- Introduction:
Internal audit provides effectiveness of organisation’s internal control system, risk management, governance. Internal audit looks beyond the financial transactions and extends to advisory services, organisation growth, policy matters, work environment and relevant recommendations to the management etc.
Global regulations such as FCPA in US, UK Bribery Act, SOX Act, COSO, Fraud Risk Management (FRM) by RBI and introduction of IFC (Internal Financial Controls) in companies Act,2013 are the few witness stating the seriousness for requirement of Fraud detection mechanism.
There are instances where organisations extricated from frauds and financial hardship due to early detection and corrective measures by the internal audit team. Internal audit facilitates the organisation to take timely decisions and emphasize on proactive environment than reactive, which is vital in the dynamic economy.
- Objective:
This article aims at illustrating few significant aspects explaining the benefits of internal audit.
- What is Internal Audit?
According to the Institute of Chartered Accountants of India (ICAI), “Internal audit is an independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity's strategic risk management and internal cont rol system.”
According to the Institute of Internal Auditors (IIA), “internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes”.
Accordingly, Internal Audit can be broadly understand as management’s independent activity to facilitate the management to -
? Improve and add value in governance mechanism.
? Strengthen the strategic risk management and internal control system.
4. Why Internal Audit?
Considering the objectivity of internal audit, it can be viewed as amanagement independent activity to strengthen its own organisation than a statutory requirement. Internal auditors provide the governing body and senior management with comprehensive assurance based on the highest level of independence and objectivity within the organization.
4.1 Major Benefits:
4.1.1 Facilitates strong system to compliance with law:“Ignorantia juris non excusat” means ignorance of law excuses no one. In the present world of business there are so many stringent norms mandated by regulators, further law is being revised continuously, which demands continuous updation. However it might be the difficult for organisational staff, who majorly concentrate on execution of day to day operations. Further, sometimes organisations may not afford as many professionals.
An effective internal audit team with versatile experts can provide organisation a strong system to compliance with the law.
4.1.2 Facilitates informed decisions by the management: in-time quality information helps in quality decisions; internal audit will provide the requisite analysed data to make effective decisions by the management. Instances are there where analysis done by the internal audit team helped management to take vital decisions wrt business expansion such as manufacture of profitable by product, optimisation of ideal resources etc.
4.1.3 Facilitates implementation of effective internal control system: Internal audit examines the policies and procedures of an organisation on a regular basis and ensures the effectiveness of internal control system in force. For instance finding the absence of maker checker control in bills processing will curb processing of fake bills by implementing maker checker control.
4.1.4 Facilitates to strengthen the risk assessment process: Due to increase of complexity in business process new risk factors are emerging. Internal audit plays vital role in evaluating inherent and non inherent risks exist in the business and thereby to mitigate the risk.
4.1.5 Facilitates dedicated review of operations and Fraud detection: with the expansion of business, management oversight dilutes in review of operations which gives ample of opportunities for fraudulent operations. Internal audit with dedicated review of operations will put check to the emerging frauds. Artificial entries in pay roll detected during internal audit will put an end to the fraud in salary payments.
4.1.6_ Facilitates pro activeness than reactive nature: Internal audit facilitates the regular review of operations and through its timely review and information it enables the management to be a proactive than a reactive.
4.1.7 Protect interest of the investors: All investors can’t be a part of management; they may not have insight into all the operations and process. Internal audit plays a vital role in protecting the interest of the investors. An effective audit system will boost up the confidence in the investors about the effective performance of their organisation.
4.2 Requirement under Indian Companies Act 2013 applicable to Companies only:
As per section 138 of Indian Companies Act 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, appointment of internal auditor is mandatory for the following nature of companies.
|
Criteria |
Listed Company |
Unlisted Public Company |
Private Company |
|
Paid up share capital (during preceding F.Y.) |
Always applicable |
Not less than Rs. 500Millions |
N.A. |
|
Turnover (during preceding F.Y.) |
Always applicable |
Not less than Rs. 2000Millions |
Not less than Rs. 2000Millions |
|
Outstanding Loans / borrowings from banks/Financial Institutes (at any point of time during preceding F.Y.) |
Always applicable |
Not less than Rs. 1000Millions |
Not less than Rs. 1000Millions |
|
Outstanding deposits (at any point of time during preceding F.Y.) |
Always applicable |
Not less than Rs. 250Millions |
N.A. |
- Conclusion:
Effective internal audit is one of the major pillars in the growth of an organisation. Internal Audit is a prerequisite for every emerging organisation in the dynamic business environment. However unless the Internal auditor treated as admonitor and backed by management, effectiveness will be mere fancy. Hence, pervasive perception towards internal auditor is required to be changed and to achieve its objectivity internal audit should be recognised as intramural mechanism of the organisation.
Establishing a professional internal audit activity should be a governance requirement for all organisations. This is not only important for larger and medium sized organisations but also may be equally important for smaller entities , as they may face equally complex environments with a less formal, robust organisational structure to ensure the effectiveness of its governance and risk management process.
This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.
