TaxesHow to Do an Internal Audit for Philippine Businesses

Internal audits are an important way for Philippine businesses to improve their operational procedures and ensure compliance proactively. Unlike external audits, which are primarily mandatory reviews of financial statements for regulatory purposes, internal audits focus on optimizing company processes to ensure consistent efficiency and effectiveness. To help you understand the internal auditing process, we’ll explain what an internal audit is, its purpose, and how to conduct one for your business.

What Is an Internal Audit?

An internal audit is an independent, objective evaluation of a company’s operations, financial systems, and internal controls, conducted by an in-house audit team or an outsourced professional service. In the Philippines, internal audits help businesses proactively align with standards set by regulatory bodies like the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR), as well as industry best practices. Unlike external audits, which are often mandatory, internal audits are typically voluntary and focus on improving efficiency, detecting fraud, and ensuring compliance with internal policies.

Internal auditors assess areas such as financial reporting, operational workflows, and risk management. They may also review procurement processes or evaluate compliance with tax regulations.

What Is the Main Goal of an Internal Audit?

The primary goal of an internal audit is to boost efficiency and protect assets by identifying weaknesses in processes, controls, and risk management. For this reason, they are considered proactive and a form of financial preventative maintenance. 

Here is a list of common internal audit objectives.

• Enhancing Organizational Efficiency: Identify and address weaknesses in processes and controls to streamline operations.
• Safeguarding Assets: Protect company resources by detecting inefficiencies, potential fraud, or non-compliance before they escalate.
• Ensuring Compliance: Verify alignment with internal policies and local regulations, such as the Philippine Financial Reporting Standards (PFRS).
• Providing Assurance: Offer management and stakeholders confidence in the transparency and alignment of operations with strategic objectives.
• Supporting Decision-Making: Deliver actionable recommendations to improve processes, fostering long-term sustainability in a competitive market.
• Prepare for an External Audit: Ensure financial records and processes are accurate and well-documented to facilitate smoother external audits.

How to Conduct an Internal Audit

Conducting an internal audit requires a structured approach tailored to the business’s size, industry, and objectives. In the Philippines, internal audits are often led by certified internal auditors. Even without an in-house audit team, you can access professional auditing services. Contact us and our certified team will provide you with expert assistance.

Before you start an audit, prepare by maintaining organized records, fostering open communication with auditors, and ensuring that staff are aware that the audit’s purpose is to improve business operations (rather than to blame them for mistakes caused by inefficient procedures).

Here’s what typically happens during the process:

1. Planning and Scope Definition: The audit team collaborates with management to define objectives, scope, and focus areas, such as financial controls or operational processes.
2. Risk Assessment: Auditors identify high-risk areas, such as inventory mismanagement or tax compliance issues. They will give special attention to these areas.
3. Data Collection and Testing: The audit team examines documents, conducts fieldwork, interviews staff, and tests controls to assess their effectiveness. For example, they may review expense reports and check if they comply with company policies.
4. Analysis and Recommendations: Auditors analyze findings to identify gaps and propose actionable solutions, such as improving internal controls or streamlining processes.
5. Reporting: A detailed report is presented to management, outlining findings, risks, and recommendations for improvement. An internal audit report may undergo several revisions, incorporating management feedback, before being completed.
6. Follow-Up Checks: After a designated period, auditors review implemented recommendations to confirm that corrective actions are effective and sustained. Ensure this step is completed to verify that internal audit recommendations are being followed and deliver lasting results.

Make Sure to Get an External Audit as Well

In the Philippines, external audits are mandated for certain businesses under the Corporation Code, SEC regulations, and the Tax Code. Companies required to undergo external audits include:

• Corporations with paid-up capital exceeding PHP 50,000 or gross annual sales exceeding PHP 3 million.
• Publicly listed companies and those registered with the SEC.
• Businesses registered as VAT entities subject to BIR regulations, 

The SEC requires audited financial statements to be submitted annually, typically within 120 days after the fiscal year-end. Non-compliance can result in penalties, fines, or suspension of business permits. Additionally, the BIR may use audited financial statements to verify tax compliance, making external audits practically mandatory for avoiding legal issues.

Business Registration Philippines offers internal and external auditing assistance. Whether you’re looking to make more informed strategic decisions, highlight areas for financial improvement, or boost your credibility for investors, our team is ready to deliver solutions that move your business forward.

Final Thoughts

Internal audits are a proactive way to improve a business’s operations and mitigate risks. While not always legally required, internal audits offer valuable insights so entrepreneurs can ensure their businesses are operating efficiently and make informed strategic decisions. Create a clear audit plan, conduct thorough fieldwork, and prepare a detailed report with recommended improvements. Don’t forget to follow up to ensure your solutions are being properly implemented and delivering the intended results.

Are You Looking for Auditing Assistance?

An internal audit is important for Philippine businesses aiming to boost efficiency and ensure compliance. The process can be complex and varies based on your audit objectives. Additionally, analyzing the data to identify improvements and implementing those changes can pose significant challenges, especially for businesses without dedicated auditing teams.

Thankfully, Business Registration Philippines offers professional support for your business, including bookkeeping, payroll, auditing, and other accounting outsourcing tasks. Our team specializes in accounting and compliance-related services, ensuring your internal audits are thorough and aligned with Philippine regulations.

Contact us today to schedule an initial consultation with our experts.

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