short answer - I combine both the process and standard based approach for internal audits, ISO 9001:2000, creating seperate audit reports by department and also by standard. This demonstrates conformance to internal procedures as well as your standard.
long answer - The standard that you need to conform to should point you in the right direction. Ask yourself what you need to show auditors from another organization when they view your internal audit reports.
I like to divide the internal audit into functional or logical areas first, and collect all the related procedures - documents - flowcharts - whatevers. Then start organizing using the audit module. Create an audit record for each area, and add all the related documents and department to the scope. use that organized list to develop a checklist and save that in the audit record so you have it next time.
You may also need to review whatever standard you are working with, to verify that you are also auditing anything related to compliance with said standard. Create a seperate audit record that references the areas of the standard that were covered in your process approach, then you can cover anything that hasnt been hit with the process approach. Here is an example, at my company we have procedures for the receiving, storing, and tracking of material. These procedures cover ISO 9001 7.5.4 control of customer property, so there is no need to cover that while auditing based on the standard.