Unit 3 Internal Audit

Unit 3 Internal Audit

• 1.
  Principles and Practicesof Auditing Unit 3 – Internal Audit
• 2.
  Topics covered underthis chapter • Meaning • Importance • Advantages • Limitations • Differences between Internal Audit and Statutory Audit
• 3.
  Meaning of InternalAudit • “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.
• 4.
  Importance of InternalAudit • 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
• 5.
  Advantages of InternalAudit • 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.
• 6.
  Limitations of InternalAudit • 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.
• 7.
  Differences - InternalAudit & Statutory Audit InternalAudit 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. StatutoryAudit 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.
• 8.
  Differences - InternalAudit & Statutory Audit InternalAudit 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. StatutoryAudit 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.