Internal Audit – A Quick Overview

Today many business organizations have grown so large that it is difficult to concentrate on their activities. With the growth of business, the risks associated with the business have also increased manifold. In order to reduce the risks associated with the business, the government has advanced the internal audit system for many companies under the Companies Act, 2013. Internal audits play an important role in day to day operations of company. Internal audits assess business processes and internal controls in order to provide independent assurance regarding the effectiveness of internal controls and risk management systems, allowing the organization to meet its goals.

As per the Companies Act 2013, following class of companies shall have to mandatorily appoint internal auditor.

• Every Listed Company
• Every Unlisted public company if during the preceding financial year, it satisfies any of the below mentioned conditions:
  1. turnover of rupees two hundred crore or more.
  2. paid up share capital of rupees fifty crore or more.
  3. outstanding loans or borrowings from banks or PFI exceeding rupees one hundred crore or more at any point of time.
  4. outstanding deposits of rupees twenty five crore or more at any point of time.
• Every private company if during the preceding financial year, it satisfies any of the below mentioned conditions:
  1. turnover of rupees two hundred crore or more.
  2. outstanding loans or borrowings from banks or PFI exceeding rupees one hundred crore or more at any point of time.
• Part of the management and have the authority to investigate the operations of organization.

As per clause XIV of CARO 2020 an external auditor should consider the following while preparing its audit report

1. whether the company has an internal audit system commensurate with the size and nature of its business;
2. whether the reports of the Internal Auditors for the period under audit were considered by the statutory auditor;

As per section 138 of the Companies Act, 2013, any CA, CMA, or such other professional as may be decided by the Board can be appointed as an internal auditor of the company. An employee of the company may also become the internal auditor of the company but it must be considered as a part of the management and have the authority to investigate the operations of organization.

• Always enjoy an independent status and shall not involve in the performance of executive function.
• Analyze the risk and bring them in the notice of management.
• Analyze the operations of the entity and maintain an adequate system of internal control, also provide safeguard. against misappropriation of assets.
• Evaluate the policies of organization and made necessary changes on it, if required.
• Keep an eye on all all important occurrences and events which may affect the business.
• Shall not take operation decision on those matters later which may be internal audit.

• An internal auditor must possess an expertise necessary to evaluate the management control system.
• An internal auditor must have a basic knowledge about the technology and commercial practices followed by the entity. So, that he can evaluate the operational performance and non-monetary, operational controls.
• An internal auditor must possess knowledge of commerce, laws, taxation, cost accounting, economics, quantitative methods and ERP systems.
• He has an ability to deal with people and an understanding of management principles and techniques.
• He should maintain the confidentiality of such information which he acquired during the course of audit.

The Internal Auditor shall issue their report on the basis of his best professional judgement, after consultation with the auditee, in a reasonable period of time from the completion of audit. Key elements of internal audit report are as follows:

• Conclusion of internal audit report should be on the basis of audit procedures performed during the audit and the analysis of the audit evidence obtained by performing these procedures.
• If internal audit is performed as per Standards on Internal Audit then the auditor shall specify the same in his report.
• Since the Standards on Auditing does not mandate the auditor to follow a particular format. So, an auditor may frame his report by exercising professional judgement and may be influenced by the preferences of the recipients.
• After fulfillment of all the compliance procedure Copies of draft and final internal audit reports to should be maintained in a proper manner.

An internal audit ensures that a company follows the law and rules in a timely manner. The audit provides a level of security and aids in the management of risk arising from fraud, power abuse, or other scenarios. An internal auditor provides management with an unbiased assessment of the processes and financial statements. Using the services of an internal auditor, an organization can improve their operational and financial performance.