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SUBJECT: Corporate Laws Ii

Project topic:
‘’ internal audit of company”

Submitted By
GUNJAN KUMAR
Roll no. 1212
4 Year, 8 Semester, B.B.A.LL.B(Hons.)
th th

Submitted to
Ms. Nandita S Jha
Faculty of Corporate Laws Ii

Chanakya national Law University, Patna

april, 2018
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ACKNOWLEDGEMENT

Writing a project is one of the most significant academic challenges, I have ever faced.
Though this project has been presented by me but there are many people who remained in veil,
who gave their all support and helped me to complete this project.

First of all I am very grateful to my subject teacher Ms.Nandita S Jha without the kind
support of whom and help the completion of the project was a herculean task for me. She
donated her valuable time from her busy schedule to help me to complete this project and
suggested me from where and how to collect data.

I am very thankful to the librarian who provided me several books on this topic which proved
beneficial in completing this project.

I acknowledge my friends who gave their valuable and meticulous advice which was very
useful and could not be ignored in writing the project. I want to convey most sincere thanks to
my 5thyear seniors, for helping me throughout the project.

Last but not the least, I am very much thankful to my parents and family, who always stand
aside me and helped me a lot in accessing all sorts of resources.

I thank all of them!

Gunjan Kumar

1212
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CERTIFICATE OF DECLARATION

I hereby declare that the project work entitled “internal audit of company” submitted to
Chanakya National Law University, Patna, is a record of original work done by me under the
guidance of Mrs. Nandita S. Jha, Faculty-in-Charge (Corporate Laws), CNLU, Patna, and this
project work is submitted in the final fulfillment of the requirements for the Project Work for
Corporate Laws-II (Semester VIII), CNLU, Patna. The results embodied in this project have not
been submitted to any other University or Institute for any purpose.

Date-23/04/2018 Gunjan Kumar

Roll no. 1212
B.B.A.LL.B
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Contents
1. INTRODUCTION .............................................................................................................. 1

2. HISTORY OF INTERNAL AUDIT:- ................................................................................ 3

3. OBJECTIVES OF INTERNAL AUDIT:- .......................................................................... 4

4. INTERNAL AUDIT ........................................................................................................... 5

5. ACTIVITES OF INTERNAL AUDIT ............................................................................... 7

6. CONCLUSION:- ................................................................................................................ 8
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Research methodology:
The method of research adopted is doctrinal. The researcher has used secondary sources to
answer his statement of problem. Various books and articles have been referred while writing the
present paper.

Standard Indian Legal Citation method of citation is used and works of various scholars which
were referred is gratuitously acknowledged in the citation.

Style of writing:

The style of writing used by the researcher is descriptive and analytical.

Objective of the study:

The main object of the research is to learn about the concept of internal audit, legal provisions
regarding internal audit and why is internal audit important to your organization?
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INTRODUCTION

The general definition of an audit is an evaluation of a person, organization, system, process,

enterprise, project or product. The term most commonly refers to audits in accounting, internal
auditing and government auditing, but similar concepts also exist in project management, quality
management, water management and energy conservation. Auditing is defined as a systematic
and independent examination of data, statements, records, operations and performances
(financial or otherwise) of an enterprise for a stated purpose. In any auditing the auditor
perceives and recognizes the propositions before him for examination, collects evidence,
evaluates the same and on this basis formulates his judgment which is communicated through his
audit report. The types of audit are:-
EXTERNAL AUDIT: - independent of the organization.
INTERNAL AUDIT: - an organization auditing its own systems, a self-assessment.
Here, we will study about internal audit and how it helps to control cost.

INTERNAL AUDIT is an independent, objective assurance and consulting activity designed to

add value and improve an organization's operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate and improve the
effectiveness of risk management, control, and governance processes. Internal audit is a catalyst
for improving an organization's governance, risk management and management controls by
providing insight and recommendations based on analyses and assessments of data and business
processes. With commitment to integrity and accountability, internal audit provides value to
governing bodies and senior management as an objective source of independent advice.
Professionals called internal auditors are employed by organizations to perform the internal
auditing activity. The scope of internal audit within an organization is broad and may involve
topics such as an organization's governance, risk management and management controls over:-
efficiency/effectiveness of operations (including safeguarding of assets), the reliability of
financial and management reporting and compliance with laws and regulations. Internal audit
may also involve conducting proactive fraud audits to identify potentially fraudulent acts;
participating in fraud investigations under the direction of fraud investigation professionals, and
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conducting post investigation fraud audits to identify control breakdowns and establish financial
loss. Internal audit is an audit conducted by an internal auditor appointed by the management of
the enterprises with a view to highlighting the weak areas of the organizations. It includes
examination and evaluation of various organizational activities and to produce the helping hand
to the management complete their responsibilities efficiently and effectively. The institute of
internal auditor has defined internal auditing as follows: “Internal auditing is the independent
appraisal activity within an organization for the review of the accounting, financial and other
operation as a basis for protective and constructive service to the management. It is a type of
control, which functions by measuring and evaluating the effectiveness of other types of control.
It deals primarily with accounting and financial matters but it may also properly deal with
matters of an operating nature.” The internal auditor audits the accounts and other relevant
records daily, regularly or on periodical basis to accomplish the following requirements:-

1. Internal audit may be conducted to ascertain whether all rules, regulations, policies,
procedures and principles have been followed by the company or not.

