Internal Auditing: 7 Things You Don’t Know (2025)

Internal auditing is not “mini external audit” or a compliance formality; in Australian accounting practice it is a structured, independent assurance and advisory activity that strengthens governance, improves control effectiveness, and reduces financial, tax and regulatory risk—often delivering measurable time savings and fewer ATO disputes when designed properly. The seven most commonly misunderstood aspects are its independence model, its role in fraud and cyber risk, its direct impact on BAS/GST and income tax governance, how it uses data analytics continuously (not annually), how it strengthens board accountability, how it improves operational performance (not just controls), and how technology is reshaping internal audit into a faster, evidence-rich function.

What is internal auditing (and what is it not)?

Internal auditing is an independent assurance and consulting activity designed to add value and improve an organisation’s operations by evaluating risk management, controls, and governance processes. It is not the same as external audit, and it is not limited to financial statement line-items.

• Financial reporting controls (month-end, year-end close, consolidations)
• Tax governance and substantiation (GST/BAS, PAYG withholding, income tax positions)
• Payroll, superannuation and workforce compliance
• Fraud risk, cyber controls, and third-party risk
• Process efficiency and quality of management reporting

What are the “seven things” most people don’t know about internal auditing?

Internal auditing contains several technical and practical realities that are frequently misunderstood by finance teams, SME owners, and even experienced accountants who have only worked around external audit.

1) Is internal audit truly “independent” if it’s employed by the organisation?

Yes—internal audit independence is achieved through governance design, not by being external. Independence is typically protected by functional reporting to the board or audit committee and administrative reporting to management.

• Internal audit should have a clear charter approved by the board/audit committee.
• The head of internal audit should have direct access to those charged with governance.
• Internal audit scope should be risk-based, not management-selected.

• A CFO asks internal audit to “avoid reviewing revenue recognition this year.” A properly governed internal audit function can refuse, document the restriction, and escalate it to the audit committee—protecting integrity and reducing downstream financial reporting risk.

2) Does internal audit “find fraud”? It’s more accurate to say it makes fraud harder.

Internal audit is not a fraud investigation unit by default, but it is a powerful fraud deterrence and detection enabler. It tests whether controls prevent, detect, and respond to fraud risks—especially where incentives, pressure, and opportunity exist.

• Override risks (manual journals posted late month-end without review)
• Vendor master file weaknesses (fake suppliers, altered bank details)
• Expense claim control gaps (approval limits, missing receipts)
• Payroll manipulation risks (ghost employees, unauthorised rate changes)

• Weak controls also raise substantiation and record-keeping risks. The ATO expects taxpayers to keep and retain records that explain all transactions and support claims; weak processes are a common pathway to ATO adjustments and penalties. Consideration should be given to ATO guidance on record keeping and substantiation principles when designing audit tests.

3) Can internal audit reduce ATO risk? Yes—if it audits tax governance, not just “tax numbers”.

Yes—internal audit can materially reduce ATO compliance risk by testing the design and operating effectiveness of tax controls and governance, particularly for GST/BAS and income tax processes.

• BAS/GST reconciliation controls (source-to-BAS mapping, exception handling, review sign-off)
• PAYG withholding processes (correct tax tables, onboarding documentation, contractor classification checks)
• FBT data completeness (logbooks, declarations, entertainment capture)
• Division 7A governance (loan agreements, MYR tracking, posting accuracy) where relevant

• ATO guidance places significant weight on governance, record keeping, and accurate reporting as foundational obligations.
• Relevant legislation is primarily contained in the Taxation Administration Act 1953 (administration and penalties) and the Income Tax Assessment Act 1997 (core income tax rules), with GST governed by A New Tax System (Goods and Services Tax) Act 1999. Internal audit does not “interpret” the law like legal counsel, but it tests whether processes reliably produce compliant outcomes.

