What are the benefits of internal auditing?
The internal audit services enhance the effectiveness of risk management. It helps with effective monitoring of internal control processes instilled by the company’s management. Unlike external audits, internal auditors are appointed by the board of directors and not by the shareholders.
How is an internal audit performed - What is the process?
Here are the five different steps of an internal audit process:
Selecting the audit’s focus area:First, decide which department or area needs an internal audit. This mostly involves high-risk areas that may have loopholes. This will help you carry out the audit process carefully.
Planning and preparation: In this phase, you assess the internal processes effectively and determine the action points. The key components involved in this phase are:
- Clarifying the scope of the audit.
- Developing a schedule for the audit.
- Deciding the standards and regulations.
- Formulating the steps carried out during the audi
Performing:Once the required planning and preparations are done, it is time to perform the audit. The audit process includes inspecting whether the company meets the specific standards or regulatory requirements. The auditor also looks for various pieces of evidence and collects information based on different sources.
Publishing: Once the auditor has performed the audit, the result is published. This result contains the findings that emphasize the areas for improvement. The findings are then discussed with the management.
Action:The final phase involves taking the necessary measures suggested by the auditors so that the company can remain risk-free and compliant at all times.
What are the perks associated with conducting an internal audit?
Compliance with the Law:Certain classes of companies are required to appoint internal auditors according to Rule 13 of the Companies (Accounts) Rules 2014 of the Comapnies Act 2013. This will allow them to stay compliant with the prevailing laws and regulations.
Identifying Risk: Internal auditors examine the company's revenue cycle processes to identify income leakage. They assess the effectiveness of internal controls designed to prevent unauthorised access, errors, and fraud. They also use data analytics techniques to identify patterns and anomalies that could signal income leakage.
Improved Internal Controls: Auditors examine processes and controls to identify vulnerabilities.They verify adherence to financial regulations, preventing unauthorised use of funds. The auditors also identify areas for improvement and foster a culture of ongoing risk management.
Stronger Governance:Many industries are subject to strict regulatory requirements. Audits can help these companies remain compliant with the regulations. This also helps avoiding legal penalties. They can also build a risk prevention strat
Increased Confidence: Internal auditing helps maintain transparency. By promoting accountability, auditing can help attract investment. It also fosters investors’ confidence and strengthens the capital markets. The clients are also more eager to do business with transparent companies.
Strategic Alignment:A company that is well aware of the risks it might face can easily engage in strategic decision-making. The leaders can allocate resources effectively. They can also prioritize high-risk areas and develop contingency plans to address potential risk scenarios. This helps in improving business resilie
Penalties for not appointing an internal auditor:This clause is mentioned under Section 450 of the Companies Act 2013. A company or an officer can be liable to pay INR 10,000 as retribution incase of failure of appointing internal auditor. A further penalty of INR 1,000 for each day can be fined for the entire duration in the case of continuing contravention. This is subject to a maximum of INR 2,00,000 for a company. The same is charged as INR 50,000 for an officer who is in default.
Conclusion:
The benefits of an internal audit are many. The audit process can help companies stay relevant to the prevailing laws and regulations. It also allows for better governance. For more details on the internal audit process, you may contact BC Shetty & Co. and we will help you with a strategy for improving internal controls in your organisation.
The frequency can depend on multiple factors. It is conducted Monthly, Quarterly or Annually in most cases.
The internal audit can be conducted by:
The internal audit requirements for limited companies depend on factors like:
- Regulatory requirements
- Company size
- Complexity and risk
- Board requirements
The internal audit report is not mandatory. The auditor should explain to the company heads the importance of audits and maintain the yearly and quarterly reports for proper evaluation.
A report from this kind of exercise can be used to evaluate the effectiveness of processes in an organization. The statutory auditor can also use the internal audit report to assess governance and identify risk
Disclaimer:
“The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received, or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation.”
Prepared On:
17/10/23
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