Auditing – Internal Audit

In this chapter, we will understand the concept of Internal Audit in Auditing. A team of experts reviews the procedures and operations of an organization and reports it to the management in cases such as non-compliance, lack of control and inefficiency, especially in big organizations where thousands of employees work and the business operations take place from various locations. The internal audit team not only requires expertise in accounting but also in organizational behavior and functional areas of management.

Statutory Requirement

As per Section 138 of the Companies Act, 2013 −

  • Such class or classes of company as may be prescribed shall be required to appoint an internal Auditor, who shall either be a Chartered Accountant or Cost Accountant or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.
  • The Central Government may, by rules, prescribe the manner and intervals in which the internal audit shall be conducted and reported to the Board.

Scope of Internal Audit

Following is the scope of Internal Audit according to the Institute of Internal Auditors −

  • Safeguarding the assets.
  • Economical and efficient use of resources.
  • Reliability and integrity of information.
  • Accomplishment of established objectives and goals for operations or programs.

Objectives of Internal Audit

Following are the main objectives of internal audit −

  • To comment about effectiveness of internal control system in force.
  • To give suggestions about improvement of internal control system in organization.
  • To check and ensure whether policies and procedure as laid down by the top management are being followed or not.
  • Whether assets of organization are properly accounted for and safeguarded.
  • To ensure whether standard accounting practices are followed by the organization.
  • Earlier detection and prevention of errors and frauds.
  • To ensure correctness, accuracy and authenticity of financial accounting.
  • To do investigation at the special request of the management.
  • To check whether liabilities of organization are valid and legitimate.

Internal Check and Internal Audit

Although Internal Check and Internal Audit are a part of the whole system of internal control yet there is a lot of difference between Internal Check and Internal Control −

Internal Check V/S Internal Audit

Basis Internal Check Internal Audit
Meaning It is an arrangement of the duties of staff members in such a manner that work performed by one person is automatically and independently checked by the other Internal Audit is a review of various operations and records of the company by staff specially appointed for this purpose.
Object To prevent and minimize the possibilities of errors, frauds or irregularities. To detect errors and frauds which have already been committed.
Timing Internal Check works during the course of transactions. Internal Audit begins after the completion of accounting process of different transactions.
Scope Scope of Internal Check is very limited. Scope of Internal Audit is very broad.
Staff The arrangement of the duties is done with the existing staff, no new member of staff is required for Internal Check. Separate staff is required to do internal audit.
Nature Internal Check checks the progress of work automatically. Internal Auditor reports to the management and suggest improvement about various inefficiencies.
Involvement A large number of employees are involved in the Internal Check system. For implementation of Internal Audit, a small team with limited members can also perform the audit.
Device Internal Check acts like a device and keeps check on the work. Internal Audit is a device for checking the work.

External Audit and Internal Audit

The following are the differences between Internal Audit and External Audit −

External vs. Internal Audit

Basis External Audit Internal Audit
Appointment Appointment of External Auditor is compulsory by the law; he is appointed either by the Shareholder or by the Government. Appointment of Internal Auditor is optional and he is appointed by the management.
Status External Auditor is an independent person. Internal Auditor is a paid employee of the company.
Scope Scope of work of External Auditor is laid down by the laws. Scope of work and rights, duties and responsibilities of Internal Audit is laid down by the management.
Object Assurance about whether the financial statements are presented fairly in all material respects and according to applicable financial reporting framework or not. Object of Internal Audit is to serve the need of the management and to prevent errors, fraud and irregularities.
Remuneration Remuneration is fixed by the shareholders of the company. Remuneration is fixed by the management of the company.
Duration External Audit starts after the preparation of final accounts. Internal Audit is carried out throughout the year.
Reporting Report is submitted to the shareholders of the company. Report of Internal Audit is submitted to the management.
Shareholder Meeting External Auditor has a legal right to attend shareholders meeting. Internal Auditor doesn’t have the right to attend the shareholders meeting.
Audit Procedure Mostly External Auditor does text checking. Internal Auditor mostly does detailed checking and examination of books of accounts and records.
Qualification External Auditor must have the required professional qualification as laid down by the law. Professional qualification is not compulsory for an Internal Auditor.