Performing and Internal Audit

Internal Audit is a process of evaluating the financial aspects of the company representing the reliability of financial information of the department/unit within the company for a specified period.

Whether the company is big or small, an Internal Audit can be useful to obtain the insights that can lead to strengthening the company's policies. Section 138 of the Companies Act, along with Rule 13 of Companies (Accounts) Rule, 2014, deals with the requirements of Internal Audit. This article can help to understand the criteria of Internal Audit. 

Who act as an Internal Auditor?

As per Section 138 of the Companies Act, an Internal Auditor for the class of company/(ies) as provided by the Act shall be:

• A Chartered Accountant (CA), or
• A Cost Accountant (CMA), or 
• Other professional as the Board decides.

The Internal Auditor can be an individual/partnership firm/ body corporate.

Which Companies are required to appoint an Internal Auditor?

Rule 13 of Companies (Accounts) Rule, 2014 provides the details of companies that must appoint an Internal Auditor.

1. All listed companies;
2. Unlisted public company whose:
   • Paid-up share capital is 50 crores or more during the preceding financial year; or
   • Turnover is 200 crores or more during the preceding financial year; or
   • The amount of outstanding loans/borrowings from banks/public financial institutions exceed 100 crores or more (at any time during the preceding financial year); or
   • The amount of outstanding deposits are 25 crores or more (at any time during the preceding financial year).
      
3. Private company whose:
   • Turnover is 200 crores or more during the preceding financial year;
   • The amount of outstanding loans/borrowings from banks/ public financial institutions exceed 100 crores or more (at any time during the preceding financial year).

What are the steps for performing the Internal Audit?

• Gather and organize the information to identify the concerned areas.
• Analyze the risk and controls measures adopted by the company.
• Review the compliance calendar of the company within the departments as per statutory laws applicable to the company.
• Verify the information.
• Document the results and findings, and suggest modifications required to fill the gaps in the existing policies.
• Suggest the process for incorporating the new policies and procedures.
• Review the implementation process.

Important points to consider in regards to Internal Audit:

• An employee of the company may or may not be the internal auditor.
• The Audit Committee or the Board shall formulate the process, scope, periodicity for performing the internal audit in consultation with the Internal Auditor.
• Chartered Accountant or Cost Accountant acting as an Internal Auditor may or may not be engaged in practice.
• The Policies and procedures put in place must focus on continuous improvement of the company's performance.
• The company must do an annual evaluation to check the results of changed policies.

A company can succeed by following efficient, effective practices and supporting the organizational goal. Internal Audit is used to reassess the policies and procedures and make amends as and when required to fulfill the operational needs without any errors or delays.

A record of all the financial transactions arranged in sequence through an automated application is known as Audit Trail. An Audit Trail can be beneficial while locating the transactions to its source document. This whole process can help eliminate various frauds and errors that might exist in a company.

The auditor can easily access the history of transactions and the document from the general ledger, ensuring fairness in the financial reports. The audit trail system is introduced in the Companies Act to promote transparency in recording the financial transactions by the company.