Internal Audit vs. Internal Controls: What UAE Managers Need to Know

In the boardroom, these terms are often used interchangeably. "We need better internal audit." "No, we need better internal controls."

Actually, you need both. But you cannot have an effective Internal Audit function if you don't first have Internal Controls to audit.

Defining the Distinction

Internal Controls (The Process)

Who owns it? Management (The CEO, CFO, Dept Heads). What is it? The policies, procedures, and checks built into the daily workflow to prevent errors and fraud. Examples:

• Requiring two signatures on a check.
• Password protecting the payroll file.
• Automatic credit limits in the ERP.

Internal Audit (The Assurance)

Who owns it? The Audit Committee (or Board). What is it? An independent verification function that tests whether the controls are working effectively. Examples:

• Testing a sample of checks to see if they actually have two signatures.
• Attempting to access the payroll file to see if the password works.

Analogy: Controls are the brakes on the car. Internal Audit is the mechanic who checks the brakes every 6 months to ensure they haven't failed.

Quick Comparison Table

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Why UAE Companies Fail at Both

1. The "Copy-Paste" Control Manual

Many companies buy a generic "Policies & Procedures" manual that sits on a shelf. Failure: Employees don't follow it because it doesn't fit the actual workflow. Internal Audit finds 100% non-compliance. Solution: Design controls that match your actual processes, not theoretical best practices.

2. The "Police" Auditor

Internal Auditors are viewed as spies. Failure: Staff hide information. The audit adds no value because it only finds surface-level errors, not root causes. Solution: Position internal audit as a "partner" that helps departments improve, not as a threat.

3. Lack of Independence

The Finance Manager is asked to "do the internal audit." Failure: You cannot audit your own homework. He will never report his own mistakes to the owner. Solution: Internal audit functions must report directly to the Board or Owner, bypassing operational management.

4. Audit Fatigue

Too many audits with no follow-up. Failure: The same findings appear year after year. Staff ignore recommendations. Solution: Track implementation of previous findings. Hold management accountable.

The Three Lines of Defense Model

First Line: Operational Management (Controls)

• Day-to-day controls embedded in processes
• Front-line managers responsible for compliance
• Examples: Approval workflows, reconciliations, access controls

Second Line: Risk Management & Compliance

• Oversight functions that monitor the first line
• Policies, training, and monitoring
• Examples: Compliance Officer, Risk Manager, Quality Assurance

Third Line: Internal Audit

• Independent assurance to the Board
• Tests both the first and second lines
• Reports directly to Audit Committee or Owner

Building a Robust Framework

Step 1: Design Controls (The 1st Line of Defense)

Map your core processes (Sales, Procurement, Treasury). Identify risks (e.g., "Fake Vendor"). Design a control (e.g., "Vendor Onboarding Form requires Trade License").

Control Design Checklist:

1. What could go wrong? (Risk)
2. How likely is it? (Probability)
3. What's the impact? (Severity)
4. What control prevents/detects it? (Control)
5. Who is responsible? (Owner)
6. How do we know it's working? (Evidence)

Step 2: Risk Management (The 2nd Line of Defense)

A compliance officer or risk manager monitors the risks and ensures laws (VAT, Labor, AML) are followed.

Key UAE Compliance Areas:

• Corporate Tax compliance
• VAT return accuracy
• WPS (payroll) compliance
• AML/CFT requirements
• Data protection (for applicable businesses)

Step 3: Internal Audit (The 3rd Line of Defense)

An outsourced or in-house auditor reports directly to the Board/Owner, bypassing the General Manager if necessary. They provide objective assurance.

Typical Internal Audit Cycle:

1. Risk assessment and audit planning
2. Audit execution and fieldwork
3. Findings discussion with management
4. Report issuance with recommendations
5. Follow-up on implementation

The Internal Audit Process

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Red Flags in Audit Findings:

• Same finding appearing 3+ years in a row
• Management disagreeing with all findings
• No findings at all (auditor not looking hard enough)
• Findings with no root cause analysis

Control Maturity Model

Where is your organization?

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Most UAE SMEs are at Level 1-2. Target Level 3-4 for compliance and investor readiness.

When to Outsource Internal Audit?

For most SMEs in UAE, hiring a full-time, qualified Internal Audit Manager (Salary AED 25k+) is too expensive. Outsourcing is the smarter move:

1. Cost: Pay for 500 hours a year, not 2,000.
2. Expertise: Access to IT auditors, Fraud examiners, and Tax specialists from one firm.
3. Independence: No conflict of interest or office politics.

Outsourcing Decision Matrix

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Frequently Asked Questions

How often should internal audit be performed?

For SMEs: full audit cycle annually, with quarterly follow-ups on previous findings. Larger or regulated companies may need continuous auditing.

What's the difference between internal and external audit?

External audit (statutory audit) opines on financial statements for shareholders and regulators. Internal audit provides assurance to management and the Board on operations, compliance, and risk management.

Do we need internal audit for regulatory compliance?

Not explicitly required for most UAE entities. However, banks often require it for lending, and DFSA/ADGM regulated entities have mandatory internal audit requirements. Companies should also maintain strong external audit relationships for statutory compliance.

Can the external auditor also do internal audit?

Generally not recommended. Independence rules (especially for listed companies) prohibit auditors from auditing their own work. For SMEs, some flexibility exists, but it's better to keep them separate.

How do we measure internal audit effectiveness?

Track metrics like: findings implementation rate, audit plan completion, stakeholder satisfaction, and reduction in repeat findings.

Conclusion

Strong internal controls prevent the fire. Internal audit installs the smoke detectors. Together, they let you sleep at night.

Related Resources

• Internal Audit Services - Outsourced and co-sourced internal audit solutions
• Internal Controls Implementation Guide - Step-by-step framework for building controls
• 5 Signs Your Business Needs Internal Audit - When to implement internal audit
• External vs Internal Audit Explained - Understanding the differences
• Forensic Audit Services - Fraud detection and investigation

Risk Advisory Farahat & Co provides co-sourced and fully outsourced internal audit services. We help you move from "firefighting" to "fire prevention."