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Limitations of Internal Audits: Undesirable Results

There are several potential limitations and disadvantages of internal audits: 1) Internal audits cannot catch all frauds as some chances of fraud happening even after an audit remain; 2) Auditors may do work inefficiently if they are outsiders with little attachment to the company; 3) Shareholders may not accept internal audit reports as they are for management use only and additional external audits are still required.

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Akash Patel
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733 views3 pages

Limitations of Internal Audits: Undesirable Results

There are several potential limitations and disadvantages of internal audits: 1) Internal audits cannot catch all frauds as some chances of fraud happening even after an audit remain; 2) Auditors may do work inefficiently if they are outsiders with little attachment to the company; 3) Shareholders may not accept internal audit reports as they are for management use only and additional external audits are still required.

Uploaded by

Akash Patel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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There are always two sides to every coin right, and with

internal audits there are also some disadvantages:

Limitations of Internal Audits


1. UNABLE TO CATCH ALL THE FRAUDS:

Internal audits are not full proof in the sense that it cannot
eliminate or catch all the frauds and therefore some chances of
frauds happening even after internal audit is done is always
there.

2. INEFFICIENT WORK BY AUDITOR:

Since internal audit is done by the professionals who are


outsiders chances are they have little or zero attachment towards
the company and hence they will do it the work for money rather
than for betterment of company.

3. NOT ACCEPTED BY SHAREHOLDERS:

Internal audit reports are not accepted by shareholders and


therefore it is for only management use and company has to
conduct external audit irrespective of fact whether it has
conduct internal audit or not, therefore it results in additional
costs for the company for hiring internal auditors.

4. UNDESIRABLE RESULTS:

Internal auditing can sometimes fail to check planned frauds.


Management can play many tricks in order to manipulate
accounts to conceal inefficiencies. These types of frauds are
not disclosed and the audited accounts will not always show a
true and fair view. If the information from management is false
then there is room for fraud and therefore internal audits can
sometimes yield undesirable results.

5.MORE EXPENSIVE:
Internal audit is considered to be more expensive in nature in
comparison with other audits, so It is ideal for large companies as
it may be very expensive to maintain and thus unaffordable by
small companies. The installation and operation of internal audit
involve extra expenditure which cannot be met by many small
concerns. As a matter of fact, internal audit is confined to larger
business.
6.TOTALLY DEPENDENT ON INTERNAL CONTROL:
The Auditor appointed has less work to do as he is totally
dependent on the internal control system and the staff of the
company. Over reliance by the management will make the staff
take advantage of perpetrating frauds. As the auditor does not
have regular check on the making of the financial statements.

7.MISAPPROPRIATION OF RESOURCES:
Internal auditors may collude with staff leading to
misappropriation of resources. When the staff does not provide
with proper accurate and reliable information about the company
records and accounts. Lack of support by management kills the
morale and ability to perform its duties effectively.
The internal auditor hired by the audit company, being out of the
company can be accepted with some reticence by the audited
departments, being in this way harder to develop collaborating
relations which could be helpful in the investigations, being
generated sometime cultural or organizational conflicts, so it is
always difficult on the part of the internal auditor.
Internal auditors can have a limited vision of improvement
opportunities because of a lack of external benchmarks.
There are occasions when managers cannot accept the finding of
internal audit and take consequent actions. This defect arises
mainly from the deficiencies of the internal auditing staff.
Because of their advisory staff position, unfamiliarity with
operating aspects of work and accounting bias, internal auditors
fail to be of any real help to the manager in many cases.

8. NOT INDEPENDENT:
Internal auditors are employed by the organization and this can
be impair their independence and objectivity and ability to report
fraud and error to senior management because of perceived
threats to their continued employment within the company to
ensure the transparency. Best practice indicates that the internal
audit should report both to management and those charged with
governance (audit committee).

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