Internal audit process: stages, types and tips

Published Wednesday 4 March 2026

Table of contents

• What is an internal audit?
• Why are internal audits important for small businesses?
• Types of internal audits
• Key areas of focus in internal audits
• The internal audit process: 5 key stages
• Key roles in an internal audit
• How to conduct your own internal audit
• Tips for success when implementing internal audits
• Streamline your audit processes with Xero
• FAQs on internal audits

Key takeaways

• Conduct internal audits at least annually following five key stages: selection (choosing what to audit based on risk assessment), planning (defining scope and objectives), fieldwork (executing the actual audit procedures), reporting (documenting findings and recommendations), and follow-up (implementing improvements and verifying results).
• Focus your internal audit on four main areas that deliver the most value: operational processes to identify inefficiencies, compliance with regulations and policies, financial record accuracy and controls, and IT security including cybersecurity and data protection measures.
• Approach internal audits as improvement opportunities rather than compliance exercises by getting team buy-in, clearly defining objectives upfront, and creating action plans with specific owners and deadlines for each recommendation.
• Invest in proper documentation and tools before starting your audit, including financial statements, policy documents, workflow diagrams, and accounting software that can generate the reports and data you need for thorough analysis.

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, a practice that continually evolves to help organisations address today's complex risk landscape. The company keeps the results internal and uses them to strengthen operations.

Auditors often work for the company, but they may get help from outside consultants. Either way, the findings stay internal rather than going to external stakeholders.

Common internal audit examples include:

• Risk management: Audit your strategies to identify how your company can reduce risks
• Insurance compliance: Audit compliance with policy requirements, such as cyber insurance rules for firewalls or network access

Someone outside the company conducts external audits and shares results with external stakeholders like investors. Internal audits generally focus on operations, while external audits focus on financials.

Why are internal audits important for small businesses?

Internal audits help small businesses improve efficiency, reduce risks, and ensure compliance with financial regulations and insurance policies. They often use established frameworks designed to improve confidence in data and information. They give you a chance to step back and look carefully at your processes.

For example, an internal audit may review your fraud prevention controls. Auditors compare your documented controls to actual workflows, identify gaps, and recommend improvements you can act on.

Types of internal audits

The focus of an audit determines the type. Here are the four main types of internal audits:

• Operational audits: Evaluate internal processes to assess efficiency and resource use
• Compliance audits: Verify the business abides by laws, industry regulations, and internal policies
• Financial audits: Examine the accuracy of financial reports and the effectiveness of internal controls
• IT audits: Assess cybersecurity, data protection, network access, and team training

Key areas of focus in internal audits

Internal audits examine the effectiveness of internal controls, compliance with regulations, and the accuracy of financial reports. Key focus areas include:

• Financial records: Examine the accuracy of your numbers, data entry processes, access controls, and who's responsible for financial reporting
• Operational processes: Identify redundancies, inefficiencies, and workflow improvements across your business
• Fraud prevention: Assess internal fraud risks like employee theft and external threats like phishing or cyberattacks. Learn more about reducing the risks of internal fraud
• Risk management: Evaluate your biggest risks and how prepared you are to handle a crisis

The internal audit process: 5 key stages

The internal audit process follows five key stages: selection, planning, fieldwork, reporting, and follow-up. Here's what happens at each stage.

1. Selection: Choosing what to audit

Before planning begins, decide what to audit. Start with a risk assessment to identify the most significant risks facing your business; professional standards require the audit plan to be based on a documented assessment of the organisation's strategies, objectives, and risks. This stage typically takes one to two days for small businesses.

For example, if you're worried about internal fraud, you may need to audit financial statements and money handling processes. If efficiency is your concern, focus on operational workflows.

2. Planning your internal audit

During planning, define the scope, objectives, and methods for your audit. Outline what you'll examine, who will conduct the audit, and what resources you need. Planning typically takes one to two weeks depending on audit complexity.

3. Fieldwork: Executing the audit

Fieldwork is where the actual audit happens. This stage typically takes two to four weeks depending on scope. Your audit procedures may include:

• Reviewing documents and financial records
• Analysing processes against documented controls
• Interviewing employees and managers about their roles
• Observing workflows in action
• Running tests to assess control effectiveness

For example, if you're auditing IT security, you might send simulated phishing emails to identify who needs additional training.

