Internal Audit under the new Companies Act 2013

, Last updated: 11 November 2014
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Internal Audit under the new Companies Act 2013 – Opportunity or Responsibility for the Internal Auditor?

Since Internal Audit has been given statutory recognition (under Section 138 of the Act), and has been made mandatory for certain categories of organizations, for the first time, it significantly expands audit opportunities. Certain other related provisions in the Act, enhance the scope of such audits, and place greater responsibility on the Internal Auditor, which I wish to highlight in this article.

Significant among such requirements is the definition / explanation to the term “Internal Financial Controls” which means Policies and Procedures adopted by the organization, for ensuring “Orderly and Efficient “conduct of business.

The key words are “Orderly and Efficient”. Through these words, Internal Financial Controls are getting extended to cover Operational areas. Even Sarbanes Oxley Act in the US, which emphasized on Internal Controls, confined it to areas in Financial Reporting, and did not specifically extend them to operational areas.

Internal Financial Controls, as specified in the Act include

a. Adherence to Company’s Policies

b. Safeguarding of its assets

c. Prevention and detection of fraud and errors

d. Accuracy and completeness of accounting records and

e. Timely preparation of reliable financial information.

Here, I wish to elaborate on “Orderly and Efficient” conduct of business.

Internal Audit always focused on Internal Controls. With the new definition of Internal Financial Controls, it gets extended to certain areas, which Internal Auditor might not be looking at specifically, unless it was a part of the Internal Audit Plan.

The word “Orderly” prompts the Internal Auditor to see “Governance” aspects like the Organization Chart, Roles and Responsibilities of key personnel, and Delegation of Authority which helps in decision making at appropriate levels.

The word “Efficient” refers to efficiencies in operations, like input / output relationship in achieving good operating results. This calls for the Internal Auditor gaining insight into all the important business processes of the organization, instead of confining to the processes in his / her internal Audit Plan as mandated by the Audit Committee.

I do not hesitate to add here that the Internal Auditor should prepare himself / herself through proper Business Process orientation, before taking up the audits. For more articles from me, please see my blog at www.operationstomoney.com

Thank you for your attention

Tulasi S Sastri

FCA, CISA

Published by

Tulasi S Sastri
(Director)
Category Corporate Law Report

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Comments

01 December 2014 ashok sharma

Nice sir

26 November 2014 Pramod

Nice article for those who want career in internet audit specialisation

17 November 2014 chandra kanth

Nice sir .

14 November 2014 Ekta

Hello Sir, very informative article. I use to read your articles on CCI. and even i have surfed your blog also. It is really really prosperous in terms of knowledge. Thank you sir for sharing all these. These all will definitely helpful in our professional career. Thank you.

14 November 2014 Mamtha

Crisp and Clear Article ! Thank you Sir.

14 November 2014 BALKRUSHNA KULKARNI

THANKS SIR, PERFECT MEANNING EXPLAINED IN BRIEF MANNER.

12 November 2014 Bharadwaj Tallapragada

Thanks for articles sir! A Learning one!

11 November 2014 Tulasi S Sastri

Regarding eligibility for conducting Internal Audits, Section 138 (1) says, "Such class of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant, or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. Thanks.

11 November 2014 Tarun Jindal

What' s the eligibilty for internal audit? Is it compulsary that only a CA can perform the internal audit???

11 November 2014 Ganeshbabu K

Thank you very much for your quick response.i have already read your previous 2 articles published in caclubindia and liked very much.Please keep writing such articles to educate us.

11 November 2014 Tulasi S Sastri

Thank you for your interest in the article. I have chosen to keep it simple. The following classes of companies shall be required to appoint an internal auditor: (Sec. 138, Rule 13) • Every listed company • Every unlisted public company having: • Paid-up share capital of Rs. 50 crores or more during the preceding financial year; or • Turnover of Rs. 200 crores or more during the preceding financial year; or • Outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 crores or more at any point of time during the preceding financial year; or • Outstanding deposits of Rs. 25 crores or more at any point of time during the preceding financial year; • Every private company having: • Turnover of Rs. 200 crores or more during the preceding financial year; or • Outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 crores or more at any point of time during the preceding financial year.