2. To check whether the existing internal control system is adequate and effective and according
to the size of the organization.

3. To ensure that all the assets of organization are properly safeguarded, if not, he reports the
management about the drawback with suggestions.

4. To highlight the weak areas of the organization and give suggestion to strengthen them.

5. To check whether working of the organization is smooth, effective, efficient and economical.1

1
Vide notification dated 4th September 2015(F No. 1/19/2013-CL-V-Part).
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HISTORY OF INTERNAL AUDIT:-

The Internal Auditing profession evolved steadily with the progress of management science after
World War II. It is conceptually similar in many ways to financial auditing by public accounting
firms, quality assurance and banking compliance activities. While some of the audit technique
underlying internal auditing is derived from management consulting and public accounting
professions, the theory of internal auditing was conceived primarily by Lawrence Sawyer (1911-
2002), often referred to as "the father of modern internal auditing"; and the current philosophy,
theory and practice of modern internal auditing as defined by the International Professional
Practices Framework (IPPF) of the Institute of Internal Auditors owes much to Sawyer's vision.
With the implementation in the United States of the Sarbanes-Oxley Act of 2002, the
profession's exposure and value was enhanced, as many internal auditors possessed the skills
required to help companies meet the requirements of the law. However, the focus by internal
audit departments of publicly traded companies on SOX related financial policy and procedures
derailed progress made by the profession in the late 20th century toward Larry Sawyer's vision
for internal audit. Beginning in about 2010, the IIA once again began advocating for the broader
role internal auditing should play in the corporate arena, in keeping with the IPPF's philosophy.
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OBJECTIVES OF INTERNAL AUDIT:-

1. To determine the reliability and integrity of information; (i.e. evaluating the internal control
systems and the integrity of financial and operating information produced by those systems).

2. To determine whether compliance exists with policies, procedures, laws and regulations.

3. To establish that there is a proper authority for every acquisition, retirement and disposal of
assets.

4. To confirm that liabilities have been incurred only for legitimate activities of the organization.

5. To appraise the economy and efficiency of resource utilization (i.e. physical, monetary and
most importantly staff).

6. To review operations or programs for consistency with established management goals and
objectives.

7. To assist members of the organization in the effective and successful performance of their
responsibilities by providing them with analyses, appraisals, recommendations and other
pertinent information concerning the activities being reviewed.

8. To analyze and improve the system of internal check, in particular to see that it is:-

a) Working, b) Sound, and c) Economical.

9. To facilitate the prevention and detection of frauds.

10. To review the operation of the overall internal control system and to bring material
departures and non-compliances to the notice of the appropriate level of management, to locate
unnecessary and weak control system effective and economical.
2

2
http://www.mca.gov.in/MinistryV2/accounts+and+audit.htmllast scene as on date 21/04/18
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INTERNAL AUDIT

i. What companies are required to appoint an internal auditor?

Section 138 read with Rule 13 of the Companies (Accounts) Rules, 2014 requires the following
class of companies to appoint an internal auditor:3

(a) Every listed company;

(b) Every unlisted public company having: a. paid up share capital of fifty crore rupees or more
during the preceding financial year; or b. turnover of two hundred crore rupees or more during
the preceding financial year; or c. outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any point of time during the
preceding financial year; or d. outstanding deposits of twenty five crore rupees or more at any
point of time during the preceding financial year;4 and

(c) Every private company having a. turnover of two hundred crore rupees or more during the
preceding financial year; or b. outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any point of time during the
preceding financial year.5

ii. Who appoints the internal auditor?

The Board appoints the internal auditor of the company.

iii. Can the appointment of the internal auditor be carried out through circular resolution?

Rule 8 of the Companies (Meeting of Board and its Powers) Rules, 2014 read with section 179
states that the appointment of the internal auditor is to be carried out at the board meeting itself.

iv. What is the qualification requirement for an internal auditor?

There is no qualification requirement prescribed for an internal auditor. The internal auditor may
or may not be the employee of the company.

v. Who does the internal auditor report to?

3
Rule 13 of companies (Accounts) Rules 2014
4
Section 138 of companies act, 2013
5
Amended vide the companies (Amendment) Act, 2015. Para19.6
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The internal auditor reports to the audit committee. The audit committee or the board may along
with the internal auditor formulate the scope, functioning, periodicity and methodology of
conducting the internal audit. Further, both the audit committee and the board are required to
consider the efficiency of internal control systems and financial controls in the company.

vi. Can the statutory auditor and the internal auditor be the same person?

