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APPLICABILITY

As per sec.138 Companies Act, 2013 following class of companies have to appoint Internal Auditor

Every Listed Company and

Every Unlisted Public Company having (Fulfillment of anyone Condition)

• Turnover Rs. 200 Crore or more

• Loan or Borrowing from Bank or Public Financial Institution of Rs. 100 Cr. or More

• Paid-up share Capital of Rs.50 Cr. or More

• Outstanding Deposit of Rs. 25Cr. or More

Every Private Limited Company (Fulfillment of anyone Condition)

• Turnover of Rs. 200Cr. or More

• Loan or Borrowing from Bank or Public Financial Institution of Rs. 100 Cr. or More.

STEPS IN INTERNAL AUDIT

Step 1 -Understanding the Client's business

It will help in identifying significant events, transactions, policies, and practices of the entity. It will also help in understanding the legislation or regulation that will affect the entity. It can be done by

Talking to management and employees

Entity procedure and policy module

Studying previous internal and statutory audit reports

Visiting entity factory and its various departments along with studying relevant industry journals.

Step 2 -Logical Walkthrough

Checking a few transactions from beginning to end through the entire flow of transactions i.e., from initiation to completion. It will help the auditor in

Helps in the implementation design of control along with its operating efficiency

Determining constraints in the smooth running of the business

After these steps auditor will be able to find the Nature, Timing & Extent of the audit procedure

Audit procedures are processes and techniques that auditors perform to obtain audit evidence that enable them to conclude on a set audit objective.

Step 3 -Performing Audit Procedure

A) Risk Assessment Procedure is performed to identify the material risk both at the assertion level and at the financial statement level. Risk Assessment Procedure mainly consists of

Observation and inspection

Inquiries of management and of others within the entity.

B) Substantive procedure is performed to check the completeness, accuracy & validity of data produced by accounting software.it mainly consists of

Checking of Opening balances of all ledgers (General ledgers, Debtor ledger, Creditor ledger, and other subsidiary ledgers) with last audited accounts.

Vouching (Checking day-to-day business transactions on a sampling Basis). It mainly consists of

• All the cash transactions shall initiate only with the approval of the authorized person.

• Instances of Negative Cash balance on any day during the year must be noted.

• Tally of Physical cash with Cash in Hand showing in Books of Accounts.

• Bank balance confirmation should directly be taken from a bank.

• Checking the Purchase Invoice and Purchase order.

• Casting and carryforwards in purchase book and posting it to relevant ledgers should be carefully checked.

• In case of purchase return, return note must be checked with storekeeper’s record and return outward register along with checking off debit note & credit note.

• Auditor should examine source document (Sales Invoice, Sales order).

• Special consideration to be paid on “Goods Sent on Sale or Return basis” & “Goods on Consignment basis”.

Verification (Process to verify the ownership, valuation, possession & Existence of a particular Asset or Liability). Verification Includes

Obtaining the schedule of Asset and Liability from the Client.

Checking if Proper Accounting standards have been adopted or not while recording the asset in the books.

Checking depreciation schedule entries in the books.

Examine assets are purchased only for a business purpose, not for the personal use of Directors.

Check if any charge is created on Asset.

Whether Insurance is taken on Asset or not.

LEDGER SCRUTINY

Scrutiny of all expense accounts to ensure that full-year expenses have been booked and no such expenses are booked which is not related to this year.

Review of all statutory payments made with the due date or not.

Non-Payment of Credit balance for more than a reasonable time.

Scrutiny of all revenue accounts to ensure that all revenue accrued during the year is accounted for.

Checking that all the vouchers are properly authorized and correctly posted in respective ledgers.

STATUTORY COMPLIANCE

Check the applicability of various acts within the organizations.

TDS should be deducted at the correct rate on the transactions where TDS have to be deducted

PF, ESI, and other statutory payments for employee welfare, whether submitted within the due date need to be checked with their Challan and returns.

Whether professional tax has been duly paid and properly accounted for in the books of accounts.

GST registration number for all the business units needs to be checked. Also, the due dates for the various GST return filing need to be complied with.

Reconciliation Statement must be prepared for matching sales with GSTR1 and GSTR3B.

ITC Claimed must be checked with P&L, and specific consideration must be paid blocked credit.

PERFORMING ANALYTICAL PROCEDURE

Measuring any deviation or unusual fluctuations in accounts by comparing the information with

• Comparable information for the prior periods

• Anticipated results like Budgets or Forecasts

• Similar Industry Information.

Step 4 -Documentation (What is not documented is Not Audited)

The auditor should obtain sufficient & appropriate audit evidence so that he can draw conclusions. Some important Documents is as under-

• Last year's Statutory & Internal Audit Reports

• Monthly BRS along with Bank Statements.

• Copy of GST, TDS, PF, ESIC, PTAX (Employee & Company) Returns

• GST reconciliation statement (Matching of GSTR1 vs GSTR3B vs Sales book)

• Cash Certificate

• Stock Statement

• Fixed Asset Register

• Roc full compliance details along with checking of Minutes Book, Charge Register, Register of Director & KMP, and Register of Members.

Step 5-Reporting

Reporting mainly consists of

Discussing Deficiency in Management’s Process and Procedure.

Providing Timely information in a concise way

Presenting all significant matters with disclosure of material facts

CONCLUSION

The basic objective of an Internal Audit is as follows

Safeguarding of Organization’s Asset.

Compliance with relevant Laws & Regulations.

Effectiveness & Efficiency of Business operations.

Reliability & Integrity of Financial and operational information.

The accomplishment of objectives and goals of the business through ethical and effective governance.