What it means
When an internal or external auditor spots a problem, a single note saying that something looks wrong is not enough. Management needs to understand the issue, believe the evidence and see why it matters.
Finding development is the structured method for building that case. Most audit methods use four elements.
The condition is what actually exists, the criteria are the standard or policy that should apply, the cause explains why the gap exists, and the effect describes the actual or potential harm. Some frameworks add a fifth element, the recommendation, which sets out what should change.
Good development starts with evidence. The auditor tests a sample, checks that the facts are right, confirms them with the people involved and avoids reaching conclusions before the cause is understood.
This protects both sides, because management can respond to facts and not opinions. Quantifying the effect is often the most persuasive step.
A statement such as some invoices lacked approval is easy to dismiss, but a figure showing that around 240 invoices worth $2,160,000 may have been paid without approval gets attention. The estimate should be clearly labelled as an estimate and explain how it was reached.
Findings are normally rated by importance, so that the audit committee can focus on the biggest risks. The best findings are short, fair and specific, give management a chance to agree the facts, and end with an action, an owner and a date.
In practice
Real-world examples.
Example
An internal auditor at a retail chain finds that stores often skip the monthly stock count. She records the condition, quotes the stock policy as the criteria, finds the cause is a shortage of staff on Sundays and estimates the effect on stock write-offs.
Example
A hospital's compliance team reviews supplier contracts and finds that several were renewed without a competitive tender. The finding identifies the contracts concerned, the procurement policy breached and the likely extra cost.
Example
An IT auditor at a bank discovers that former employees' system access was not removed promptly. The finding sets out how many accounts were affected, why the leaver process failed and the risk of unauthorised access.
Formula
Calculation
Findings are built from a simple structure, and the effect can often be estimated by scaling a sample result to the whole population.
Finding = Condition (what is) compared with Criteria (what should be), with Cause (why) and Effect (so what)
Estimated exposure = (Exceptions found divided by Items tested) x Total population x Average value per item
Worked example: policy requires approval for every invoice over $5,000. An auditor tests 200 invoices and finds 12 without approval. The full population is 4,000 invoices with an average value of $9,000.
Exception rate = 12 divided by 200 = 6%
Estimated exceptions in the population = 6% x 4,000 = 240 invoices
Estimated exposure = 240 x $9,000 = $2,160,000
The auditor reports this as an estimate based on a sample, together with the cause and a recommendation.Case study
Seen in the real world.
Kestrel Components is a fictional manufacturer whose internal audit team noticed that credit notes were being issued with little oversight. Rather than raise an alarm immediately, the auditor, Maya, tested 150 credit notes, found 9 without proper approval and traced the cause to a system setting that allowed one person to create and approve.
Maya wrote up the finding with the four elements and estimated that around $85,000 of credit notes a year could be affected. In this illustrative story, management agreed the facts at a closing meeting, changed the system setting within a month and thanked the audit team for a finding that was clear and fair. The case shows how development turns a hunch into a fix.
Watch out
Common mistakes.
- Reporting the condition without the criteria. Without a policy, law or standard to compare against, a finding is just an opinion and is easy to challenge.
- Stopping at the symptom and not the cause. If the root cause is not identified, the recommended fix may treat only the surface and the problem returns.
- Presenting a sample result as if it proved the total. Estimates from samples should be clearly described as estimates, with the method and limits explained.
Questions
People also ask.
What are the elements of a finding?
Most methods use condition, criteria, cause and effect, and many add a recommendation. Together they give the reader the full picture.
Who should see a finding before it is final?
The people responsible for the area should see it first, so that facts can be agreed or corrected. This makes the final report more accurate and the response more constructive.
How is a finding different from an observation?
An observation may be a minor point or an improvement idea, while a finding is a confirmed gap against a standard that is backed by evidence and normally needs a response.
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