What is an Internal Audit? Internal audits evaluate a company’s internal controls, including its corporate governance and accounting processes. These audits ensure compliance with laws and regulations and help to maintain accurate and timely financial reporting and data collection. Internal audits also provide management with the tools necessary to attain operational efficiency by identifying problems and correcting lapses before they are discovered in an external audit. KEY TAKEAWAYS • An internal audit offers risk management and evaluates the effectiveness of a company’s internal controls, corporate governance, and accounting processes.. • Internal audits provide management and board of directors with a value-added service where flaws in a process may be caught and corrected prior to external audits. • The Sarbanes-Oxley Act of 2002 holds management responsible for their financial statements by requiring senior corporate officers to certify in writing that the financials are accurately presented. Internal Audit Process Internal auditors generally identify a department, gather an understanding of the current internal control process, conduct fieldwork testing, follow up with department staff about identified issues, prepare an official audit report, review the audit report with management, and follow up with management and the board of directors as needed to ensure recommendations have been implemented. Internal Audit Checklist Either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. The Central Government may by Rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board. Applicability of internal audit in India – Companies that are required to appoint an internal auditor The appointment of internal auditor is compulsory for all listed companies and ‘producer companies’, irrespective of any criterion. According to Rule 13 of the Companies (Accounts) Rules, 2014, the following classes of companies are mandated to appoint an internal auditor or a firm of internal auditors: I. All listed companies II. Unlisted public companies that meet either of the below criteria: • Have a paid-up share capital of Rs. 50 crores or more during the immediately preceding financial year, or • Have a turnover of Rs. 200 crores or more during the immediately preceding financial year; or • Have outstanding loans or borrowings from banks or financial institutions with a balance exceeding Rs. 100 crores at any point of time during the immediately preceding financial year; or • Have outstanding deposits of Rs. 25 crores or more at any point of time during the immediately preceding financial year Private companies that meet either of the below criteria: • Have a turnover of Rs. 200 crores or more during the immediately preceding financial year; or • Have outstanding loans or borrowings from banks or financial institutions with a balance exceeding Rs. 100 crores at any point of time during the immediately preceding financial year • All the companies covered under any of the above conditions will need to comply with the requirements of section 138 and rules specified under the Companies (Accounts) Rules, 2014.