Internal audits provide a number of important services to company management. These include detecting and preventing fraud, testing internal control, and monitoring compliance with company policy and government regulation. Smaller companies may require these functions even more than large companies. A small business simply cannot afford employee fraud, waste, or a government fine. Establishing an internal audit function provides a vital step in the growth of a small business.


Small businesses lose millions of dollars every year to employee theft. Types of fraud committed by employees include skimming payments from customers, check tampering, cash theft and misuse of company credit cards, and improper payroll transactions. Many small-business owners may believe they lack the staff to create an internal audit policy or carry out audits to combat these problems. However, even with a small staff, a small business may create a program for monitoring employees and their behavior. An announced policy of internally auditing financial transactions for fraud may inhibit an employee from misusing company resources.

Monitoring Internal Controls

A formal internal audit policy, even if conducted part time by individuals normally assigned other duties, performs other tasks besides detecting fraud. Examining policies and procedures on a regular basis ensures that the company minimizes its exposure to fraud and other losses. Extension of credit to customers provides one such area of loss prevention. If you have formulated a policy regarding extension of credit, internal audits test compliance with that policy. Designing a credit policy with the intention of reducing bad debt does no good if not followed.

Operational Audit

Operational audits examine the practices of a company, rather than its finances. Is your business operating at maximum efficiency? Ineffective operations add to overhead without increasing profit. An operational audit may reveal these inefficiencies or point to unnecessary paperwork. Is your business following applicable regulations? Finding out you do not comply with a government regulation before the government discovers that fact avoids fines or other legal actions. A rapidly expanding business needs to monitor compliance with human resource laws as new employees join the company. Internal audit performs a vital service in reviewing these functions.

Planning Your Internal Audit

Your small business likely cannot afford to create an internal audit department, but with careful planning, you can create a system for checking up on your company and its employees. This less formal system, using people you already have, can still provide the information you need to improve your operations and financial controls. Such an internal audit requires two people working as a team. This avoids personality conflicts and prevents the auditor from simply checking his own work. It also provides an opportunity for the team members to discuss results and prepare an objective report to ownership. An informal process helps employees understand that the internal audit function provides an opportunity for the company to thrive and grow.


Daniel Cullinane CPA

2500 Plaza 5 25th fl  Jersey City NJ 07311                                                          phone 732-516-1648  fax 732-516-9778

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Copyright ©​ Daniel Cullinane CPA.

Daniel Cullinane CPA

25 Plaza 5 25th fl Jersey City NJ                                          phone 732-516-1648 fax 732-516-9778

MBA Taxation