Internal audit is an evaluation process for companies or
organization that is performed by internal auditors. It is a tool that is used
to examine the company’s financial as well as non-financial activities and
operations. Through the internal audit process, a company is made aware about
the prospective risk, compliance status, and operative loopholes and also
recommended about the measures and steps that it can take to improve efficiency
and effectiveness. The internal audit in India is governed by the Companies
Act, 2013, just like cost audit, tax audit, secretarial audit and transfer
pricing audit.
Who must have
Internal Audit?
The Companies Act, 2013 mandates all the listed companies and
certain unlisted public companies to have the internal audit conducted. The
following classes of unlisted companies are required to have internal audit:
·
Having paid-up capital exceeding
Rs. 500 million in the previous financial year.
·
Having turnover of Rs.2 billion or
above in the previous financial year.
·
Having outstanding loans and
liabilities exceeding Rs.1 billion
·
Having outstanding deposits for
Rs. 250 million
Also, the following classes of Private Companies are required to
conduct internal audit-
·
Having turnover of Rs.2 billion or
above in the previous financial year.
·
Having outstanding loans and liabilities exceeding Rs.1 billion in
the previous financial year.
Who should conduct an internal audit?
For the purpose of conducting Internal
Audit in a company, it is recommended to appoint a chartered accountant or a
cost accountant as internal auditor to perform the audit.
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Is there a penalty for non-compliance of Internal Audit?
There are no specific penal provisions that have been specified by
the Companies Act, 2013 for the non-compliance of internal audits in a company
or organization. Any sort of non-compliance is prosecuted as per Section 450 of
the act, as there is no punishment specified for not conducting an internal
audit. In case there is any non-compliance by the auditor or the company, both
are liable to pay a fine of Rs.10000.
Are there any key guidelines for conducting an internal
audit?
The Securities and Exchange Board of
India (SEBI) through Clause 49 of the Listing Agreement has introduced
mandatory corporate regulatory governance that is applicable to the listed
companies only. As per the clause an audit committee of the company is required
to review the following while internal audit:
·
Internal audit report that
relates to the internal control weaknesses.
·
Whether the internal audit has
been made functional in a proper order after thoroughly reviewing the internal
audit department’s structure, frequency of audits, seniority of the officer
heading the department, recruitment of the personnel and the remuneration terms
of the chief internal auditor.
·
The suspicion of the fraud or
forgery or internal control system failure that have been found in the
investigation in the internal audit service provided by the
internal auditor.
·
The acceptance of
responsibility for internal controls effectiveness, disclosure made to the
auditor, any deficiencies in the operations and its rectification by the board
of directors is to be certified by the Chief Executive Officer (CEO) or the
Chief Financial Officer (CFO).