4. Reporting: Documenting your findings

Once fieldwork is complete, write an audit findings report. This document should include:

• Summary of scope: What you audited and why
• Key findings: Issues or risks you identified
• Recommendations: Specific actions to address each finding
• Priority levels: Which issues need immediate attention

Share the report with your audit committee or relevant leadership, such as owners or managers.

5. Follow-up: Implementing improvements

The goal of an internal audit is to improve your business, and follow-up ensures that happens. Schedule a review 30–90 days after the audit to:

• Verify that recommendations have been implemented
• Assess whether changes are working as expected
• Identify any new issues that need attention
• Adjust your approach based on results

Key roles in an internal audit

Several people may be involved with internal audits. In smaller companies, one person may fill multiple roles. Here are the key participants:

• Internal auditor: Leads the process, evaluates records or processes, and maintains objectivity
• Audit committee: Identifies audit priorities, approves the audit plan, and reviews findings
• Management: Allocates staff and resources, then implements audit recommendations

For example, a bookkeeper might audit financial reports while a team manager audits workflows. Larger companies may have a chief audit executive who reports to both the audit committee and chief executive officer (CEO).

How to conduct your own internal audit

Ready to run your first internal audit? Follow these steps to get started.

1. Assess your audit needs and resources

Determine what you want to audit and whether you have the skills in-house. Consider your budget, timeline, and team availability. If you lack expertise in a specific area, plan to bring in outside help.

2. Set up your audit framework

Define your audit objectives, scope, and criteria. Decide what success looks like and how you'll measure it. Create a simple checklist or template to guide your process.

3. Gather your documentation and data

Collect the records, reports, and process documentation you'll need. This may include financial statements, policy documents, workflow diagrams, and access logs. Organise everything before fieldwork begins.

4. Execute the audit stages

Work through the five stages: selection, planning, fieldwork, reporting, and follow-up. Document your findings as you go and keep communication open with relevant team members.

5. Track and implement recommendations

Create an action plan with clear owners and deadlines for each recommendation. Schedule follow-up reviews to verify implementation and measure results.

Tips for success when implementing internal audits

Use these tips to ensure your audit runs smoothly and delivers real improvements:

• Focus on benefits: View the audit as an opportunity to improve your business, not a chore to complete
• Get team buy-in: Make sure your team understands the audit's purpose, with visible support from management
• Plan in advance: Define your scope, set clear goals, and outline who handles each part of the process
• Bring in expertise: If your team lacks audit experience, hire outside help, especially for specialised areas
• Gather the right data: Invest in tools like accounting software or process mapping tools to access the information you need

Streamline your audit processes with Xero

Streamline your internal audit processes and find the numbers you need easily with Xero. Generate reports, track financials for specific projects or departments, and analyse financial data in real time.

Ready to simplify your audit preparation? Get one month free and see how Xero keeps your financial data organised and accessible.

FAQs on internal audits

Common questions about internal audits.

What are the 5 stages of the internal audit process?

The five stages are selection (choosing what to audit), planning (defining scope and methods), fieldwork (executing the audit), reporting (documenting findings), and follow-up (implementing improvements).

What are the 4 types of internal audits?

The four main types are operational audits (efficiency and processes), compliance audits (regulations and policies), financial audits (accuracy of financial reports), and IT audits (cybersecurity and data protection). Guidance is available to help even smaller companies design controls to support the achievement of financial reporting objectives.

How often should internal audits be conducted?

Conduct internal audits at least once a year for most small businesses. This frequency aligns with professional standards, which mandate that the risk assessment for the audit plan be performed at least annually. Increase frequency to quarterly or monthly if you're managing higher risks or compliance requirements.

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

Internal audits focus on process improvement and risk reduction, with results kept within the company. External audits focus on compliance and financials, with results shared with investors, lenders, or regulators.

What happens if you find issues during an internal audit?

Issues you find during an audit highlight where you can improve. Document them in your findings report and share with leadership. Create an action plan with assigned owners and deadlines for each recommendation.