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Internal Audit | SG Legals

Internal Audit

A systematic review of internal controls, operations, risk management, and compliance - going beyond financial statements to improve governance and operational efficiency.

What is Internal Audit?

Internal audits are performed to systematically review how internal controls, operations, risk management, and the levels of compliance with legislation take place within an organization, with no links to the company's financial statements like statutory audits.

An internal audit is a broader review of how well a business operates, manages risks, and complies with legal or regulatory requirements. Internal Audits are a key component in improving Governance, safeguarding assets from fraud, and improving the performance and efficiency of a business.

An independent, objective assurance and consulting activity

Types of Internal Audits

Internal audits come in several forms, each targeting a different aspect of the organization's operations and compliance landscape.

Operational Audit

Evaluates operational efficiency and performance of processes. Assesses use of resources and identifies ways to improve and streamline performance to eliminate bottlenecks.

Compliance Audit

Evaluates an entity's compliance with laws, regulations, and internal policies. Ensures organizations in regulated sectors avoid fines and reputational damage.

Financial Audit

Determines if financial transactions are accurately recorded and financial records are reliable. Ensures adherence to GAAP and IFRS and helps identify errors or fraudulent activities.

IT / Cyber Security Audit

Examines IT environment and cybersecurity controls to prevent cyber threats, breaches, and vulnerabilities. Ensures protection of organizational data and information systems.

Environmental Audit

Ensures compliance with sustainability practices and environmental laws, keeping the organization aligned with regulatory environmental standards.

Forensic Audit

Assesses possible fraud or misconduct. Performance audits review effectiveness in achieving strategic objectives and ensuring accountability.

Applicability of Internal Audit

Section 138, Companies Act 2013 read with Rule 13, Companies (Accounts) Rules 2014 - the following companies are required to undertake internal audit:

Section 138 • Companies Act, 2013

Listed Company

Every listed company is required to carry out internal audit - irrespective of turnover, capital, or borrowings.

Unconditionally applicable

Unlisted Public Company

Applicable if any ONE criterion is met during the preceding financial year:

Turnover ₹200 Crores or more
Paid-up share capital ₹50 Crores or more
Outstanding loans/borrowings from banks or PFIs exceeding ₹100 Crores at any point of time.
Outstanding deposits ₹25 Crores or more at any point of time.

Private Company

Applicable if any ONE criterion is met during the preceding financial year:

Turnover ₹200 Crores or more
Outstanding loans/borrowings from banks or PFIs exceeding ₹100 Crores at any point of time.

Who Can Be Appointed as Internal Auditor?

Companies required to conduct internal audit must appoint a qualified internal auditor. The eligible qualifications are:

Eligible Internal Auditors

Chartered Accountant

Whether in practice or not

Cost Accountant

Whether in practice or not

Other Professional

As decided by the Board of Directors

The Statutory Auditor of the company cannot be appointed as its Internal Auditor - these are two distinct roles under the Companies Act, 2013.

Internal Audit Process

The internal audit process is a structured cycle consisting of planning, performing fieldwork, reporting, and following up on corrective actions.

Planning

Determine audit scope, identify major risks, and draft an audit program tailored to the organization's objectives and risk profile.

Fieldwork

Conduct interviews, document reviews, sample testing, and internal control evaluation to gather evidence and assess compliance.

Reporting

Compile a formal report outlining observations, risk areas, and recommendations for management and the board.

Follow-up

Verify corrective actions have been implemented and gaps addressed, closing the audit cycle effectively.

Benefits of Internal Audits

Operational Effectiveness

Enhances operational effectiveness and deepens risk management practices across the organization.

Improved Internal Controls

Strengthens internal controls and facilitates compliance with applicable laws and regulations.

Accurate Financial Reporting

Ensures accurate financial reporting and protects assets from fraud and misappropriation.

Fraud Detection

Detects fraud and operational weaknesses early before they escalate into significant issues.

Strategic Alignment

Promotes transparency, accountability, and helps organizations achieve their strategic objectives.

Internal audits are an essential management tool - the cornerstone of good corporate governance.

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