Internal Audit Definition
Internal audit refers to the audit which is conducted in order to evaluate and improve the risk management effectiveness in the company, evaluate the different internal controls followed in the company and ensure that the company is complying with all of the laws and regulation which are applicable on it, etc.
It is a process of checking regularly the deviation from any material compliance instructed laws and regulations. It helps maintain accurate and timely financial reporting and data collection. It is an evaluation done by an internal auditor who could be an employee of the organization or not.
It involves an organization’s governance, accounting processes, risk management, and management controls. It aims at enhancing the efficiency of operations, the reliability of financial and management reporting, and compliance with regulations. Further, it helps identify potentially fraudulent acts, control breakdowns, and also the extent of financial loss.
Internal Audit Requirement
The minimum requirements for a company to mandatorily conduct internal audit depend on the law of the land where the company operates.
For example, in the United States, Section 303A specifies these rules. The NYSE regulations require that listed companies have an internal audit function. The NYSE states that listed companies need to conduct audits for the management to assess the company’s internal controlsInternal ControlsInternal control in accounting refers to the process by which a company implements various rules, policies, or procedures to ensure the accuracy of accounting and finance information, safeguard the various assets of the business, promote accountability in the business, and prevent the occurrence of frauds in the company.read more system and risk management processes. A company can also hire a third-party auditor also for this function.
On the other hand, in India, the Institute of Chartered Accountants of India (ICAI) has constituted the Committee for Internal Audit. It is a compliance test that has been mandated by section 138 of companies act, 2013. This section mandates internal audit to all listed companies as well as to those unlisted companies which have Deposits>=INR 250 million or Paid-up capital>=INR 500 million or Borrowings>=INR 1 billion or Turnover>=INR 2 billion. For privately held companies, the conditions are borrowings>INR 1 billion or Turnover >=INR 2 billion.
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Qualifications of Internal Auditor
They can be conducted by Certified Internal Auditor (CIA)Certified Internal Auditor (CIA)A certified internal auditor (CIA) is an accountant recognized as a certified internal auditor conferred by the Institute of Internal Auditors (IIA) in internal audits after passing CIA exams and upon completing the required work experience.read more, Chartered Account (CA), Cost Accountant, or any authorized person. Moreover, an auditor should possess the following expertise:
- Special expertise was necessary to evaluate the management control system, for example, financial and accounting controlsAccounting ControlsAccounting controls comprise the methods and procedures a company adopts for verifying the accuracy, validity and transparency of its financial statements. An organization takes this measure to ensure its business operations' efficiency; it has nothing to do with the legal compliance and regulations.read more.
- Accounting and financial expertise to be able to discharge his duties;
- Ability to evaluate operational and non-monetary operational controls;
- Knowledge of the technology, commerce, laws, taxation, Cost AccountingCost AccountingCost accounting is a defined stream of managerial accounting used for ascertaining the overall cost of production. It measures, records and analyzes both fixed and variable costs for this purpose.read more, Economics, Quantitative Methods, and EDP systems;
- Integrity and detachment of a professional;
- She/he should be able to assure the management that the confidentiality of such information would be maintained.
While a statutory auditA Statutory AuditOne of the most common types of audits is the statutory or financial audit. Its main purpose is to gather all relevant information so that the auditor may provide an accurate and unbiased assessment of the company's financial position.read more happens only at the end of the fiscal year, an internal audit is done comparatively more frequently i.e., quarterly, monthly, weekly, daily, and even continuously in many cases.
Functions of Internal Auditor
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- Monitoring of Internal Controls – Management should maintain Internal control. Internal Auditor may be appointed to monitor whether Internal control is operating or not? And also to suggest any measures to achieve the improvements.
- Examination of Financial and Operating Information – They may review the means used to measure the financial and other information. Auditor may make inquiries for transaction balances and other specific matters.
- Review of Operating Activities – They have to review the operating activitiesReview The Operating ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production.read more of an organization, for example, the Examination of purchase, Production, HR dept, and also to check that whether these departments are efficient, effective, and economical.
- Review of Compliance with Laws and Regulation – They are required to examine whether the organization is following the laws and regulations.
- Governance – They may check whether an entity is following ethical values and whether they are fair or not. Auditor should always suggest measures to improve the same.
- Risk Management – They should guide the management in improving the risk management system.
Advantages
- More Effective Management – It helps a company’s management to manage it more effectively. An internal auditor can identify the shortcomings in the internal controls and operations of the company, if any. It gives the management some useful insights that are vital for achieving the company’s goals.
- Concurrent Review – It gives a unique opportunity of conducting a self-review of the performances beforehand. They do not have to wait for the end of the year to review the company’s performance. It helps them change/improve their processes and correct their mistakes, which better prepares them for the external auditThe External AuditExternal Audit is defined as the audit of the financial records of the company in which independent auditors perform the task of examining validity of financial records of the company carefully in order to find out if there is any misstatement in the records due to fraud, error or embezzlement and then reporting the same to the stakeholders of the company.read more at the end of the year.
- Improvement if Staff Performance – Due to frequent checks, the staff always remains on the toes due to the fear that the internal auditor may catch their mistakes almost immediately. It ensures an improvement in their efficiency and performance, which becomes a good habit over some time. Moreover, for honest employees who are already on track, it acts as a morale booster.
- Resource Optimization – It helps the management zero in on the areas where the resources are not being utilized to their full potential. It goes a long way in controlling the costs and expenses of the company. Therefore it is also helpful towards improving the economic position of an organization.
- Division of Work – Taking resource optimization further, the practice of internal audit keeps a check on and observes the activities of all the departments and all of their employees. It does this by promoting the optimum division of labor across the organization.
Disadvantages
- Availability of Qualified Staff – To conduct any type of audit properly (be it internal or external), one needs to have years of experience. So it is often a tough task finding sufficiently qualified personnel in the company who can conduct an internal audit. And you can’t simply hire an inexperienced auditor since that will do more damage to your company than good.
- Dependence on Accounting Process – As it does in the dictionary, accounting always precedes auditing. The beginning of an internal audit depends upon the completion of accounting. So a delay in the accounting process results in a delay in the audit process as well.
- Management’s Ignorant Attitude – Management often does not take the findings of internal audits since they are not made available to all. The findings don’t go beyond the management, and thus it depends upon whether it takes the necessary corrective actions or not.
Conclusion
Internal Audit is an integral part of an organization. It not only helps in the performance of the employees but also helps the management to have a check on whether or not the organization is complying with the laws and regulations.
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