Principles and Practices of Auditing

Unit 3 – Internal Audit

Topics covered under this chapter•Meaning• Importance •Advantages • Limitations•Differences between Internal Audit and Statutory Audit

Meaning of Internal Audit• “Internal Auditing consists of continuous, critical review of financial and operating

activities by a staff of auditors functioning as full time salaried employees”.

• It is an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization.

• It is a type of control which functions by measuring and evaluating the effectiveness of other type of control.

• It deals primarily with accounting and financial matters, it may also properly deal with matters of an operating nature.

Importance of Internal Audit

• It is important as it will help to maintain Reliability and Integrity of Information

• It is critical as it will ensure smooth Compliance with policies, plans, procedures, laws and regulations

• It is very useful in Safeguarding of company assets

• It is a method of Economical and efficient use of resources

• It will support the company in Accomplishment of established objectives and goals for operations

Advantages of Internal Audit

• It will lead to discovery of errors or frauds which can be rectified before the external final audit is conducted. • It removes the need to employ external consultants to act as internal

auditors hence saving large sum of money. • The internal auditors are intimately acquainted with the business and its

processes as they are continuously employed in the same company.• It maintains a group of highly skilled people available to cope with non

recurring and exceptional jobs unlike other less skilled staff. • It ensures that the company’s standard policy and procedures are running

smoothly. • Internal auditors are very useful in areas like operational audits, internal

check controls and other forms of detailed auditing methods.

Limitations of Internal Audit

• Internal auditor’s report is not accepted by the shareholders or tax authorities. They require the external auditor’s report.

• Since internal audit is done by the employees of the company chances are that it may be biased and therefore company cannot depend on such reports.

• As an internal audit is not done by the professional auditor, chances of internal auditor not detecting the errors are high.

Differences - Internal Audit & Statutory Audit

Inte

rnal

Aud

it Appointment – Internal Auditor is appointed by the Management. Qualifications – Need not possess any specific expertise.Status – Is an employee of the company.Conduct of Audit – Is a kind of continuous audit. Scope of Work – Determined by the management.

Stat

utor

y Au

dit Appointment – Statutory

Auditor is appointed by the Shareholders.Qualifications – Must be qualified as per Sec 226 of the Companies Act 2013.Status – Is an independent person.Conduct of Audit – After preparation of final accounts.Scope of Work – Determined by Law.

Differences - Internal Audit & Statutory Audit

Inte

rnal

Aud

it Objective – To find out error or frauds.Determination of duty – Can be reduced by management.Report – No report required.Prosecution – Cannot be prosecuted for professional misconduct under the CA Act unless is a CA.Remuneration – Fixed by the Management. Attendance at Meetings – No right to attend meetings.

Stat

utor

y Au

dit Objective – To check the

conformity and fairness of accounts.Determination of duty – Not possible, cannot be reduced. Report – Mandatory report to be submitted. Prosecution – Can be prosecuted under the CA Act. Remuneration – Fixed by the Shareholders.Attendance at Meetings – Right to attend meetings.