mandatory internal audit for companies€¦ · internal audit... all companies except certain...
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MANDATORY INTERNAL AUDIT FOR
COMPANIES
TM
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- When Is It Applicable?
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The name reflects our objective of Accelerating Growth. “ ”Floraison India Compliances Private Limited is a Bangalore-based business consulting organization. As a company which provides integrated consulting services, we partner our clients from the stage of inception to assist them in successfully commencing their operations and further hand-hold them to run their company efficiently.
At Floraison, we strive to cultivate strong relationships with our clients by providing them with solutions, which cater to their precise requirements. Customizability is therefore the essence of all the services provided by us. We believe true success is not just fulfilling our clients' requirements, but exceeding their expectations. And, to be successful, we work as an cohesive team all the way, using the best of tools and methodologies.
Floraison is a member of:» Confederation of India Industry
» Bangalore Chamber of Industry and Commerce » Indo-German Chamber of Commerce
For more information on the company, Please visit us at www.floraison.in
floraison in French means 'flowering'.
DisclaimerThis publication is a product of Floraison India Compliances Private Limited. The items contained herein are provided for general information purposes only. Floraison strives to maintain up-to-date information from its own and other reliable sources; however, no responsibility is accepted for any errors and/or omissions or results of any actions based upon this information, without consulting Floraison first. Though all efforts have been made to ensure the accuracy of the content, the same should not be construed as a statement of law or used for any legal purposes. The information is for reference purposes only and should not be dealt with as advice.
About Floraison...
MANDATORY INTERNAL AUDIT FOR COMPANIES
inflofostering knowledge
“ hecking the results of a decision
against its expectations shows executives
what their strengths are, where they
need to improve, and where they lack
knowledge or information.”
C
Peter Drucker
MANDATORY INTERNAL AUDIT FOR COMPANIES
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In this issue...
MANDATORY INTERNAL AUDIT FOR COMPANIES
Introduction... 1
Scope and Objectives... 2
Mandatory Applicability of Internal Audit... 3
General Evaluation of Internal Audit Function... 4
Relying upon the Work of an Internal Auditor... 5
Standard on Internal Audit: Basic Principles
Governing Internal Audit... 6
Conclusion... 7
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Introduction...Internal Audit refers to an independent appraisal of activity within an organization for the
review of accounting, financial and other business practices. It consists of a continuous
and critical review of financial and operating activities by a staff of auditors. It is a
separate part of internal control system.
Internal audit is a vital tool that helps modern organisations to manage risks. It helps to
focus on key areas such as the identification and management of risks.
There is a great deal of ambivalence when it comes to internal and external audits.
Therefore it is to be mentioned that both have significant differences.
Internal Audit External Audit
It involves all the risks faced by an
organisation and the procedure by
which they are managed.
This, on the other hand deals with
financial accounts.
Therefore the role of internal audit is much broader than that of external audit.
1MANDATORY INTERNAL AUDIT FOR COMPANIES
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Scope and Objectives...It is almost clear from the brief introduction above that the primary objective of internal
audit lies in helping the management attain maximum efficacy by providing an important
source of review of operations and records for the assistance of all levels of management.
However, the scope and objectives have been explained point wise in the following table
for better understanding.
The establishment of an adequate accounting
system and the related controls is the responsibility
of management which demands proper attention on
a continuous basis. The internal audit function is
often assigned specific responsibility by
management for reviewing the accounting system
and related internal controls, monitoring their
operation and recommending improvements
thereto.
This may include review of the processes used to
identify, measure, classify and report such
information and specific inquiry into individual items
including detailed testing of transactions, balances
and procedures.
Generally, the external auditor is interested in the
results of such audit work only when it has an
important bearing on the reliability of the financial
records.
This would generally include examination and
verification of physical existence and condition of the
tangible assets of the entity.
To ascertain that the standard accounting practices,
as have been decided to be followed by the
organization, are being adhered to.
This is mainly to establish the fact that there is a
proper authority for every acquisition and disposal of
assets.
