India: Self-Test Drive of Process and Controls – An Internal Audit

published on 16 August 2022 | reading time approx. 3 minutes

As the ancient proverb goes, “prevention is better than cure” in all cases. It applies radically for the processes to create system built with adequate controls to ensure minimal risk for the company. When the business of the company is growing faster and evolving, we should ensure the growth pace will continue without any obstacles.

In current fast-pacing business environment, to find or forecast such obstacles we need to conduct the audit in the company by ourself which is like a self-test or an introspection. Internal audit is the self-test intelligence, which will be helpful not only for prevention but also for the improvements and growth of the company.

Beyond Compliance Audit

Internal Audit is an activity conducted to ensure effectiveness of the internal controls, organisational processes including accounting and compliances and provides reports to the management.

Whereas the statutory audit is mostly limited to statutory obligation to verify the position in the financial statements, finding errors or non-compliances and vouching the documents with aim to conclude or provide assurance of past events and a year.

However, the internal audit objective is to create value addition in the way of insights for correction, betterment and standardisation of processes and operations based on the events of past year but keeping in mind current and future challenges and opportunities for company’s environment.

A Complete Programme for Self-test

Internal audit programme is detail oriented plan to develop a system for defined intelligence related to process, control and procedures in the matrix of organizational structures. Generally, an internal audit programme should ensure the following:

All compliances by the company in timely manner and avoid the risk of non-compliance and suggest for the recourse available.
Identification of the waste, inefficiency or duplication of efforts in processes.
Minimizing the risks and early mitigation of risk.
Improvement of the internal controls in all aspects such as operational, financial and compliance departments.
Possibility of detecting the frauds, mis-use or mis-appropriation of company’s resources.

Curating the Internal Audit Framework

There are no set of rules to define the internal audit framework. We have summarized practical action for company to set-up the internal audit framework:

The first step will be management of the company need to decide on hiring of the internal auditor by passing the board resolution in the board meeting. It may be internal employees with sufficient knowledge and experience or external professionals. The support of the top level management is very crucial for the effectiveness of the internal audit.
Before structuring the internal audit, it is important to consider the overall business nature and origination's structure and processes at macro-level. This will help to understand the areas of risks, control levels for internal audit team.
Next, the structure of the internal audit department shall be defined. It involves, each member responsibilities, tenure, scope of work, periodicity of report and to whom to report.
The policies and procedures shall be defined which includes regulations, standardised documentations, scope, limits (if any), audit plan and activities, approval process, following ups, reporting to stake holders etc.

Points of Caution

Threshold for Applicability

As per section 138 of Indian Companies Act 2013 , certain category of companies are required to appoint Internal Auditors to conduct the internal audit. The applicability is mentioned in Rule 13 of Companies (Accounts) Rules, 2014 and it is applicable for a private company having turnover more than INR 2,000 million in previous financial year or having loans from banks or public financial institutions more than INR 1,000 million.

Who can Conduct

The Companies Act and the Rules have given the free hand for the companies to decide on the internal auditor. The Internal Auditor can be a chartered accountant or cost accountant or any such professional including employee of the company.

The Internal Auditor can also be any professional firm or body corporate (Company). However, the statutory auditor of the company cannot be the internal auditor for the same company.

Penalty

Section 138 of the Companies Act, 2013 has not prescribed any penal provisions for non-compliance. However, and the company & the responsible employee at individual capacity in default can be penalized up to INR 10,000 and in case of continuing default, INR 1,000 fine for every day.

Concluding Runway

Although, the internal audit is a statutory requirement; it’s more of internal affair of the company. Internal audit provide the reliability on processes and control of company to a statutory auditor for overall assurance. The scope of internal audit should be defined in a very intriguingly manner to consider the priorities and need of the company to ensure maximum control and minimize risks for the company. Our expert team can guide you in each and every step during your journey for set-up of robust internal audit framework and advise a practical and right controls to minimize your risk.