Internal audit: Improve your business operations and compliance

Published Friday 23 January 2026

Table of contents

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

Key takeaways

• Conduct internal audits annually at minimum to identify vulnerabilities before they become costly problems, improve operational efficiency, and ensure compliance with regulatory and insurance requirements.
• Focus your internal audit on four key areas: financial records accuracy, operational process efficiency, fraud prevention controls, and risk management strategies to address your business's most critical vulnerabilities.
• Follow a structured four-phase audit process including planning (risk assessment and scope definition), fieldwork (document review and control testing), reporting (documented findings with actionable recommendations), and follow-up (implementation tracking and effectiveness assessment).
• Ensure audit success by getting your entire team on board with the process, planning the audit scope and goals in advance, and considering external consultants for specialised expertise if your internal resources lack the necessary experience.

What is an internal audit?

Internal audit is an independent examination of your business's finances, processes, and systems to identify risks and improvement opportunities. The audit results stay within your company and help strengthen operations.

Your employees or hired consultants typically conduct internal audits. Unlike external audits, these assessments focus on helping your business run more efficiently rather than satisfying outside stakeholders.

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; in the UK, these companies have just six months from the accounting reference date to file their accounts with Companies House. 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, although there are some exceptions.

Why are internal audits important for small businesses?

Internal audits help small businesses improve efficiency, reduce risks, and maintain compliance. In the UK, a business is legally defined as a small company if it meets at least two of three criteria related to turnover, balance sheet, and number of employees. They provide an objective view of your operations that's hard to achieve when you're focused on day-to-day tasks.

Key benefits include:

• Risk reduction: Identify vulnerabilities before they become costly problems
• Efficiency gains: Spot process improvements that save time and money
• Compliance assurance: Meet regulatory and insurance policy requirements
• Decision support: Get reliable data to guide business strategy

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 examine your business's control systems, regulatory compliance, and financial accuracy. Small businesses typically focus audits on four key areas:

• Financial records: Accuracy of numbers, data entry processes, access controls, and reporting procedures
• Operational processes: Workflow efficiency, role clarity, redundancy identification, and improvement opportunities
• Fraud prevention: Internal theft risks, cybersecurity threats, and protective control systems
• Risk management: Business vulnerabilities, crisis preparation, and risk mitigation strategies

Types of internal audits

Internal audit types are determined by their specific focus area. Each type addresses different business needs and risk factors.

The four main types are:

• Operational audits: Evaluate process efficiency and resource utilisation
• Compliance audits: Ensure adherence to laws, regulations, and internal policies
• Financial audits: Examine financial record accuracy and control systems
• Information technology (IT) audits: Assess cybersecurity, data protection, and technology controls

The internal audit process

The internal audit process is a structured way to evaluate and improve your business operations. It typically involves four main stages: planning, fieldwork, reporting, and follow-up. This systematic approach ensures that every audit is thorough, objective, and provides valuable insights to strengthen your business from the inside out.

Key roles in an internal audit

Internal audit teams typically include three key roles, each with specific responsibilities that ensure thorough and objective assessments.

Key roles include:

• Internal auditor: Leads the audit process, evaluates systems objectively, and maintains independence from audited areas
• Audit committee: Approves audit plans, reviews findings, and oversees implementation of recommendations
• Management: Provides resources, facilitates access, 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 can improve your business. See the audit as an opportunity to strengthen your business and reach your goals.
• Get the whole team on board: Make sure your team understands the purpose of the audit and why it's important. Company culture comes from the top down, so management needs to 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 is handling the process?
• Make sure you have the right experience: You can hire outside help for internal audits. This is especially helpful for small businesses, and is supported by expert guidance based on interviews with 12 current and former heads of internal audit.
• Gather the right data: Whether you're auditing processes or financial records, you need accurate information. Part of this involves knowing the legal requirements for how long to keep accounting records (in the UK, it is three years for private companies and six for public companies). This may require you to invest in software like process mapping tools to visualise and assess workflows, or accounting software to analyse financial reports.

How to conduct your own internal audit

The internal audit process follows four structured phases that ensure thorough examination and actionable results. Each phase builds on the previous one to deliver meaningful business improvements.

Here's how the process works:

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

Audit planning establishes the scope, objectives, and methodology for your assessment. This phase determines what you'll examine and how you'll conduct the review.

Planning steps include:

• Risk assessment: Identify your business's most significant vulnerabilities
• Scope definition: Determine which areas, processes, or systems to examine
• Resource allocation: Assign team members and set timeline expectations
• Methodology selection: Choose appropriate audit techniques and tools

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

Audit execution involves gathering evidence and testing controls to assess your business's current state. This hands-on phase reveals how well your systems actually work.

Execution activities include:

• Document review: Examine policies, procedures, and transaction records
• Process analysis: Map workflows and identify inefficiencies or gaps
• Staff interviews: Understand roles, responsibilities, and daily challenges
• Control testing: Verify that protective measures work as intended

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

Audit reporting documents findings and provides actionable recommendations for business improvement. The report translates technical discoveries into practical next steps.

Report components include:

• Executive summary: Key findings and priority recommendations
• Detailed findings: Specific issues discovered and their business impact
• Risk assessment: Severity levels and potential consequences
• Action plan: Recommended improvements with timelines and responsibilities

4. Follow up on the implementation of the internal audit

Audit follow-up ensures recommendations actually improve your business operations. Without proper follow-up, even excellent audit findings won't deliver results.

Follow-up activities include:

• Implementation tracking: Monitor progress on recommended changes
• Effectiveness assessment: Measure whether improvements achieve intended results
• Adjustment planning: Modify approaches based on real-world outcomes
• Continuous monitoring: Schedule regular reviews to maintain improvements

Streamline your internal audit with Xero

With Xero, you can streamline your internal audit by quickly finding the numbers you need. Generate reports, track financials for specific projects or departments, and analyse financial data in real-time. Try Xero for free today.

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 annually at minimum, with frequency adjusted based on business size, risk level, and regulatory requirements.

Recommended frequencies:

• Small businesses: Annual comprehensive audits with quarterly focused reviews
• Growing businesses: Semi-annual audits covering different operational areas
• High-risk industries: Quarterly audits with monthly compliance checks

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

Internal and external audits serve different purposes and audiences. Understanding these differences helps you choose the right approach.

Key differences:

• Internal audits: Focus on operational improvement, risk reduction, and internal decision-making
• External audits: Focus on financial accuracy, regulatory compliance, and stakeholder assurance
• Results usage: Internal findings stay within your business; external results go to investors, lenders, and regulators

What happens if you find issues during an internal audit?

Issues found during an audit show you where you can improve. Document them in the findings report, share them with your senior team, and use them to create an action plan.