outside help for internal audits – this is especially important for small businesses. If your team doesn't have the right experience, bring in a specialist.

Gather the right data: Whether you're auditing processes or financial records, you need the right data. This may require you to invest in software like process mapping tools to visualize and assess workflows, or accounting software to analyze financial reports.

Internal audit process stages and how to conduct your own

So, what exactly does the internal audit process look like? Here's an overview of the steps:

1. Start planning for your business’s internal audit process

During the audit planning phase, decide what aspect of your business you want to audit and how to conduct the audit. Planning often starts with a risk assessment where you look at the most significant risks facing your business. Design an audit to help reduce those risks.

For example, if you're worried about internal fraud, you may need to audit financial statements and money handling processes. But if you're worried about a lack of efficiency, you may need to audit your workflows.

2. Complete the fieldwork/execution stage of the process

Next up – it's time to do the audit. Depending on the audit focus, your internal audit procedures may include looking at documents, analyzing processes, talking with employees or managers about their roles, and observing workflows in action.

If you're auditing internal controls, you may need to run tests to assess their effectiveness. For example, if you're auditing your IT security, you may need to send fake phishing emails to employees. Then, you can easily spot who needs more training.

3. Start writing a comprehensive audit findings report

Once you're done, write up an audit findings report that outlines everything you discovered in the audit and provide recommendations for improvement. Then, share this information with the audit committee or relevant leadership (owners, managers, etc).

4. Follow up on the implementation of the internal audit

The role of an internal audit is to improve your business, and the right follow-up is key to ensuring that happens. Schedule a time to review any changes that were implemented after the audit. Then, adjust as needed.

FAQs on internal audits

If you have more questions, keep reading. Here's a look at business owners' top concerns regarding internal audits:

How often should internal audits be conducted?

Internal audits should be conducted as needed, but ideally, you should do process and compliance audits at least once a year. Large companies may want to do audits quarterly or even monthly. Consider increasing the frequency of audits if you're trying to minimize risk, improve compliance, and become more efficient.

What’s the difference between an internal audit and an external audit?

Internal audits tend to focus on process improvement and minimizing risks to the business. The results are used internally. External audits tend to be for compliance or financial reasons. The results are shared with external stakeholders – potential investors, lenders, tax agencies, or insurance companies.

What happens if you find issues during an internal audit?

Issues found during an audit show you where there's room for improvement. The issues should be documented in the findings report, shared with leadership, and used to create an action plan.

Streamline your audit processes with Xero

Xero can help you streamline internal audit processes by making it easy to find the numbers you need. Generate reports, track financials for specific projects or departments, and analyze financial data in real-time.