It is necessary to implement such techniques while
conducting the internal audit so that it can detect
and prevent frauds in the accounts.
Review of
accounting system
and related
internal controls
Examination for
management of
financial and operating
information
Examination of the
economy, efficiency and
effectiveness of operations
including non-financial
controls of an organisation
Physical examination
and verification
Adoption of standard
accounting practices
Proper authority on
the acquisition and
disposal of assets
Prevention and
detection of fraud
2MANDATORY INTERNAL AUDIT FOR COMPANIES
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Mandatory Applicability of Internal Audit...
All companies except certain categories of companies
specifically exempted from the application of the
Companies (Auditor's Report) Order, 2003
Foreign Companies incorporated outside India
establish a place of business within India ***
Foreign Companies incorporated outside India which
have established a place of business within India and
continue to have an established place of business
within India at the commencement of the Act ***
Charitable Trust / Companies
Internal
Audit
applies to
*** In respect of foreign companies, an established place of business in India would
include a liaison office.
Companies with paid-up capital and reservesof Rupees Fifty Lakh or less
Companies with outstanding loan of Rupees Five Lakhor less from any bank or financial institution
Companies with turnover less than Rupees Five Crore
Exempted
Companies
3MANDATORY INTERNAL AUDIT FOR COMPANIES
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General Evaluation ofInternal Audit Function...The external auditor's general evaluation of the internal audit function assists him in
determining the extent to which he can place reliance upon the work of the internal
auditor. The external auditor should document his evaluation and conclusions in this
respect. The important aspects to be considered in this context are:
1. Organisational Status: Whether internal audit is undertaken by an outside agency or
by an internal audit department within the entity itself, the internal auditor reports to
the management. In an ideal situation he reports to the highest level of
management and is free of any other operating responsibility. Any constraints or
restrictions placed upon his work by management should be carefully evaluated. In
particular, the internal auditor should be free to communicate fully with the external
auditor.
2. Scope of Function: The external auditor should ascertain the nature and depth of
coverage of the assignment which the internal auditor discharges for management.
He should also ascertain to what extent the management considers and where
appropriate, acts upon internal audit recommendations.
3. Technical Competence: The external auditor should ascertain that internal audit
work is performed by persons having adequate technical training and proficiency.
This may be accomplished by reviewing the experience and professional
qualifications of the persons undertaking the internal audit work.
4. Due Professional Care: The external auditor should ascertain whether internal audit
work appears to be properly planned, supervised, reviewed and documented. An
example of the exercise of due professional care by the internal auditor is the
existence of adequate audit manuals, audit programmes, and working papers.
4MANDATORY INTERNAL AUDIT FOR COMPANIES
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Relying upon the Work of anInternal Auditor...External auditor should, as part of their audit, evaluate the internal audit function to the
extent they consider that it will be relevant in determining the nature, timing and degree
of their compliance and substantive procedures. Depending upon such evaluation, the
external auditor may be able to adopt less extensive procedures than would otherwise be
required. The external auditor’s general evaluation of the internal audit function will
assist them in determining the extent to which s/he can place reliance upon the work of
the internal auditor. Important aspects to be considered in this context are -
Organisational status of the entity;
Nature and depth of the internal audit assignment;
Technical competence of the internal audit staff and
Degree of due professional care taken by internal audit staff.
External auditor must ascertain the internal auditor’s tentative plan for the year and
discuss it with them at an early stage to determine areas where they could consider
relying upon the work of the internal auditor.
Co-ordination with internal auditor is usually more effective when meetings are held at
appropriate intervals during the year. Where, following the general evaluation, external
auditor intends to rely upon specific internal audit work, s/he should review the internal
auditor’s work, considering the following:
Scope of work and related audit programmes;
Whether the work was properly planned and the work of assistants was properly
supervised, reviewed and documented;
Whether sufficient appropriate evidence was obtained to afford a reasonable basis
for the conclusions reached;
Whether conclusions reached are appropriate in the circumstances and
Whether any exceptions or unusual matters disclosed by the internal auditor’s
procedures have been properly resolved.