No, the statutory auditor and the internal auditor cannot be the same person. The statutory
auditor cannot be the employee/officer of the company or cannot be such person having business
relationship with the company.6

Why is internal audit important to your organization?

By reporting to senior management that important risks have been evaluated and highlighting
where improvements are necessary, the internal auditor helps senior management to demonstrate
that they are managing the organization effectively on behalf of their stakeholders. Hence,
internal auditors, along with executive management, non-executive management and the external
auditors are a critical part of the top level governance of any organization.

Assessing the management of risk

The profession of internal audit is fundamentally concerned with evaluating an organization’s

management of risk. All organizations face risks. For example, risks to the organization’s
reputation if it treats customers incorrectly, health and safety risks, risks of supplier failure, risks
associated with market failure, IT risks and financial risks to name some key areas. The key to an
organization’s success is to manage those risks effectively - more effectively than competitors
and as effectively as stakeholders demand. To evaluate how well risks are being managed the
internal auditor will assess the quality of risk management processes, systems of internal control
and corporate governance processes, across all parts of an organization and report this directly
and independently to the most senior level of management.

Assisting management in the improvement of internal controls

An internal auditor’s knowledge of the management of risk enables them to act as consultant and
catalyst for improvement in an organization’s practices. So, for example if a line manager is

6
Amended vide notification No.F.No.1/2/2014-CL.V Dated 5 June 2015.
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concerned about a particular area of responsibility, working with the internal auditor could help
to identify improvements. Or perhaps a major new project is being undertaken – the internal
auditor can help to ensure that project risks are clearly identified and controls put in place to
manage them.

ACTIVITES OF INTERNAL AUDIT

Below are the key things an internal does. Within these areas, it is important to think of the
internal auditor as the organizations critical friend – someone who can challenge current practice,
champion best practice and be a catalyst for improvement, so that the organization as a whole
achieves its strategic objectives.7

Evaluating controls and advice managers at all levels

Internal audit’s role in evaluating internal controls is wide ranging because everyone from the
mailroom to the boardroom is involved in internal control. The internal auditor’s work includes
assessing the tone and risk management culture of the organization at one level through to
evaluating and reporting on the effectiveness of the implementation of management policies at
another.

Evaluating risks

Internal auditors identify key activities and relevant risk factors and assess their significance.
Changing trends and business/economic conditions impact the way the internal auditor assesses
risk. The techniques of internal auditing have changed from a reactive and control based form to
a more proactive and risk based approach. This enables the internal auditor to anticipate possible
future concerns and opportunities as well as identifying current issues.

Analyzing operations and confirm information

Achieving objectives and managing valuable organizational resources requires systems,

processes and people. Internal auditors work closely with line managers to review operations
then report their findings. The internal auditor must be well versed in the strategic objectives of

7
Chartered institute of internal auditors page 2, www.iia.org.uk, last scene on 21/04/18
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their organisation, so that they have a clear understanding of how the operations of any given
part of the organisation fit into the bigger picture.

CONCLUSION:-

The internal auditor should check whether proper operating standards and norms have been
established for cost control and reduction. They should be detailed enough to be identifiable with
specific operating responsibilities and should be capable of being used by operating personnel
for monitoring and evaluating their performance. The internal auditor should review the methods
of establishing the operating standards and norms. He should carefully examine the assumptions
made while setting the standards to ensure that they are appropriate and necessary. The variances
should be examined to evaluate whether or not the standards and norms are practical. Where
there is a wide divergence between actual performance and the corresponding standards, reasons
may be looked into. The system of identification and analysis of deviations from standards
should be examined. The internal auditor should examine whether analysis of variances is
communicated to those concerned in time. He should also examine whether in communicating
the variances serious matters are highlighted and whether exceptional variances are
communicated more expeditiously than is done in the normal course. As a part of evaluating
resources utilization, identifying the facilities which are under-utilized is an important function
of the internal auditor. Such instances may consist of underutilized machines, unoccupied storage
space, huge cash or bank balances, idle man power etc. The internal auditor may also identify
understaffing and overstaffing in various areas as these prevent optimum use of resources. While
commenting on staffing, the internal auditor should pay special attention to nonproductive work
being performed. This would require an enquiry into the job descriptions of employees combined
with an intelligent observation of the work being done. Finally the internal auditor should review
all procedures with reference to their costs and benefits. One of the factors resulting in
inefficiency is that in many cases procedures become hindrance to operations.
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BIBLOGRAPHY:-

1) Taxmann's Campany Laws by Dr. G.K KAPOOR

2) Chartered Institute of Internal Auditors , www.iia.org.uk

3) Element of companies law by N.D KAPOOR

4) Companies Act,2013

WEBSITE:-

4) www.mca.gov.in
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