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Internal Audit

Internal audit can be used to assess an organization's performance or the execution of a process against a number of standards, policies, metrics, or regulations. These audits may include examining a business's internal controls around corporate governance, accounting, financial reporting, and IT general controls.

Package inclusions:
  • Internal Audit Outsourcing
  • Internal Audit Co-Sourcing
  • Internal Audit Partnering
  • Process and Internal Controls Consulting
  • Audit Committee Advisory
  • Continuous Auditing Monitoring
  • Risk Assessment and Audit Plan
  • Financial Advisory
  • IT Audits/Assurance
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Internal Audit Services

The Institute of Chartered Accountants of India (ICAI) lays down the standard for Internal Audit. The ICAI defines Internal Audit as a Risk Management Function that is carried out independently to assist the management of an organization. This audit is carried internally at the behest of management, and it is different from the External or Statutory Audit.

Internal audit helps in identifying the loopholes and gaps while implementing the policies and procedures laid down by the organization on various day to day functions. The audits can be performed in areas related to Finance, Risk, Statutory compliance, etc. It also does checks on the internal controls and helps in the implementation of best industry practices for meeting the corporate objectives.

What is Internal Audit?

The internal audit evaluates the company's internal controls that include its corporate governance and accounting processes. They help in evaluating compliance with laws and regulations. The internal audits assist in maintaining accurate and timely financial reporting and data collection. It can also be said to be a tool that is necessary to obtain operational efficiency by way of identifying problems and also correcting lapses before they are discovered in an external audit.

The internal audit is required for the following purposes:

  • The increased size and complexity of the business.
  • Compliance of statutory requirement.
  • Using Information Technology on a large scale.
  • Internal Controls for the purpose of risk management.
  • Establishing sound corporate governance and use the best industry practices.

What are the Benefits of Internal Audit?

Internal Audits have many benefits, such as:

  • It protects the assets and reduces the possibility of fraud as it keeps a check on the internal control of the organization.
  • It also serves as an early warning system that enables the organization to identify the deficiencies and also apply the remedies on a timely basis.
  • It develops efficiency in operations.
  • It increases the financial reliability and integrity.
  • It ensures that the organization complies with the laws and statutory regulations.
  • The Internal audit system looks at the monitoring procedures.
  • It also helps in reducing the risk of data breaches and several other cybersecurity concerns.

What is the Procedure to Conduct Internal Audit?

An internal audit generally has four phases of activities, such as:

Procedure to Conduct Internal Audit
  • Planning 

During the planning process, the internal audit team defines the scope and objectives or review the guidance related to audit like laws, regulations, company policies, industry standards, and procedures, etc.  It will also review the results from the previous audits, budget and also set a timeline for the audit.  Create an audit plan to be executed, identify the process owners to involve, and also schedule a kick-off meeting to commence the audit.

  • Fieldwork 

The actual act of auditing is fieldwork. The audit team will execute the plan throughout this phase. This generally includes interviewing key personnel to confirm an understanding of the process and controls. It tests the sample controls over a period of time and documents the work performed by identifying the exceptions and recommendations.

  • Reporting 

The internal audit department will draft the audit report during the reporting phase. To avoid any type of misrepresentation, the report should be written clearly and concisely. This is done to encourage the intended audience to actually read and understand the report. The findings should be accompanied by recommendations that are actionable and must directly lead to process improvements. The process of issuing an internal audit report must include the drafting report; review the draft with the management to ensure the accuracy of findings and issuance and also the distribution of the final report.

  • Follow-up

The final stage is an essential one that is often neglected and overlooked. Following up is crucial to ensure that the recommendations have been implemented to address the identified findings. This process must include the appropriate follow-up with the process owners. It needs to implement recommendations as well as the Board oversight of the company’s overall status in addressing the findings identified by internal audit. In case the organization fails to follow up on the implementation of recommendations, it is unlikely that the changes will be made.

What are the Types of Internal Audits?

A significant portion of internal audit covers internal controls of financial reporting within the organization. The organization must pertain to the generally accepted accounting procedures (GAAP) impacting its financial statements. Many organizations also recognize the need for other types of risk assessments or audit outside of accounting or finance. Some of the key areas of internal audits are:

Types of Internal Audits
  • Compliance Audits 

Compliance Audits is evaluating the compliance with the applicable laws, regulations, procedures and policies. Some of these regulations might have a significant impact on the company's financial well being. Failure to abide by some laws and policies may result in hefty fines or also preclude a company from doing business in specific jurisdictions.

  • Environmental Audits

Environmental Audits assess the impact of the operations of the company. They may also assess the company's compliance with environmental laws and regulations.

