🧭 Internal Audit Preparation Guide: How Controllers Strengthen Controls and Prevent Surprises
Most companies fear the word “audit” — but often, it’s not the external audit that reveals the biggest surprises. It’s the internal audit. While external audits verify financial statements for regulators and investors, internal audits go deeper: they examine how your company operates, how decisions are made, and whether internal processes are truly effective.
For growing companies, internal audits are no longer optional. They’re essential for protecting assets, improving operations, and preparing for future funding or acquisition. And for controllers and finance leaders, a well-prepared internal audit isn’t just about passing a review — it’s about building confidence across the business and preventing risks before they ever become headlines.
In this guide, we’ll walk through a complete roadmap for internal audit readiness. You’ll learn how to prepare documentation, test internal controls, conduct walkthroughs, and respond to findings — all while positioning your company for a smoother external audit down the line.
🧭 What Is an Internal Audit — and Why It Matters
An internal audit is a comprehensive review of a company’s internal controls, financial processes, and compliance practices. Unlike external audits — which are performed by independent CPA firms — internal audits are initiated by the company itself (often with help from an internal audit team or external advisor).
The purpose is not to issue an opinion on your financial statements. Instead, it’s to ensure that the systems behind those numbers are sound. A strong internal audit can help you:
🛡️ Identify risks before they become costly problems.
🧮 Ensure internal controls are designed and operating effectively.
🧾 Confirm compliance with policies, contracts, and regulations.
📊 Improve accuracy and timeliness of financial reporting.
🏦 Build trust with investors, lenders, and auditors.
In other words: an internal audit is your company’s financial health check. Done right, it builds resilience and confidence — and makes future external audits far easier.
🧰 Internal vs. External Audit: Key Differences Explained
One of the most common questions finance leaders face is, “What’s the difference between an internal audit and an external audit?” While they share a common goal — ensuring financial integrity and building stakeholder confidence — they serve very different purposes and audiences.
An internal audit is initiated by the company itself and focuses on strengthening the business from the inside out. It is typically carried out by an internal audit team or an outsourced advisor and is designed to evaluate the effectiveness of internal controls, risk management practices, and operational processes. Because the company defines the scope, internal audits are flexible and often much broader in reach — extending beyond accounting to include operational efficiency, compliance, cybersecurity, and governance. They can be conducted on a quarterly, annual, or project-specific basis. Instead of issuing a formal opinion, internal audits result in detailed recommendations and improvement plans, helping management make better decisions and reduce future risk.
An external audit, by contrast, is performed by an independent CPA firm and is primarily concerned with providing external stakeholders — such as investors, lenders, and regulators — with confidence in your financial statements. The purpose is to independently verify that your financial reports are accurate, compliant with GAAP or IFRS, and free from material misstatements. Unlike internal audits, external audits are usually performed once a year and focus specifically on financial reporting accuracy. The outcome is an official audit opinion that accompanies your financial statements, which can significantly influence investor trust, financing decisions, and regulatory compliance.
Both audits are essential — but for different reasons. The internal audit builds the foundation, ensuring your company’s processes, policies, and controls are strong and working as intended. The external audit builds credibility, confirming that the financial picture you present to the outside world is accurate and reliable.
📌 Controller Insight: Companies that approach internal audits as proactive “practice runs” for external audits consistently experience smoother, faster, and less costly external reviews — with fewer adjustments, reduced risk, and greater trust from stakeholders.
📍 Step 1: Define the Scope and Objectives
The first step in preparing for an internal audit is to define what the audit will cover. Because internal audits are flexible, you can tailor them to your company’s specific risks and priorities.
Start by answering these questions:
🧭 What is the primary goal? (e.g., improve internal controls, prepare for funding, strengthen compliance)
🏢 Which areas or departments will be included? (e.g., accounting, procurement, payroll, revenue recognition)
📊 What is the audit period? (e.g., the current fiscal year, a specific project, or a multi-year lookback)
Once you define the scope, communicate it clearly across the organization. This ensures teams are aligned and know what to expect — reducing resistance and confusion later in the process.
Step 2: Review and Strengthen Internal Controls
Internal controls are the backbone of your accounting and operations. They safeguard assets, ensure accurate reporting, and reduce the risk of fraud or errors. Internal audits focus heavily on whether your controls are both designed effectively and operating as intended.
Controllers should review controls in key areas like:
🏦 Cash management: Are bank reconciliations reviewed by someone independent of the preparer?
📬 Accounts receivable: Are credit approvals documented and aging reports reviewed monthly?
💳 Accounts payable: Are invoices matched to purchase orders and approved before payment?
📊 Revenue recognition: Are contracts reviewed for proper performance obligations and timing?
🔐 System access: Is access to financial systems limited and reviewed regularly?
📌 Best Practice: Perform a walkthrough of each major process with the people involved. Observe how transactions are recorded, how approvals happen, and where controls could fail. This firsthand view often reveals issues that policies on paper don’t.
🗂️ Step 3: Gather and Organize Documentation
Documentation is the foundation of a successful internal audit. Without it, auditors can’t verify that controls exist or are working. Controllers should compile and review key documents well in advance of fieldwork.
Essential documentation includes:
📘 Accounting policies and procedures: Written policies for revenue recognition, capitalization, expense classification, etc.
🗂️ Process flowcharts or narratives: Visuals or written descriptions of how transactions flow through the company.
📄 Control documentation: Evidence that controls have been performed (e.g., approvals, reconciliations, system logs).
