When You Should Consider Opening or Creating an Internal Audit Function

Growing businesses and regulated firms need an internal audit function when day-to-day management cannot provide independent oversight. Experts emphasize that whether large or small, a company needs an internal audit function as part of good governance and as a last line of defense against errors and fraud. Internal audits proactively uncover deficiencies in internal controls and operations before external auditors do. Industry reviews even call internal audits “mission-critical” for improving risk management and operational efficiency. They serve to independently review the internal processes and controls of a company, uncovering control gaps that need fixing.

Recognizing Key Indicators of Needing An Internal Audit Function

There are several red flags signaling it’s time to build an internal audit function. Rapid growth, acquisitions, or new product lines introduce complexity that can overwhelm existing controls. Public companies and regulated firms face strict requirements (for example, SOX) that make thorough internal control reviews necessary. Other indicators include repeated audit findings, control breakdowns, or even minor fraud cases. When these signs appear, management should consider adding an internal audit function to strengthen oversight. For smaller private businesses, the initial steps could include periodic audits or co-sourcing, which can scale up as needs grow.

• Rapid growth or added complexity: Scaling businesses often see controls break down or manual processes fail. An internal audit helps catch inefficiencies early.

• Regulatory or stakeholder demands: Public companies and regulated industries (like financial services or healthcare) often require documented controls (e.g., under SOX or ISO 27001). Internal audits provide that documentation and assurance.

• History of fraud or control failures: Even small cases of fraud or repeated control lapses are signs you need an independent review function.

• Lack of independent oversight: If the same people designing controls are also enforcing or reviewing them (e.g., your CFO managing the books and reviewing financials), there’s a conflict. Internal audit functions add objectivity.

  
  

For small businesses, you don’t need to launch a full department. You can start small with periodic internal reviews, or even co-source with a third party, like Audit Advantage Group, and scale as needed.

Ensuring Independence and Governance

When establishing an internal audit function, a well-defined structure and strong governance are just as critical as the function itself. Internal audit is often described as the organization’s “third line of defense,” independent from daily operations and compliance functions. Ideally, the internal audit chief reports directly to the board or audit committee, not to the units being audited. Richard Chambers of The IIA emphasizes that internal audit works best when auditors are “free from bias and undue influence” and have “direct accountability to the board”. Likewise, PCAOB standards note that internal auditors provide objective analyses and assurances to management and boards while maintaining their objectivity. These practices help protect the audit function’s independence and credibility.

• Direct reporting. The internal audit leader should report to the board or audit committee, not to operational managers.

• Charter and standards. A formal audit charter (approved by the board) and adherence to professional standards define scope and reinforce independence.

• Qualified staff. Auditors (in-house or outsourced) should have the skills and certifications needed. If hiring is not an option, co-sourcing or outsourcing to firms like Audit Advantage Group provides experienced professionals.

• Audit committee oversight. The audit committee should approve the audit plan and review the chief auditor’s performance, rather than leaving these to management.

  
  

Maintaining audit independence reassures stakeholders that the internal audit function can objectively challenge management. It also means auditors can focus on high-risk areas without conflicts.

In-House vs. Outsourced Internal Audit

Finally, organizations should choose the internal audit model that fits their resources and strategy. Larger companies may build a full in-house team, while others can benefit from internal audit outsourcing or co-sourcing. Outsourcing immediately provides an expert team without recruitment delays. It removes the burden of hiring and retaining auditors; you gain a seasoned audit team right away. Outsourced providers also bring established processes and tools, often delivering faster results.

Key advantages of internal audit outsourcing include:

• Specialized expertise. Third-party firms bring auditors skilled in areas (IT security, compliance, etc.) that a small internal team may lack.

• Scalability and flexibility. Outsourced teams can scale up or down as needed – for instance, handling large projects or seasonal requirements without permanent hires.

• Cost and time efficiency. Outsourcing often offers fixed-fee contracts, avoiding recruitment overhead. Providers use proven tools and processes to speed up audit work.

How Audit Advantage Group Helps

At Audit Advantage Group, we specialize in helping businesses:

• Decide when and how to build an internal audit program

• Design governance structures that meet AICPA, PCAOB, and IIA standards

• Implement policies, controls, and continuous improvement systems

Whether you need a custom audit framework, an independent third-party review, or expert guidance on internal audit governance, we’re here to help.