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Internal Audit
Overview
Internal Audit is a key compliance and governance tool that helps companies evaluate the effectiveness of internal controls, risk management, and business processes. Under Section 138 of the Companies Act, 2013, certain companies are mandatorily required to conduct an Internal Audit to ensure financial and operational transparency. It plays a preventive role by detecting inefficiencies, financial irregularities, and compliance gaps before they escalate.
Applicability and Requirements
As per Rule 13 of the Companies (Accounts) Rules, 2014, the following class of companies is required to appoint an Internal Auditor:
1. Listed Companies
All listed companies are mandatorily required to conduct internal audits.
2. Unlisted Public Companies
If they meet any of the following thresholds during the preceding financial year:
Paid-up share capital ≥ ₹50 crore
Turnover ≥ ₹200 crore
Outstanding loans or borrowings from banks or public financial institutions ≥ ₹100 crore
Outstanding deposits ≥ ₹25 crore
3. Private Companies
If they meet:
Turnover ≥ ₹200 crore, or
Outstanding loans or borrowings ≥ ₹100 crore
The internal audit can be conducted by a chartered accountant, cost accountant, or any professional deemed fit by the Board.
Steps Involved in an Internal Audit
1. Planning
Understand the business operations and industry.
Define audit objectives and risk areas.
Prepare an audit plan and assign responsibilities.
2. Risk Assessment
Identify potential areas of financial, operational, and compliance risks.
Evaluate internal controls currently in place.
3. Fieldwork & Testing
Collect data, test processes, and evaluate system effectiveness.
Use analytical and substantive audit procedures.
4. Reporting
Draft the internal audit report with findings, observations, and recommendations.
Discuss draft findings with management before finalization.
Submit the final report to the Audit Committee or Board.
5. Follow-Up
Monitor corrective actions taken based on audit recommendations.
Conduct periodic reviews for high-risk areas.
Key Objectives of Internal Audit
Ensure compliance with legal and regulatory requirements.
Evaluate the effectiveness of internal controls.
Prevent and detect frauds and misstatements.
Enhance operational efficiency.
Provide independent assurance to management and stakeholders.
Frequently Asked Questions
An audit ensures financial transparency, regulatory compliance, and accurate financial reporting. It also helps in risk management and enhances investor confidence.
An internal audit is conducted voluntarily to improve internal controls and operational efficiency, while a statutory audit is legally mandated to ensure compliance with financial regulations.
Businesses and professionals whose turnover or receipts exceed specified thresholds under the Income Tax Act must undergo a tax audit.
Financial statements, bank statements, invoices, ledgers, tax filings, and other relevant financial documents are necessary for a statutory audit.
A stock audit should be conducted at least once a year to reconcile physical stock with accounting records and prevent discrepancies.
GST due diligence is a comprehensive review of a company’s GST compliance, ensuring accuracy in tax filings and adherence to GST laws to avoid penalties.
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