  • Information Technology Audits

Information Technology Audits evaluates the information systems and the underlying infrastructure to ensure the accuracy of their processing.  The security and the customer information is checked in Information Technology Audits. They will generally include the assessment of the general IT controls related to logical access, change management, logical access, system operations and backup and recovery.

  • Operational Audits

The organization’s control mechanisms are assessed by the control mechanisms for their overall efficiency and reliability.

  • Performance Audits

The performance Audits keeps a check on the goals and objectives of an organization set forth by the Board of Directors in an organization.

What can Cause Failures in an Internal Audit?

Internal audit is extremely useful to help in restructuring the processes, identify the frauds and find gaps. However, the red flags that can cause failure in an Internal Audit are:

Problems related to the scope

Appropriate planning and meaning of scope are critical to an effective internal audit. With complex frameworks and work processes, it is simple for the scope to grow quickly. It is better to allow the scope to increase and later on realize that you are one step away from auditing the entire organization and processes.

Not talking to all clients/stakeholders

It is best to involve clients and stakeholders in the beginning stage itself. It is recommended to go deeper than the teal leads, and the managers also talk with staff, engineers etc. In many cases, the people in trenches might be following a completely different process than what is documented or understood by the management.

Not reviewing the data.

When the data is required, it is typical to ask the organization to provide it. The auditor must also clarify if the data provided is accurate and not modified or altered in any way. The auditor must have a meeting with the data provider to understand how the data has been generated directly from the system, along with all the queries or constraints that are used to generate it.

Objectivity and Independence

This is really difficult in a smaller organization. In a large organization, the internal auditors report to a board of directors or an audit committee, but in contrast in smaller companies, an internal auditor may be reporting to the same person or group they are auditing. The primary key is to stay independent, objective and forward-looking mindset. An internal auditor is basically trying to help and must be allowed to do so even if the results are hard to hear.

Which Type of Companies are Required to Conduct Internal Audit in India?

The following companies must appoint internal auditors in India:

Every Listed and Unlisted Company

Every listed and unlisted company during the preceding year has:

Paid-up share capital

Rs. 50 crores or more

Turnover

Rs. 200 crores

At any point during the year

Outstanding Loan or borrowing

 

Exceeding Rs. 100 crores

Outstanding deposits

 

Rs. 25 crores or more

Private Company 

Every private company having:

  • During the preceding financial year a Turnover of Rs. 200 crore or more.

At any point during the year

  • Outstanding Loan or borrowing -  Exceeding Rs. 100 crores.

The Outstanding loans here are referred to the outstanding loans or borrowings from banks or public financial institutions.

The Central Government can, bye rules, advise the manner and the intervals in which the internal audit shall be conducted and reported to the board.

Who can be an Internal Auditor for the purpose of Internal Audit?

An internal auditor is a person who performs an internal audit. The Internal auditor for the purpose of audit can be an individual, partnership firm or a body corporate. He/ she can be a Chartered Accountant or Cost Accountant (whether in practice or not) or such other professional that is appointed by the board to conduct an internal audit of the functions and activities of the company.

An employee of a company can also be appointed as an internal auditor provided that he possess requisite qualification and abilities to perform an internal audit.

The Functions of Internal Auditor are as follows:

  • Review operations, procedures, and policies and also assist the management in establishing better policies and procedures.
  • Certify risks being managed within acceptable limits as specified by the Board of Directors.
  • Examine and evaluate the continuous effectiveness of the internal control system and make proper recommendations, if any, for improving the internal control mechanism.
  • Help the management in identifying frauds and also preventing them.

What are the Activities involved in Internal Audit?

Generally, an internal audit involves the following activities:

  • The Internal auditor will establish and communicate the scope and objectives of the audit to appropriate members of management. 
  • The internal auditors will develop an understanding of the business area that is under reviews such as measurements, objectives, type of key transaction, review of documents, and interviews.
  • The internal auditor must describe the basic risks in the business activities that are within the scope of the audit that is to be conducted.
  • The internal auditor must identify the management practices to ensure that the risk is properly monitored and controlled.
  • The internal auditor must develop and execute a risk-based sampling as well as a testing approach to determine whether the most important management controls are operating as planned.
  • He will report the identified issues and challenges and discuss them with management to reach some action plans to address those issues.
  • Lastly, he must follow-up on the reported findings at the appropriate interval of time to check whether any efforts have been undertaken by the management. Internal Audit Departments hence maintains a follow-up database with regard to this purpose.

How Enterslice Provides the Internal Audit Services?

