Internal audit is a corporation department or entity responsible with conducting unbiased, independent examinations of systems, business organizations, and procedures. An internal audit department's role is to give an independent source of information to an organization's senior management and governing bodies about the following:
Internal Auditing Requirements Under Section 138 of the Companies Act, 2013
Section 138 of the Companies Act, 2013 outlines the requirement for certain companies to undertake internal audits of their functions and activities. The clause emphasizes the importance of conducting internal audits by an internal auditor selected by the company. The method of conducting internal audits is to be prescribed by the Central Government.
Internal audits seek to uncover gaps within the organization's processes and control environment so that they can be addressed as soon as feasible to avoid harm to the organization or its stakeholders. As a result, an organization's internal audit plan should be risk-driven, or customized to investigate the areas that pose the greatest danger to the company. An internal audit strategy should also include a component of an organization's strategic needs. Likewise, each internal audit purpose should be consistent with the audit plan.
Internal Audits –
External audits- of financial reports and internal financial reporting controls.
Internal Audits - Internal auditors, who are often firm employees, conduct internal audits. Companies that lack the necessary expertise or staff may outsource this to a third party.
External audits- are performed by external auditors, who are often members of a CPA firm. To preserve objectivity, external auditors and the firm they work for must be independent of the entity being audited.
TO WHOM IS THE AUDIT REPORTED?
Internal audits - Board of Directors and management members
External audits- are performed on shareholders and members from outside the company.
WHAT ARE THE DIFFERENT TYPES OF INTERNAL AUDITS?
While internal audits cover a large component of the organization's internal controls over financial reporting as they relate to generally accepted accounting principles (GAAP) affecting their financial statements. Many businesses also acknowledge the need for evaluations or audits that are not related to accounting or finance. Compliance (i.e., regulatory), environmental, information technology, operational, and performance audits are some of these main areas.
As per the Companies Act, 2013, internal auditing is defined as an independent, objective assurance and consulting activity that enhances the operations of an organization by adding value. Internal auditing assists companies in achieving their goals by systematically evaluating and enhancing the efficiency of risk management, control, and governance systems.
Company Classification and Appointment of Internal Auditor
Section 138(1) categorizes companies based on certain criteria and mandates the appointment of an internal auditor. The appointed internal auditor must be a chartered accountant, cost accountant, or another professional decided upon by the company's Board. Rule 13 further outlines the specific criteria for companies that must appoint an internal auditor or a firm of internal auditors:
Compliance and Punishment
Companies meeting the specified criteria must comply with Section 138 and Rule 13 within six months of the section's implementation. The section doesn't outline specific punishment provisions; instead, the penalties of Section 450 apply in case of violation. For contraventions, both the company and any defaulting officials can be penalized with fines up to Rs. 10,000, with an additional fine of Rs. 1,000 per day if the violation persists. Offenses under this section are compoundable as per the provisions of Section 441 of the Act.
In summary, Section 138 of the Companies Act, 2013, underscores the importance of internal audits for certain companies, ensuring systematic assessment and enhancement of internal controls, risk management, and governance systems.
Internal audit is technically a cost center in a firm; it does not produce income. A good internal audit function, on the other hand, can be critical to any organization's survival and development. Internal auditors, unlike external auditors, assess concerns other than financial statement reporting risk, such as the organization's reputation, operational efficiency, strategic growth, environmental impact, and employee treatment. Objective evaluations of an organization's processes and performance can provide useful insight that individuals who conduct or oversee the actual operations are unable to notice because to the paradigm or constrained perspective that comes with being a part of the activity being evaluated.
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In simple words the approach for managing compliance overall throughout the organization includes a secretarial audit.
Internal audit is a corporation department or entity responsible with conducting unbiased, independent examinations of systems, business organizations, and procedures.
NGOs are formed as public trusts under Trust Laws, as societies under the Societies Registration Act, or as corporations under the Companies Act of 2013. Depending on the manner or type of registration, the NGO must have its accounts audited in accordance
An audit, also known as auditing, is a procedure to determine whether a specific business is operating in accordance with all the rules and laws that have been directed at them and that they are required to abide by.
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