Internal Audit: Applicability, Role, and Importance in Strengthening Corporate Governance

Introduction

Internal audit is an independent management function that involves a continuous and critical appraisal of the functioning of an entity. Its primary purpose is to suggest improvements, add value, and strengthen the overall governance mechanism of the entity, including its strategic risk management and internal control system. This article discusses the applicability of internal audit provisions, the role of internal auditors, and the importance of internal audit in corporate governance.

Applicability of Provisions of Internal Audit

According to Section 138 of the Companies Act, 2013, read with Rule 13 of the Companies (Accounts) Rules, 2014, the following entities are required to appoint an internal auditor or a firm of internal auditors:

a) Listed Companies

Every listed company must appoint an internal auditor.

b) Unlisted Public Companies

Unlisted public companies meeting any of the following criteria during the preceding financial year are required to appoint an internal auditor:

Paid-up share capital of ?50 crore or more.
Turnover of ?200 crore or more.
Outstanding loans or borrowings from banks or public financial institutions (PFIs) exceeding ?100 crore at any point.
Outstanding deposits of ?25 crore or more.

c) Private Companies

Private companies meeting any of the following criteria during the preceding financial year must appoint an internal auditor:

Turnover of ?200 crore or more.
Outstanding loans or borrowings from banks or PFIs exceeding ?100 crore at any point.

Role of Internal Auditors in Strengthening Corporate Governance

The internal audit function is responsible for assessing the internal control system and recommending improvements. While internal auditors are not involved in the day-to-day running of the system, they contribute significantly to corporate governance by:

Evaluating Risk Management Activities: Assessing the organization’s risk management practices and identifying areas of potential improvement.
Ensuring Compliance: Verifying that the organization adheres to relevant laws and regulations.
Improving Internal Controls: Providing recommendations to enhance the effectiveness of internal controls.
Investigating Fraud: Conducting fraud risk assessments using fraud deterrence principles.
Providing Independent Advice: Offering objective and independent recommendations to support decision-making.
Performing Audit Assignments: Carrying out specific audit tasks as assigned.
Developing Audit Plans: Creating annual plans aligned with the organization’s strategic risks.
Analyzing Documentation: Reviewing accounting records, reports, and data for accuracy and reliability.
Monitoring Follow-Ups: Ensuring management interventions based on audit findings are implemented.
Promoting Ethics: Identifying and addressing improper conduct within the company.

Importance of Internal Audit

Internal audit plays a crucial role in maintaining operational efficiency, financial reliability, and safeguarding assets. Key benefits include:

1. Increasing Productivity

Internal audits enhance operational efficiency by identifying control recommendations that improve processes. This systematic approach ensures the organization relies on robust systems rather than individual performances.

2. Evaluating Risk and Protecting Assets

Regular audits uncover evidence of fraud, identify gaps in the control environment, and allow for remediation plans. They also track and document changes in the organizational environment to ensure risks are mitigated.

3. Ensuring Quality Control

Internal auditors evaluate the design and effectiveness of systems and processes, ensuring alignment with company goals. They also provide consulting to improve these systems and processes as needed.

4. Providing Independent and Unbiased Insight

Internal audits offer an impartial view of the effectiveness of internal controls. Organizations with limited resources can cross-train employees to audit each other’s departments to achieve similar insights.

5. Enhancing Corporate Governance

Internal audits evaluate and strengthen corporate governance by ensuring:

Compliance with laws and regulations.
Accurate and timely financial reporting.
Efficient operations through early problem identification and correction.

Conclusion

Internal audit is indispensable in strengthening corporate governance. By evaluating risk management, improving internal controls, ensuring compliance, and promoting operational efficiency, internal audits provide invaluable support to an organization’s strategic objectives. Companies that prioritize internal audit processes not only safeguard their assets but also ensure long-term sustainability and success.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)