1. Objective of Internal Audit

• Internal auditors are responsible for evaluating and improving the effectiveness of internal controls, risk management, and governance processes.
  
• Their main objective is to provide independent assurance to the board and management that the company’s operations are functioning efficiently and in compliance with laws and internal policies.
  
• Unlike statutory auditors, internal auditors operate within the organization and offer continuous review.
  
• Their findings help in preventing fraud, detecting inefficiencies, and enhancing process integrity.
  
• Internal audit is a proactive and preventive function, not just corrective.
  

2. Applicability and Legal Requirement

• Under Section 138 of the Companies Act, 2013, internal audit is mandatory for:
  
  • Listed companies
    
  • Public companies with turnover ≥ ₹200 crore or outstanding loans/deposits ≥ ₹100 crore
    
• The company’s Board of Directors must appoint an internal auditor, who may be a chartered accountant, cost accountant, or other qualified professional.
  
• The appointment and scope are determined by the audit committee or board, based on the company’s operational needs.
  
• Internal auditors may be in-house employees or outsourced professionals.
  

3. Key Functions and Responsibilities

• Review financial records and transactions for accuracy and compliance.
  
• Assess the efficiency of internal control systems and suggest improvements.
  
• Evaluate the company’s risk management policies and identify potential exposures.
  
• Verify compliance with statutory and regulatory requirements, including tax, labor, and environmental laws.
  
• Conduct operational audits to ensure productivity and cost-effectiveness in various departments.
  

4. Reporting and Interaction with Management

• Internal auditors report their findings to the Audit Committee or the Board of Directors.
  
• They submit internal audit reports periodically with observations, risks identified, and recommended corrective actions.
  
• Management is expected to act on the recommendations and update the board on progress.
  
• Internal auditors also assist in investigating fraud, misuse of assets, or irregularities when suspected.
  
• Their role includes educating staff and strengthening internal processes to mitigate future risks.
  

5. Support to Statutory and External Auditors

• Internal audit work helps statutory auditors by providing preliminary assessments and data analysis.
  
• Their continuous oversight contributes to effective statutory audit planning and risk assessment.
  
• While internal auditors are not a substitute for external auditors, their findings may be used by statutory auditors as part of the audit evidence.
  
• They support the overall corporate governance framework by maintaining audit trails and accountability mechanisms.
  
• Their work enhances transparency, control, and stakeholder confidence in the company’s internal functioning.