•
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5MANDATORY INTERNAL AUDIT FOR COMPANIES
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Standard on Internal Audit: BasicPrinciples Governing Internal Audit...The Standard on Internal Audit (SIA) 2 “Basic Principles Governing Internal Audit” is
issued by the Council of Chartered Accountants of India.
The purpose of this Standard is to establish standards and provide guidance on the
general principles governing internal audit. Following is a brief overview of those
principles:
The internal auditor should have a straightforward, honest and sincere approach to his
professional work. The audit report must be fair and must not allow prejudice or bias to
override his objectivity. He should maintain an impartial attitude. He should not only be
independent in fact but also appear to be independent. The internal auditor should not,
therefore, to the extent possible, undertake activities, which are or might appear to be
incompatible with his independence and objectivity.
The internal auditor should maintain confidentiality of the information acquired in the
course of his work and should not disclose any such information to a third party, including
the employees of the entity, without the specific authority of the management/client or
unless there is a legal or a professional requirement to do so. The internal auditor,
therefore, needs to ensure that there are well laid out policies and controls to protect
confidentiality of the information.
The internal auditor should exercise due professional care, competence and diligence
expected of him while carrying out the internal audit. Due professional care signifies that
the internal auditor exercises reasonable care in carrying out the work entrusted to him in
terms of deciding on aspects such as the extent of work required to achieve the objectives
of the engagement, relative complexity and materiality of the matters subjected to
internal audit, assessment of risk management, control and governance processes and
cost benefit analysis.
The internal auditor should maintain the documents, which are important in providing
evidence that the audit was carried out in accordance with the Standards on Internal
Audit and support his findings or the report submitted by him. In addition, the working
papers also help in planning and performing the internal audit, review and supervise the
work and most importantly, provide evidence of the work performed to support his
findings or the report(s).
Integrity, Objectivity and Independence
Confidentiality
Due Professional Care, Skills and Competence
Documentation
6MANDATORY INTERNAL AUDIT FOR COMPANIES
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Evidence
Internal control and risk management systems
Reporting
The internal auditor should, based on his professional judgment, obtain sufficient and
appropriate evidence to enable him to draw reasonable conclusions based on his opinion
or findings. Factors affecting the professional judgment include the activity under audit,
possible errors and their materiality and the risk of occurrence of such errors.
While the management is responsible for establishment and maintenance of appropriate
internal control and risk management systems, the role of the internal auditor is to
suggest improvements to those systems. For this purpose, the internal auditor should:
a. Obtain an understanding of the risk management and internal control framework
established and implemented by the management.
b. Perform steps for assessing the adequacy of the framework developed in relation to
the organisational set up and structure.
c. Review the adequacy of the framework.
d. Perform risk based audits according to the risk assessment process.
Internal auditor may, however, also undertake work involving identification of risks as
well as recommend design controls or gaps in existing controls to address those risks.
The internal auditor should carefully review and assess the conclusions drawn from the
audit evidence obtained, as the basis for his findings contained in his report and suggest
remedial action. However, in case if the internal auditor comes across any actual or
suspected fraud or any other misappropriation of assets, it would be more appropriate for
him to bring the same immediately to the attention of the management.
7MANDATORY INTERNAL AUDIT FOR COMPANIES
It is extremely essential for the internal auditor to have the independence in terms of
organisational status and personal objectivity which permits the proper performance of
his duties. The internal auditor should ensure that findings, conclusions and
recommendations arising from each internal audit assignment are communicated
promptly to the appropriate level of management. The reports must be fair and should
not allow prejudice or bias.
Conclusion...
TM
Credits: Roopa J. Ved
Floraison India Compliances Pvt. Ltd.,#185/7, 2nd Floor, "Chandra Plaza", 25th Cross, 8th F Main Road, Jayanagar 3rd Block Bangalore - 560 011,India
Tel: + 91-80-26538257 / 58 / 59Fax: + 91-80-26538273E-mail: [email protected]
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