Internal audit has been defined as "…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..."

In simpler words, internal audit is an activity through which the management can evaluate and analyse a particular process or function. The purpose of conducting an internal audit is to identify weaknesses in systems and processes compared to defined parameters and to rectify lapses if any.

The need for internal audit arises because of

  • Increased size and complexity of businesses
  • Enhanced compliance requirements
  • Focus on risk management and internal controls to manage them
  • Unconventional business models
  • Intensive use of information technology
  • Stringent norms mandated by regulators to protect investors
  • An increasingly competitive environment

Over the years internal audit has gained critical importance and become an indispensable function. Various statutory requirements also mandate internal audit to be conducted compulsorily. In India, the Companies Act is the basic statute prescribing the role of internal auditor, requirements, and qualifications of an auditor.

The following are the Key Regulations Relating to Internal Audit

Clause 49 of Listings Agreement

All listed companies are required to follow corporate governance provisions prescribed under clause 49. A major requirement is that of conducting internal audit, formation of audit committee and following detailed directives.

Section 138 of Indian Companies Act, 2013

As per section 138 of Indian Companies Act, 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, certain class of companies are required to appoint Internal Auditors. Companies qualifying based on the type, turnover, outstanding loans, and deposits are required to compulsorily appoint an internal auditor and follow the prescribed process.

Companies (Auditor's Report) Order, 2016

The MCA has issued the Companies (Auditor's Report) Order, 2016 which prescribes the detailed matters on which the auditor is required to report on and to be included in the audit report.

Other Provisions

The need for internal audit arises in special cases like producer companies in India, or companies intending overseas expansion or listing in other countries. The growing importance of Internal Audits is a testament to the fact that business complexities are increasing. Various internal and external factors are pushing compliance requirements, and organizations are willing to stay one step ahead by carrying out internal audits as prescribed by laws. Experts at V. Purohit & Associates hold in-depth Internal Audit experience across diverse domains and complexities.

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