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How to Improve Your Internal Audit Reports

When sharing an audit plan, lead with the most important information, embed links to help readers find what they need, and separate the identified risks into those that affect a business unit from those that affect the firm as a whole

Auditors always produce a report after they complete their work. It is a universal standard activity. It is expected by management and other stakeholders alike. The reports record the results of the audit work and should be the foundation for driving sustainable improvement in the management of the company.

Hours spent in the reporting phase of an audit have increased over time, yet this extra time has not translated into increased report quality or effectiveness. On average 95 hours are now spent producing an audit report – up from 55 hours in 2008 and 84 hours in 2010. This now represents 18% of the total time spent on an audit in planning, fieldwork, reporting and follow up activities (up from 14% in 2008).

CEB research reports management concern about the quality of audit reports and urgency of audit findings, raising questions about the impact of assurance work on helping the business address deficiencies. Only 50% of those in the business rate audit reports as effective and clear.

Reasons to Improve Audit Reports

  1. Increased visibility: Audit results are distributed to a wider range of both internal and external stakeholders, each with varying needs. Auditors need to ensure the audit report does not overstate or understate risk and that it provides an accurate picture of the risk and control environment.
  2. Demonstrate credibility: Internal Audit continues to review more complex, strategic risks. This means auditor understanding of the business and associated risks has to be properly demonstrated within the audit report.
  3. Avoid ratings clustering: The tendency to cluster results at the mid-point of audit ratings leads to an inadequate reflection of actual risk exposure.
  4. Articulate business value: Stakeholders often feel audit results are not directly linked to their business priorities or urgent enough to address in a timely manner.

Many audit departments make basic mistakes that detract from the usefulness of their reports. Most of these mistakes are easy to fix. Defining a report template, using clear examples of good writing and streamlining the editing process are examples of quick improvements you can make.

Yes or No to Audit Ratings

Over three-quarters of respondents issue individual ratings and almost 80% issue overall report ratings. The three-point scale is still the most common rating method for audit teams. However, the use of four and five-point scales is increasing. Our research shows 23% do not rate individual issues and 22% do not rate reports with 9% not rating either.

There are benefits to using audit ratings yet they can also add delays and friction to the audit process. Example positives and negatives are summarised below.

Ratings No ratings
 

Example positives

Quick to understand severity of audit issues or overall report conclusion.

Easier to track trends in reported issues.

Primary focus is upon issue resolution.

Reduced defensiveness of audit client management.

 

Example negatives

Stakeholders spend more time debating rating than the underlying issues.

Inconsistency of ratings across audits / auditors.

Difficult to distinguish between issues.

Harder to track trends.

The challenge is represented by this quote from the chief auditor at a CEB Audit member firm:

“We spent about as much time discussing the grade as we spent discussing how to remediate the finding, so we wanted to find a way to communicate critical issues to senior management and the Audit Committee without the use of grades.”

Innovative Audit Reports

Most audit departments rely on electronic distribution of audit results and provide digital periodic summaries of audits to the audit committee.

Today more stakeholders are reviewing reports and other information via smart phones or tablets. Internal Audit should keep stakeholder preferences in mind when designing a report to ensure it can be easily read on devices used by their key stakeholders.

As an illustration, among the audit report innovations we found during recent research were the following:

  • A company that leads its audit report with the most important information but embeds links in the text to allow stakeholders to easily navigate to more detailed information as needed.
  • A company that divides the executive summary into parts that effectively demonstrate the results of the audit engagement, including separating the risk impact to Company and BU, using a risk management maturity model (with target and actual) as well as providing summary company / process information.

More On…

6 Responses

  • Sinead says:

    As an internal auditor myself, I face the same challenges. The audit report is our key deliverable so it needs to be concise, pragmatic and relevant to the audience. Before I discuss ratings I sit down face to face with key stakeholders, agree the facts and commercial impact statement. I work out if the issue is high on their priority list. I use data analytics to quantify and support the commercial impact statement.

    All of this requires effort and time which needs to be built into planning and stakeholder management. If you take people on the journey and are transparent I your thinking, it will reduce the lead time to deliver reports.

    In our organisation, we have internal sessions through the audit lifecycle to constantly challenge our thinking and ultimately produce a quality report. We also frame the report as early as planning the audit.

  • Thandolwethu Solani says:

    As a Finance student wanting to be an internal auditor i got to know the challenges internal auditors face and how they overcome them. this blog increased the knowledge i have about internal auditors in the workplace.

  • Dr. Peter Hughes CPA says:

    The long debates about the ranking is an excellent opportunity to better appreciate the client’s perspective and an even better chance to educate him or her on the auditor’s view point.

  • Dr. Peter Hughes CPA says:

    All the time spend debating the score or ranking of the findings is exactly time that needs to be spend to impress upon management the relative importance of the findings. Management needs to know which finding they need to address first and which findings they can address later. The ranking should be objective with clearly stated criteria to ensure fairness and consistency in its application. Additionally, the Board and CEO need to know what finding they need to focus on and discuss. I connect the ranking with a required implementation and audit follow-up timeline. It is a time saver or everyone and makes the audit process much smoother. Furthermore only about 15% of our findings are either material or sigmificant which saves the Board and CEO time and energy cause it reduces the findings they have to read and react to. Email me if you have any questions.

    Peter Hughes PhD, CPA

    • David says:

      It does not appear that LA County uses rankings of findings, though OC does. I find that there can be controversies about audit report rankings, with managers wanting findings to be ranked as minor. Also, some recommendations are just process improvements, not necessarily having findings.

  • Dan Moller says:

    These are good tips. Internal auditing could become a complicated process if not done properly and could end up costing your company. I agree that innovation, as well, is key to a successful audit. Thanks for the great read!

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