• Internal audit re-performs a GST coding sample and traces to tax invoices, then tests whether BAS review evidence exists, whether adjustments are explained, and whether recurring errors are remediated. The outcome is fewer rework cycles and stronger defensibility in ATO reviews.

4) Is internal audit only for big listed companies? No—SMEs often benefit more, sooner.

No—internal audit is increasingly used by Australian private groups, not-for-profits, and fast-growth SMEs because complexity grows faster than headcount. A lightweight, risk-based internal audit plan can be more cost-effective than repeated remediation after errors or ATO activity.

• Rapid growth (new systems, new entities, new staff)
• Multi-entity structures (trusts, companies, intercompany loans)
• High transaction volumes (e-commerce, NDIS providers, labour hire)
• Regulatory exposure (grants, government funding, licensing)
• Outsourced finance function (risk of unclear accountability)

• Start with 3–5 high-risk reviews per year (for example: payroll/super, revenue/AR, procure-to-pay, BAS/GST controls, cyber access controls).
• Implement a “management action plan” with owners and deadlines.
• Re-test within 90–180 days for closure.

5) Is internal audit just “controls testing”? The best internal audits also improve performance.

No—modern internal audit is as much about operational efficiency and decision-useful reporting as it is about control compliance. In practice, internal audit frequently finds process bottlenecks that create month-end stress, rework, and reporting delays.

• Duplicate data entry across systems (finance, CRM, payroll)
• Manual reconciliations that could be automated
• Poorly designed approvals that slow purchasing without reducing risk
• Incomplete documentation causing repeated queries and delays

• Anything that reduces rework (especially around BAS preparation, payroll finalisation, and year-end) tends to reduce errors and improve compliance outcomes. In a professional services firm, this also increases recoverable time.

6) Does internal audit happen annually? Increasingly, it’s continuous and analytics-driven.

No—annual “once-over” internal audits are being replaced by continuous monitoring in key risk areas using data analytics. This is especially relevant where transaction volumes are high and errors are systematic.

• Weekly exception reporting on manual journals above thresholds
• Detection of duplicate supplier invoices
• Trend analysis on GST codes applied to key expense categories
• Monitoring of changes to supplier bank accounts
• Continuous review of user access and segregation-of-duties conflicts

• Continuous analytics catches issues before BAS lodgment, before year-end, and before ATO review activity.
• It reduces the time spent “finding” evidence because it is captured and tested as part of the process.

7) Is technology changing internal audit? Yes—and it’s changing expectations of speed and evidence.

Yes—internal audit is being reshaped by automation, better data access, and AI-enabled document review. That shift is raising the standard for what “good evidence” and “timely assurance” look like.

• Auditors increasingly expect structured data, clear audit trails, and consistent reconciliations.
• Finance teams using automation can produce faster, more reliable evidence packs.
• Internal audit functions can cover more scope with the same headcount by focusing humans on judgement and exceptions.

• Instead of sampling 40 transactions manually, internal audit runs analytics over the full population, then investigates exceptions (unusual GST treatments, missing tax invoices, out-of-hours postings, abnormal credit notes). This approach is typically more defensible and more efficient.

How does internal auditing differ from external audit in Australia?

Internal audit and external audit are different in purpose, mandate, and deliverables.

• Primary purpose: Internal audit = improve governance/risk/controls and advise management, External audit = express an opinion on financial statements (where required).
• Scope: Internal audit = flexible and risk-based (can include cyber, HR, operations), External audit = financial report-focused with materiality considerations.
• Timing: Internal audit = throughout the year, External audit = typically interim/final with year-end peak.
• Audience: Internal audit = audit committee/board and management, External audit = shareholders/members and regulators (where relevant).

When should an Australian business implement internal audit?

An internal audit function (in-house or outsourced/co-sourced) becomes justified when risk and complexity exceed what informal oversight can control.

