Introduction
Internal audit refers to an independent service to evaluate an organisation’s internal controls, its corporate practices, processes, and methods. An internal audit helps in securing compliance with the various laws applicable to an organisation. An organisation can prepare its accounts and records as per the applicable legal requirements and reporting.
Understanding Internal Audit
The purpose of an internal audit is to check the effectiveness and operational standards framed by an organisation. An organisation may have a set of rules for operations, such as placing orders, accepting deliveries, and making payments. An internal audit also helps in knowing whether the employees follow the internal operational standards.
An internal audit helps in identifying problems or inefficiencies and taking necessary corrective steps. Internal audits can identify any frauds by employees, such as embezzlement of funds. The audit can also identify whether there are deliberate cost overruns, whether a particular vendor is getting preference over other low-cost suppliers.
Benefits of an Internal Auditor
Many companies choose to employ an internal auditor, despite not being legally obligated to do so. Robust internal audits are viewed as a key way to correct issues quickly, maintain a good reputation, and prevent money from being wasted. Reports filed by internal auditors (IA) can help companies to prosper and operate at maximum efficiency. Internal auditors also set the company up for success when it’s annual external audit comes around. The job of an internal auditor is essentially to help catch and fix issues before an external auditor has the chance to so do. For this reason, many executives view them as a necessary expense.
How long does an Internal audit take?
The time neededmay take up to a few weeks, depending on the scope of the audit and the size of the company, or department, being assessed. Before it is concluded, an audit includes a consultation with the director or board that hired them to discuss how their suggestions for improvement can best be implemented.
What are Internal auditors responsible for?
Routine internal audits ensure the company has the ability to survive in a competitive business environment, and continue to prosper. Auditors do this by:
- Monitoring, analyzing and assessing the risks and controls of the organization
- Reviewing the organization’s compliance with state and federal policies and laws
- Making reassurances and recommendations to the organization or company’s owners or governing boards
Essentially, they gather information on how an organization or company is operating and uses it to show where it is doing well and where it can improve.
Objective outsourced or co-sourced audits, performed by professionals who have no personal connection to the organization, are an excellent business investment. Internal audits done often make sure the company is in compliance and that every department is working as efficiently, effectively, and securely as possible.
Applicability of Internal audit
According to Rule 13 of the Companies (Accounts) Rules, 2014, the following classes of companies are mandated to appoint an internal auditor or a firm of internal auditors:
1. All listed companies
2. Unlisted public companies that meet either of the below criteria:
- Have a paid-up share capital of Rs. 50 crores or more during the immediately preceding financial year, or
- Have a turnover of Rs. 200 crores or more during the immediately preceding financial year; or
- Have outstanding loans or borrowings from banks or financial institutions with a balance exceeding Rs. 100 crores at any point of time during the immediately preceding financial year; or
- Have outstanding deposits of Rs. 25 crores or more at any point of time during the immediately preceding financial year.
3. Private companies that meet either of the below criteria:
- Have a turnover of Rs. 200 crores or more during the immediately preceding financial year; or
- Have outstanding loans or borrowings from banks or financial institutions with a balance exceeding Rs. 100 crores at any point of time during the immediately preceding financial year.
All the companies covered under any of the above conditions will need to comply with the requirements of section 138 and rules specified under the Companies (Accounts) Rules, 2014.
Internal audit report
The internal audit report must be sent to the company’s board of directors. It is the responsibility of the internal auditor to report risk management issues and internal control deficiencies identified. He/she must report directly to the audit committee/ Board of Directors and suggest recommendations for improving the operations of the company, in terms of both efficient and effective performance.
