Internal Audit:- Traditionally It was developed as an checking of records on behalf of management to ensure a. That laid Internal Controls are adequate and Effective, b. Financial and other records & reports show the actual operations accurately and promptly and c. Each unit of the organization follows the policies and procedures as laid down by the Management. All these efforts are aimed at minimization of chances of fraud and errors. As the time changed Modern Approach developed, whereby in addition to above three objectives Internal Auditing has been entrusted with the task to d. Assist members of Organization in discharge their duties and e. Outcome of Audit is also to furnish Analysis, Appraisal, Recommendations, Counsel and provide Information in Respect of activities under review.
Thus Internal Auditing has gained importance in an organization because it has constructively provided solutions to the problems encountered by the business. Further It has also secured attention because most of the times Internal Auditing remained futuristic and suggested areas of weaknesses to the business before damage actually occurs. The suggestive and recommendatory report may add value to the organization.
Scope of Internal Auditing: “ The examination and Evaluation of the adequacy and effectiveness of the organization’s system of Internal Control and the Quality of performance in carrying out assigned responsibilities.” – The Institute of Internal Auditors
A. Reliability and Integrity of Information: The Internal Audit should review the Reliability and Integrity of Financial and Operating Information.
B. Compliance with Policies, Plans, Procedure, Laws and Regulations : Review and report has to be done of Policies, Plans, Procedure, Laws and Regulations which could have a significant impact on operations. This include compliance relating to GST, Income Tax, Labor Laws, Environmental Laws, FEMA, Factories Act. Provident Fund Act & Employee State Insurance Act etc. Report should also be on compliance of management plans and procedures.
C. Safeguarding of Assets : Internal Audit review the safeguarding of assets and as appropriate verify the existence of such assets. System of safeguarding should be evaluated to assess the risk of losses from theft, fire, misappropriation and natural calamities.
D. Economical and Efficient use of Resources : Internal Audit Appraise the economy and efficiency with which resources are employed. It is normally misunderstood by “Responsibility to comment on individual Managerial Action and Decision”. Rather it actually means :
a. To check whether operating standards have been established by the management for measuring economy and efficiency (To set standards is not the responsibility of Internal Auditors)
b. Established Standards are understood properly by the executing staff and are being met periodically
c. Deviation from standards are Identified, Analyzed and Communicated to those responsible for Corrective Action
d. To see finally corrective actions have actually been taken.
E. Accomplishment of Established Objectives and Goals for Operations/Program : Internal Auditors should review the operations or program to ascertain whether results are consistent with established objectives & Goals and whether the operations / program are being carried out as they are planned.
Need for Internal Audit in an Organization : The need for Internal Audit arises primarily due to the fact that in the past business organizations have grown enormously in size and operations. many of them employ thousands of persons and conduct operations from various locations. It has therefore become necessary for the management of such organizations to have a team of specialists to review the procedures and operations of various units and report cases of non compliances, inefficiency and lack of control so that necessary action can be taken. This task cannot be handed over to statutory auditors whose main job is to give opinion on true and fairness of the financial statements.
Independence of Internal Auditors : How Important : The nature and scope of operations and the status of An Internal Control System differ from one organization to another organization.
A. Organizational Status : Place of Internal Audit Department in Organizational Chart ensure it’s relative independence so that it can carry out it’s work freely & objectively and render impartial and unbiased judgments. “The organizational status of the Internal Audit Department should be sufficient to permit the accomplishment of it’s Audit Responsibilities”. Steps which are initiated to ensure effective Internal Audit are :
a. Chief Internal Auditor should be made responsible to Higher Management. This ensure Comprehensive coverage and sufficient/prompt action on audit report.
b. Functions, Responsibilities and Authority of the Internal Audit Department should be clearly & specifically laid in a written and Formal document approved by top management.
c. Chief Internal Auditor should have a direct communication with higher management.
B. Objectivity: To ensure that Internal Auditors are objective in performing audits, i.e. they do not subordinate their judgment on auditing matters to that of others and they should not be asked to assume operating responsibilities. This is because having assumed authority or responsibility responsibility for any function he himself cannot review the performance in that area objectively. The Institute of Internal Auditors have opined that “Even designing, installing and operating the system are not audit functions and they are likely to impair audit objectivity..
However Internal Auditor can review the procedures before they are implemented and suggest improvement therein.
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