• Repeated BAS or payroll corrections and “surprise” liabilities
• High reliance on one key finance person (key-person risk)
• Multiple entities, acquisitions, or restructures
• Frequent manual journals to “make things work”
• Weak documentation and inconsistent approval evidence
• Increased ATO engagement (reviews, audits, information requests)

How can accountants and CFOs make internal audit valuable (not disruptive)?

Internal audit delivers value when it focuses on the risks that actually drive misstatements, cash leakage, and non-compliance, and when it produces implementable recommendations.

1. Define a risk-based internal audit plan aligned to business objectives and compliance hotspots (BAS/GST, payroll/super, revenue).
2. Agree upfront on what “good evidence” looks like (source documents, review sign-offs, system reports).
3. Use a “no surprises” protocol: confirm facts with process owners before reporting.
4. Focus on root causes, not just findings (training, system design, accountability).
5. Track remediation formally with owners and dates, then re-test.

What does good internal audit evidence look like for ATO-sensitive processes?

For Australian tax and reporting processes, internal audit evidence must be traceable, complete, and retained. While requirements vary by tax type and scenario, ATO guidance consistently emphasises keeping records that substantiate claims and explain transactions.

• BAS workpapers showing reconciliation from accounting system to BAS labels
• Tax invoices and adjustment notes supporting GST credits and GST payable
• Payroll evidence: onboarding forms, TFN declarations where relevant, super calculations, award/EA references
• Review and approval evidence: who reviewed, when, what was checked, what exceptions were resolved

It should be noted that record retention expectations and substantiation rules can vary by tax area, and specific advice should be taken for particular fact patterns.

How can technology reduce internal audit findings in reconciliation and working papers?

Automation reduces findings by removing manual steps that create inconsistent coding, missing documentation, and weak audit trails. This is where AI accounting software Australia trends intersect directly with internal auditing outcomes.

• Automated bank reconciliation with consistent coding rules and exception workflows
• Audit-friendly working papers produced from reconciled data
• Version control and evidence snapshots
• Faster production of BAS reconciliation support

From a workflow perspective, accounting automation software reduces the friction internal audit often identifies: manual reconciliations, spreadsheet drift, and incomplete review evidence.

Next Steps: How Fedix can help (and where MyLedger fits)

Fedix helps Australian accounting teams move faster from bank statement to financial statement with stronger evidence, clearer audit trails, and less manual reconciliation—exactly the areas internal audit frequently criticises.

• Automated bank reconciliation: commonly 10–15 minutes per client rather than 3–4 hours (up to 90% faster), reducing manual error risk and improving traceability.
• AI-powered reconciliation and categorisation: reduces rework and improves consistency of coding across periods.
• Automated working papers: reduces spreadsheet sprawl and supports consistent documentation.
• Australian compliance focus: supports BAS/GST processes, reporting, and documentation workflows aligned to Australian practice needs.

If your internal audit findings repeatedly relate to reconciliations, documentation quality, or BAS support packs, it is advisable to review whether your tooling is creating avoidable risk. Learn more at home.fedix.ai and evaluate whether MyLedger can remove the manual steps internal audit keeps reporting.

Conclusion

Internal auditing in Australia is a governance and performance tool, not a narrow compliance exercise. The seven overlooked realities—independence by design, fraud deterrence, tax governance impact, SME relevance, operational improvement, continuous analytics, and technology-driven speed—explain why internal audit is increasingly central to finance leadership. Organisations that align internal audit to ATO-sensitive processes, strengthen evidence quality, and automate reconciliation and working papers typically experience fewer issues, faster closes, and lower compliance friction.

Frequently Asked Questions

Q: Is internal auditing mandatory in Australia?

Q: Does internal audit replace external audit?

Q: How does internal audit help with ATO compliance?

Q: What should internal audit review first in an SME?

Q: How can we make internal audit less disruptive?

Disclaimer: This content is general information for Australian accounting and governance contexts as of December 2025 and does not constitute legal or tax advice. Tax laws and ATO guidance can change, and outcomes depend on specific facts. Professional advice should be obtained for your circumstances.