Internal auditing itself is a vast process that includes a number of sub-processes that are used to:

• Evaluate the usefulness of company operations and the accuracy of financial reporting within an organization
• Spot fraudulent activities
• Secure company assets
• Make sure that all the financial policies of the company are in line with the rules and regulations of the region the company is functioning in

Internal auditors are not responsible for taking any legal action against an activity. They are only responsible to report it to the board of directors and suggest ways of solving the problem. Also, internal auditing is not the same as financial and cost accounting. Therefore, it does not deal with giving suggestions and recommendations regarding the financial aspect of the company. Internal auditing is only responsible for reporting activities and checking the accuracy of documents created by the financial departments.

Another major responsibility of an internal auditing department is to maintain the transparency of records and keep the board of directors aware of any issues that might be there. Internal auditors are responsible for transferring these records to external auditors and are responsible if any fraudulent activity is detected.

Internal auditing departments are rare in partnership firms. They are usually present in Joint Stock Companies where the movement of assets and the involvement of financial activities are on a larger scale. Today, an internal auditing department has become a severe necessity because of the number of fraudulent activities being caught by external auditors in the last decade. In some cases, companies are directed to create internal auditing departments by the federal agencies.

There are three types of audits:

1. Internal – first party or self-audit
2. External – second party audit
3. Independent – third party audit (another organization is involved)

Auditing may also be specifically defined as an independent and objective examination of the final accounts of a business. In the case of financial audits, it is for the purpose of determining whether the balance sheet and profit and loss accounts present fairly the financial position of the business and results of operations.

The biggest auditing firms in the world are called The Big 4 Auditors.

Big 4 Auditors

This group was earlier known as the “Big Eight”, and was reduced to the “Big Five” by a series of mergers. The Big Five became the Big Four after a fifth large auditor, Arthur Andersen, collapsed in the wake of the Enron scandal in 2002.

Under orders from Congress, the Government Accountability Office (GAO) surveyed large companies to determine whether having fewer auditors affected the market. The report, published in 2003, found that most large U.S. companies will not even consider hiring an auditor from outside the ranks of the Big 4, but most said they would prefer having more than four.

The Big 4 audits 98 percent of U.S. companies with annual revenues over $1 billion.

The following are their revenues for fiscal year 2008:

Pricewaterhouse Coopers – $29.2bn revenue

Deloitte Touche Tohmatsu – $27.4bn revenue

Ernst & Young – $24.5bn revenue

KPMG – $22.7bn revenue

None of the Big Four accounting firms stand alone—each is a network of firms that is owned and managed independently. Each of these firms entered into agreements with other member firms in the network to share a common name, brand and standards of quality. Each network has established an entity to coordinate the activities of the firms.

In most cases, each member firm operates in a single country, and is structured to comply with the regulatory environment in that country.