Types of Audit

Internal Audit

The management of an organization may want the safety of having an independent audit team within the organization, that keeps a constant check on the accounting and finance practices. So they usually set up an internal audit. This is quite different from a statutory audit. Let us see how.

Internal Audit

As per the name, an internal audit occurs within an organization. So an independent auditor or team of auditors, who are actually employees of the organization, will review the financing, accounting and operating activities of the organization. It is actually a part of the internal control system of the company.

For most organizations, the appointment of an internal auditor is completely mandatory. However, according to Rule 13 of the Companies (Accounts) Rules 2014 the following classes of companies are required by law to carry an internal audit,

  • Every company listed on the stock market
  • Every unlisted public company that has
    • Paid up capital exceeding 50 crores in the previous year
    • Turnover greater than 200 crores in the previous year
    • If at any point in the previous year if outstanding loans and liabilities exceeded 100 crores
    • Outstanding deposits exceeds 25 crores in the previous year
  • And every private company that,
    • Has a turnover of more than 200 crores in the previous year
    • If at any point in the previous year if outstanding loans and liabilities exceeded 100 crores

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Objectives of Internal Audit

1. Proper Control

One of the main objectives of an internal audit is to keep stringent control over all the activities of an organization. The management needs assurance of the authenticity of the financial records and the efficiency of the operations of the firm. An internal audit helps establish both.

2. Perfect Accounting System

An internal audit keeps a very close check on the accounting system of an organization. It checks everything from the vouchers, to the authority of transactions to mathematical accuracy. All entries are verified against documents and other proof. Chances of mistakes or frauds are greatly reduced.

3. Review of Business

The purpose of an internal audit is to keep a check on the financial and operational aspects of a business. So as the current financial year is ongoing, internal audit can point out the mistakes, weak points, and strengths of the business. This will allow an ongoing review, instead of waiting till the year-end.

4. Asset Protection

In the process of internal audit, there is always a valuation and verification of an asset. There is also a physical verification of the ownership and possession of the asset.

And in case of special transactions like sale, purchase or revaluation of the asset, the authorization of this is also audited in an internal audit. So the assets enjoy complete protection.

5. Keeps a Check on Errors

In a financial audit, the auditor will be able to determine if any mistakes were made in the financial records. But this only happens at the end of the financial year.

And the mistakes are corrected thereafter. But in case of an internal audit, the mistakes are spotted as soon as they are made, and corrected immediately.

6. Detection of Fraud

In case the company has an internal audit in place, the detection of fraud becomes much easier. This is because there is a year-round check on the employees.

In fact, an employee is less likely to attempt fraud in the presence of an internal auditor. He will not have any time gap between the occurrence of fraud and its detection to cover it up. This will dissuade employees from committing fraud.

Solved Question for You

Q: Is an internal audit helpful to an independent auditor in any way?

Ans: Yes, the work of an independent auditor becomes much easier in the presence of an internal auditor. He may conduct test checks and accordingly choose to use the work done by the internal auditor for his audit. This saves both time and money for the company.

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