Internal Audit: Applicability, Role, And Importance in Strengthening Corporate Governance
“An independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity’s strategic risk management and internal control system”.
> Applicability of Provisions of Internal Audit
According to the Section 138 of the companies act, 2013 read with Rule 13 of the Companies (Account) Rules, 2014 shall be required to appoint an internal auditor or a firm of internal auditors, namely
a) every listed company;
b) every unlisted public company having-
a. paid up share capital of 50 crore rupees or more during the preceding F.Y.; or
b. turnover of 200 crore rupees or more during the preceding F.Y; or
c. outstanding loans or borrowings from banks or PFI exceeding 100 crore rupees or more at any point of time during the preceding F.Y; or
d. outstanding deposits of 25 crore rupees or more at any point of time during the preceding F.Y.; and
c) every private company having-
a. Turnover of 200 crore rupees or more during the preceding F.Y; or
b. outstanding loans or borrowings from banks or PFI exceeding 100 crore rupees or more at any point of time during the preceding F.Y; or
> Role of Internal Auditor in Strengthening Internal Audit
The internal audit department is responsible, within the scope of its duties, for assessing the operation of the internal control system and for making recommendations to improve it.
It helps raise awareness and train management personnel in internal control, but is not directly involved in the design or the day-to-day running of the system.
As part of its work plan approved by executive management, it examines compliance with laws and regulations, ensures that executive management’s instructions are properly carried out and verifies the proper functioning of the company’s internal processes relating to the reliability of reporting channels and information systems.
The internal audit manager draws up a work programme in light of the main risks incurred by the company and reports the significant findings of work carried out to executive management and, in accordance with the procedures defined by each company, to the board.
Ensuring the success of an organization and bridging the gap between the board of directors and the corporate management team is a key performance indicator. Below are some of their specific responsibilities and duties:
i. Evaluating risk management activities within the organization.
ii. Determining the organization’s compliance with relevant laws and regulations.
iii. Evaluating and making recommendations that can assist in improving internal control.
iv. Investigating fraud via a fraud risk assessment that uses fraud deterrence principles.
v. Offering an objective source of independent advice to help reach the goal and achieve legality and validity.
vi. Performing audit assignments assigned to them
vii. Learning and studying the organization’s policy and guidelines.
viii. Identifying audit scope and developing annual plans within the organization.
ix. Gathering, analyzing, evaluating, and presenting accounting documentation, reports, data, and flowcharts.
x. Following up the audits to monitor the managements’ intervention.
xi. Promoting ethics and identifying improper conduct within the company
> Importance of Internal Audit
An internal audit is essential to maintain operational efficiency and financial reliability and to safeguard the assets. It provides independent assurance that an organization risk management, governance, and internal control process are operating effectively. The following are the importance of Internal Audit:
1. Increase Productivity:
Internal audit is an objective assurance and consulting activities designed for add value and improve business operation. Internal audit can help an organization accomplish its strategic objectives by bringing a systematic, discipline approach to evaluating and improving the effectiveness of risk management, control and governance process. By continuously monitoring and reviewing the organization processes, internal auditor can identify the control recommendation to improve the efficiency and effectiveness of these processes and they also help to an organization to dependent on processes rather than on people.
2. Evaluate Risk and Protect the Assets:
A regular internal audit assess a company control and help to uncover evidence of frauds, help to identify any gaps in the environment and allow for a remediation plan to take place. Internal audit program will help to an organization to track and document any changes that have been made to environment and ensure the mitigation of any found risks.
3. Quality Control:
Internal auditor help the organization how well system and process are designed and keep the company goals on track and also provide the consulting on how to improve those system and processes if and when necessary.
4. Independent and Unbiased Insight:
Internal audit provides unbiased view into how effective internal controls of your business. If an organization has limited resources and they are unable to setup an independent audit team, they could cross-train employees to audit each other’s departments.
5. Good Corporate Governance:
Internal audits evaluate a company’s internal controls, including its corporate governance and accounting processes. They ensure compliance with laws and regulations, accurate and timely financial reporting and data collection. They also help maintain operational efficiency by identifying problems and correcting lapses before they are discovered in an external audit.
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