  • Enterslice’s Internal Audit, as well as the Financial Advisory consultants, work with the audit executives, audit committees, and management.
  • We work with companies of all sizes, public or private, to assist them in their internal audit activities.
  • This includes starting and running the activity for them on a fully outsourced basis or work with an existing internal audit function to add the skills that are lacking on the team.
  • The Internal Audit and Financial Advisory team in Enterslice helps the clients to assess their fraud risks and also implement better solutions to manage the risks in a better way and in case of any irregularities leads investigations.
  • Our Financial Reporting Remediation and Compliance professionals provide critical functional and project management expertise that is essential.
  • We proactively monitor new accounting rules, alert our clients to changing requirements, and offer assistance with addressing complex accounting or reporting challenges, including the latest revenue recognition and lease accounting standards.

What are the Internal Audit Services provided in Enterslice?

The internal audit services provided in Enterslice are as follows:

  • Function Start-Up- Through function start-up can assist the organizations in setting up an Internal Audit function if they do not have one.
  • Risk Assessment and Planning– Risk Assessment and planning is a comprehensive scoping and risk analysis. It is used to determine the risk-based internal audit plans that drive optimal allocation of internal audit resources.
  • Internal Audit Projects– The internal audit projects plan, execute, and make a report relating to findings and recommendations.
  • Audit Committee/Board Reporting– prepare and present Board-level reporting in this step.

Why Should You Take Compliance Help for Internal Audits?

For internal audits purpose, you must take compliance help for internal audits:

  • The auditors are trained and qualified appropriately and carefully selected for their audit skill and customer, benefit focus, and business.
  • Save time, money and internal resources by having an expert work for you.
  • The benefit of having an outsider or independent view of the organization and the opportunity to bounce off the business ideas of a qualified person.
  • The audit reports provided by the auditors will be helpful, easy to read, and understand.
  • The Auditors will follow up on the previous audit results at their next visit.
  • Our Auditors are helpful and approachable.
  • Our audit reports will include the compliance scores that will help in identifying weaknesses and overall compliance with your procedures.

How can Enterslice Help you?

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Frequently Asked Questions

The role of an internal auditor is to provide independent assurance that an organization’s risk management, governance and internal control processes are operating effectively. Typically this is the board of directors or the board of trustees, the accounting officer or the audit committee.

The three main types of audits are:

• external audits

• internal audits, and

• Internal Revenue Service (IRS) audits.

An example of internal audit: if the management requests a review of inventory management, an internal audit can include testing of inventory controls. In this way, they are able to provide helpful feedback to management and also increase assurance over a key asset category inventory.

The purpose of auditing internally is to provide insight into an organization's culture, policies, procedures. It also aids board and management oversight by verifying internal controls such as operating effectiveness, risk mitigation controls, and compliance with any relevant laws or regulations.

According to Section 138 of the Companies Act 2013: Such class or classes of companies shall be required to appoint an Internal Auditor, which shall either be a Chartered Accountant or a Cost Accountant, or such other professional as may be decided by the board to conduct an internal audit of the functions of the company.

The internal auditor shall sight and examine sufficient hard-copy or electronic records to verify; evidence of compliance with the management system procedures; and effective implementation of process and internal control. The organization’s needs to ensure the audit are conducted in a fair and unbiased manner.

The internal audits are performed to improve the effectiveness of governance and risk management and control over the critical processes. Through internal audits, board management is provided with information and assurance related to their duties.

An internal audit should, in general, have four general phases of activities. They are

• Planning

• Fieldwork

• Reporting and Follow-up.

The process of issuing an internal audit report must include drafting the report, review the draft with management to ensure the accuracy of findings and issuance and distribution of the final report.

The roles and responsibilities of an internal auditor are as follows:

• Objectively assess a company's IT and/or business processes.

• Assess the company's risks and the efficacy of its risk management efforts.

• Ensure that the organization is complying with relevant laws and statutes.

• Evaluate internal control and make recommendations on how to improve.

An internal audit offers risk management and evaluates the effectiveness of a company's internal controls, corporate governance, and accounting processes. Internal audits provide management and board of directors with a value-added service where flaws in a process may be caught and corrected prior to external audits.

There are eight steps to perform an internal audit:

• Identify Areas that Need Auditing work.

• Determine how often auditing must be done.

• Create a calendar regarding audit.

• Alert the concerned departments regarding scheduled audits.

• Complete the preparation.

• Interview the users.

• Prepare the results of documents.

• Report Findings.

Appointment of the internal auditor is mandatory for every producer company irrespective of any criterion. However, the Private Company is still required to comply with the requirements of Section 179.

Generally, the time required for the audit will vary depending on the size, complexity and strength of the organization's internal controls. Some take as little as a couple of weeks, and others can take several months.

The internal audit requires an in-depth understanding of the business culture, systems and processes, understanding and improvement of internal controls for effective risk management, understanding the governance structure of the organization and ability to provide value additions for improvement in governance processes.

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