Mandatory conduct of an Internal Audit

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).