📁 Supporting schedules: Bank reconciliations, aging reports, rollforwards, depreciation schedules, etc.
🏗️ Key contracts: Customer, vendor, lease, and loan agreements that impact financial reporting.
📌 Controller Tip: Organize documentation in a secure, shared location (such as a cloud folder) with clear naming conventions. The easier it is to navigate, the faster auditors can complete their work.
📉 Step 4: Conduct a Risk Assessment
Internal audits are most valuable when they focus on high-risk areas — places where errors, fraud, or inefficiencies are most likely. A risk assessment helps you prioritize and allocate audit resources effectively.
Start by identifying risks in these categories:
📊 Financial reporting risks: Revenue recognition, accruals, reserves, and estimates.
🏗️ Operational risks: Procurement, project accounting, inventory, and billing.
🔐 Compliance risks: Tax filings, contract obligations, and industry-specific regulations.
🧑💻 IT and system risks: Access controls, data security, and segregation of duties.
Once identified, map each risk to the controls designed to mitigate it — and assess whether those controls are functioning. This becomes the basis for your audit plan.
Step 5: Perform Walkthroughs and Sample Testing
Auditors don’t just review policies — they verify that those policies are followed. That’s why walkthroughs and sample testing are critical components of internal audits.
🧭 Walkthroughs: Follow a transaction from start to finish — from initiation to approval to recording. This helps verify whether the process aligns with documented controls.
📊 Sample testing: Select random transactions and check for compliance with policies (e.g., invoice approvals, journal entry support, contract documentation).
📌 Example: During accounts payable testing, auditors may select 25 invoices and verify that each has a purchase order, receipt confirmation, and approval. If 22 of 25 pass but three fail, it’s a sign that controls may not be consistently applied.
Controllers should proactively review sample transactions before the audit begins. Fixing issues in advance reduces findings and strengthens your company’s control environment.
📁 Step 6: Prepare a “Prepared by Client” (PBC) File for Internal Audit
Although PBC lists are more common in external audits, they’re extremely useful in internal audits too. A PBC file is a collection of all documentation the auditors will request, organized and ready before fieldwork.
Include:
📑 Reconciliations for all major accounts.
🧾 Supporting documentation for revenue, expenses, and accruals.
📄 Evidence of control performance (e.g., approval emails, system logs).
📊 Rollforward schedules for fixed assets, debt, and equity.
📚 Updated policies and procedures manuals.
📌 Best Practice: Organize documents by category and include a short explanation or index page. This small step dramatically reduces follow-up questions and audit delays.
📋 Step 7: Communicate With Your Internal Audit Team
Clear communication is one of the most overlooked aspects of internal audit preparation. Set the tone early with your internal audit team or external consultants.
📆 Kickoff meeting: Review the audit scope, objectives, and timeline.
📬 Regular updates: Schedule check-ins to track progress and address roadblocks.
📁 Centralize requests: Use a shared document or tracker for audit requests and responses.
🧭 Designate a point of contact: Assign one team member to manage communication with auditors.
📌 Controller Tip: When communication is structured and proactive, internal audits run more smoothly and require less back-and-forth.
📑 Step 8: Review Preliminary Findings and Respond Quickly
Once testing is complete, auditors will share preliminary findings — observations, control deficiencies, or process weaknesses. How you respond matters as much as the findings themselves.
Steps to manage findings:
🧾 Acknowledge and document: Review each finding and confirm your understanding.
📊 Provide context: If there’s additional documentation or explanation, share it promptly.
🔁 Prioritize fixes: Tackle high-risk findings first, and assign owners and deadlines.
📆 Track remediation: Keep a log of findings and corrective actions for future reference.
📌 Controller Tip: View findings as opportunities, not failures. Most companies uncover at least a few issues during internal audits — addressing them before an external audit is the real win.
📘 Step 9: Implement Improvements and Strengthen Processes
An internal audit’s value comes from the changes you make afterward. Controllers should work with leadership and operations to turn findings into long-term improvements.
Examples of common post-audit improvements:
🔐 Strengthening segregation of duties in key processes.
🧾 Implementing new approval workflows or system controls.
📊 Automating manual reconciliations or reports.
📁 Updating documentation and training materials.
🧭 Introducing quarterly mini-audits for continuous improvement.
📌 Best Practice: Maintain a “control improvement log” that tracks every change made after the audit. It demonstrates progress and builds confidence with future auditors, investors, and boards.
✨ Final Thoughts
An internal audit isn’t about passing or failing — it’s about building a stronger, more resilient business. It helps companies identify risks early, improve processes, and ensure that financial reporting is reliable and accurate. And for controllers, leading a successful internal audit is one of the most strategic contributions you can make to the organization.
Done right, internal audits don’t just prepare you for external reviews — they make them easier. They show investors and stakeholders that your company takes governance seriously. And they give leadership the confidence that decisions are built on a strong, reliable foundation.
📩 Acrux Advisory helps companies prepare for internal audits by strengthening controls, organizing documentation, and building processes that reduce risk and increase confidence. Whether you’re preparing for an external audit, due diligence, or just want to operate at a higher standard, we’re here to help you get there.
📌 Services & Disclaimer
Acrux Advisory is not a CPA firm and does not provide services requiring a public accountancy license. All services are focused on accounting operations, financial reporting, and controller-level support. We do not provide audit, attest, or tax services that require licensure. Availability may vary, and engagements are accepted based on current capacity.