INTERNAL AUDIT

Posted On September 13, 2023September 19, 2023

Internal Audit is a function within an organization that aims to provide an independent and objective assessment of its operations, financial control, risk management practices, and compliance with relevant laws and regulations. The primary objective of an internal audit is to ensure that an organization’s processes are efficient, effective, and aligned with its strategic objectives. Internal auditors help organizations achieve their goals by identifying areas for improvement and offering recommendations to enhance operations and reduce risks.

Importance of Internal Audit

• Risk Management and Mitigation: Internal Auditor helps identify, assess, and manage various risks that the organization faces. By evaluating controls, processes, and procedures, an internal audit ensures that risks are identified early and addressed to prevent potential negative impacts on the organization.
• Fraud Identification: Internal Auditors conduct specific fraud detection tests that are designed to uncover potentially fraudulent activities. These tests may include examining expense reports, cash handling procedures, payroll records, and more.
• Compliance and Legal Requirements: Internal audits ensure that the organization adheres to laws, regulations, industry standards, and internal policies. This compliance focus helps avoid legal penalties, reputational damage, and operational disruptions.
• Early Warning System: Regular Internal audits provide an early warning system for emerging risks, enabling the organization to proactively address potential issues before they escalate.
• Training and Awareness: Internal audits can contribute to the organization’s training and awareness efforts. By sharing best practices and educating employees about controls and risks, auditors help build a culture of compliance and risk management.

Applicability of Internal Audit as per Companies Act 2013

The following are the criteria to have an Internal Audit

• Every Listed Company.

• Every unlisted public company having (1) Turnover equal to or more than 200 Crores (2) Paid up share capital of INR 50 Crore or More (3) Outstanding loans from banks/public institutions, exceeding INR 100 Crore or more at any point of time (4) Outstanding deposits of INR 25 Crores or more at any point of time.

• Every Private Company has a (1) turnover of INR 200 Crores or more and (2) Outstanding loans/borrowings from banks/Public Financial Institutions exceeding INR 100 Crores or more at any point of time during the year.

Qualification to Become an Internal Auditor

An individual can become an internal auditor if they meet the specific qualifications given below:

• A Chartered Accountant or
• A Cost Accountant or
• Such other professionals as may be decided by the Board.

Procedure to Appoint an Internal Auditor

• Board Resolution: The board of Directors of the company must pass a resolution to appoint an internal auditor. The resolution should specify the terms and conditions of the appointment, including the tenure, remuneration, scope of work, reporting structure, and any other relevant details.

• Consent and Eligibility Certificate: Before appointing an internal auditor, the proposed auditor should provide written consent and an eligibility certificate to the company. The eligibility certificate confirms that the proposed auditor meets the eligibility criteria for appointment as per the Companies Act 2013.

• Notice to Registrar of Companies: The company must file a certified copy of the resolution relating to the approval of the appointment of an internal auditor and such copy is to be filed with the Registrar of Companies in form MGT 14 Within 30 days of passing the board resolution to appoint the internal auditor.

• Appointment Confirmation: Issue an appointment letter to the appointed letter.

Types of Internal Audit

Internal Audit encompasses several types of audits, each serving a specific purpose within an organization. Here are some common types of Internal audits:

• Financial Audit: This type of audit focuses on the accuracy and reliability of financial statements and the effectiveness of financial controls. It ensures that the organization’s financial information is prepared by accounting standards and regulatory requirements.

• Operational Audit: Operational audits assess the efficiency and effectiveness of operational processes, systems, and procedures. They aim to identify process improvements, cost-saving opportunities, and potential areas of inefficiency.

• Compliance Audit: Compliance audits verify whether the organization is adhering to laws, regulations, industry standards, and internal policies. This helps ensure that the organization operates within the legal and regulatory framework.

• Information System Audit: Also known as IT Audit, this type of audit evaluates the organization’s IT systems, data security, controls, and the overall management of information technology. It’s particularly relevant for organizations heavily dependent on technology.

• Performance Audit: Performance audit assess the achievement of organizational objectives. They focus on whether the organization is efficiently and effectively using its resources to achieve its goals.

• Risk Assessment Audit: This type of audit evaluates the organization’s risk management processes. It identifies the assesses risks, evaluates the effectiveness of risk mitigation strategies, and provides recommendations to enhance the risk management framework.

• Forensic Audit: Forensic audits are conducted to investigate potential fraud, financial irregularities, or misconduct. They involve in-depth examination and analysis of financial records, transactions, and evidence.

• Environmental Audit: Environmental Audit assesses the organization’s compliance with environmental regulations, sustainability practices, and environmental impact. This type of audit is especially relevant for environmentally sensitive industries.

• Integrated Audit: An integrated audit combines elements from different types of audits to provide a comprehensive assessment of various aspects of the organization, such as financial controls, operational efficiency, and compliance.

• Quality Audit: Quality audit focuses on the organization’s quality management systems, processes, and product/service quality. They help ensure that the organization maintains high standards and continuously improves its offerings.

• Project Audit: Project Audit evaluates the management and performance of specific projects within the organization. They assess project objectives, execution, resource allocation, and outcomes.

The choice of audit type and the frequency of conducting audits may vary depending on the organization’s needs, industry-specific requirements, and risk management strategies. Many organizations implement a combination of these audit types to address different aspects of their operations and ensure robust internal controls.