Applicability of internal audit

The section 138 of Companies Act, 2013 provides for the compilation of internal audits. This section requires the business corporations to hire internal auditors and go ahead with the internal audits of the company. Internal audits are done by a certain class of businesses who hire chartered accountant (generally) or cost accountant or other professional for the internal audits. The internal audit is mandatory for this section of companies.

The class or categories of companies required to appoint internal auditor are listed below:-

• Listed company- every listed company
• Unlisted public company- these companies are applicable for internal audit if :

1. They have paid up share capital of 50 crore or more during the preceding financial year
2. They have outstanding deposits of 25 crore or more at any point of time during the preceding financial year
3. They have turnover of 200 crore or more during the preceding financial year
4. They have outstanding loans or borrowing from banks or other financial institutions of one hundred crore or more at any point of time during the preceding financial year.

• Private company- these companies are applicable for internal audit if :

1. They have outstanding loans or borrowing from banks or other financial institutions of one hundred crore or more at any point of time during the preceding financial year.
2. They have turnover of one hundred crore or more during the preceding financial year.

Functions of internal audit

The main function and objective of internal audit is to provide assurance on company's risk management, internal environment, governance and framework. These are done through the review of:

1. Relevance, adequacy and extent of compliance with existing policies, plans and procedures.
2. Extent of compliance with statutory requirements.
3. Adequacy of risk management, assessment and mitigation of the organization.
4. Operational control framework including the basic systems of all areas of business.
5. Terms of reference.
6. Status of implementation of internal and external audits.

The broad areas of coverage of internal audits are-

• Investments
• Fixed assets
• Revenue
• Cash and banks
• Inventories
• Key spends
• Payrolls
• Loans and advances
• Safety and security

The periodic reports regarding the audit will be issued to the management on the basis of- impact of issue, audit management, audit finding, recommendation, target date and management comment.

Whenever internal audits are discussed then the two major components are fees and confidentiality.

Fees- The fee is usually payable on a quarterly basis once the draft reports are submitted with the organization. The fee is based on the assessment of the work and the time involved in it.

Confidentiality- confidentiality plays an important role in internal audit. The data that is received, assessed and managed is kept strictly confidential. The auditors ensure that they keep the data as safe as their own so no complaints could arise against them. If there is no confidentiality then a serious damage could be done to the company with the internal data by the company's competitors.

Internal audit's main aim is to make sure that all the accounts and tabs are working properly and there is no malfunctioning. It works best to ensure that all the debits and credits are in compliance with the working of the company.