When small to midsize businesses (SMBs) set their sights on growth, they often focus on activities like research and development, capability expansion, and investing in partnerships and new markets. But in doing so, they may be overlooking a powerful way to improve operations: the internal audit process.
In this article, we provide a step-by-step guide to turning your internal audit process from a standard compliance measure into a driver of operational efficiency, risk management and long-term growth.
What is the Internal Audit Process?
The internal audit process is a systematic checkup of your company’s financial health, internal controls and compliance with regulations, policies and ethical standards. The main goal is to ensure your books are accurate for financial reporting and your internal controls are strong. Unlike external audits, which are conducted by a third party, an internal audit is generally completed by a company’s internal team or with the help of external experts.
How does it benefit SMBs?
But this process is more than just a compliance exercise. Internal audit benefits also include uncovering inefficiencies and illuminating areas of risk and opportunities for growth. Senior leaders can then make informed decisions that optimize cost structures, improve quality and drive revenue.
For instance, an audit might find inefficiencies in your procurement process that, when corrected, could save thousands in unnecessary expenses. Or it could identify untapped growth potential in a specific market segment by revealing operational bottlenecks. In this way, the internal audit process becomes a form of consulting for SMBs with limited resources.
Steps for How to Conduct an Internal Audit
1. Plan: Define audit goals, purpose and scope.
The goals of audits can vary widely depending on your business situation. Start with a firm understanding of the company’s broader strategic objectives and the key performance objectives (KPIs) used to measure them.
- Are you hoping to improve performance to prepare for an upcoming IPO?
- See how effective your current systems and processes are?
- Expand into new markets?
To do this, you’ll need to engage senior leaders, identify key stakeholders and select auditing standards and frameworks that make the most sense for your goals.
Next, define the scope of the audit by determining the target areas and means of evaluation. Your business objective will also govern your audit methodology design.
- How will you evaluate performance and efficiency?
- Where will you begin your search for cost optimizations?
Let’s say your business objective is to expand into a new market. You’ll need to focus on processes like compliance with regional regulations and operational capacity to handle growth. The internal audit should directly tie into your broader strategic objectives, ensuring that insights lead to actionable growth strategies.
Finally, assign a competent and experienced audit team spanning finance, operations, IT and leadership. Determine the internal control review tools, tactics and software you’ll use, and engage external expertise as necessary to expedite, optimize and infuse trust into the process.
Once the high-level planning and scoping is complete, you’ll still need to go through all the standard motions of preparing for an audit.
2. Assess Risk: Evaluate potential risks within audit scope and align them with strategic goals.
Security and risk management is a major part of business activity today, so it’s critical to the internal auditing process. Identify risks with the greatest potential impact on your business and its strategic objectives, then assess how well the controls you have in place mitigate them.
Continuing with the example objective of market expansion, you’ll want to identify risks to things like pricing and service delivery—such as the competitive landscape, political unrest or natural disasters—and evaluate response and mitigation tactics such as supply chain agility and forecasting capabilities.
By proactively identifying and addressing risks, SMBs can turn potential threats into operational strengths that build competitive advantage and investor trust. For example, reducing a supply chain risk could lead to lower costs or more reliable delivery, directly impacting customer satisfaction and market share growth. Prioritizing risks also ensures resources are allocated efficiently to prevent disruption and maintain business continuity.
3. Conduct the audit: Prioritize, gather information and test.
Determine which auditing activities best suit your objectives. These could include on-site visits, interviews about the efficacy of controls and processes, enterprise-wide surveys, documentation reviews, scenario modeling, gap analyses, help desk activity analyses and more.
Once you’ve created an audit checklist, start gathering data: any relevant documents, financial records, enterprise platforms and databases. How easily you can collect your data is a testament to your data management practices, which should also be part of your internal control review.
- Where is your data stored?
- Who owns it?
- Does it come from disparate sources?
- What are your sources’ controls like? Are they standardized and secure?
Answers to these questions should appear in your report.
Remember, conducting the audit effectively provides insights beyond just compliance—it helps you spot inefficiencies, improve governance and even uncover growth opportunities. For instance, testing controls around customer data security might show ways to optimize data management, which could open up avenues for personalized marketing and revenue growth.
4. Report: Prepare a concise overview of findings and strategic suggestions.
Your internal audit process should reveal findings around areas for improvement, and your report should propose actionable ways to address them. As you think through solutions, identify bottlenecks, areas of volatility and talent gaps, and think about the kinds of technologies, training, processes and partnerships that could solve or mitigate these problems. If you have limited resources, generative AI tools can help quickly brainstorm strategic recommendations and create visually appealing reports for leadership.
Be sure to prioritize recommendations that not only fix immediate issues but also contribute to long-term growth. For example, implementing an ERP system might streamline operations, enabling your business to scale faster. Emphasize these growth-oriented recommendations when presenting your findings to leadership.
5. Monitor and follow up: Forge a culture of continuous improvement.
To realize the most internal audit benefits and ultimately improve, you must consistently monitor the implementation of changes your audit recommended. Keeping strategic business objectives top of mind:
- Create a plan and identify project owners and KPIs for each initiative.
- Set up regular check-in points for each recommended change, ensuring continuous improvement rather than waiting for the next annual audit.
- Implement a feedback loop so your company can quickly adapt to changing conditions and stay on track for long-term success.
- Consider how the proposed changes could disrupt or cause unintended issues with existing programs.
Midsize businesses in particular can work in this agile way, instead of waiting on cumbersome, costly annual review cycles or future audits.
Finishing up our previous example, a company with an objective of market expansion may use audit insights to improve its supply chain. By continuously refining these processes through follow-ups, it can reduce downtime and increase throughput—leading to increased revenue and faster achievement of its market expansion goal.
Case Study: AVIA Enhances Efficiency During Audit Process
AVIA, a digital health services firm, needed help preparing for their year-end audit while managing daily financial operations with a lean finance team. Paro connected them with a fractional CPA who assisted with the audit preparation and helped streamline important financial processes.
During the audit process, AVIA reduced time spent on month-end tasks, improved accounting practices and accelerated reconciliations, allowing leadership to make quicker, more informed decisions. This not only ensured compliance but also created opportunities for operational efficiency and long-term growth.
Reinvent Your Internal Audit Process
Thanks to the emergence of big data and AI, the internal audit process is now a multidimensional business activity, integral to ensuring compliance and instrumental in pinpointing opportunities for operational improvement and growth. But some things never change: Who you choose to design and conduct your audit is a key driver of success.
For SMBs, bringing on external experts is a reliable way to bolster your compliance capabilities and get the most value out of this endeavor. Book a free consultation with Paro today to learn how our internal audit advisory services can help you turn this overlooked tool into a competitive advantage.
