APPLICABILITY OF INTERNAL AUDIT CONT…. - icsi.edu 2015/presentation 2015/PPT... · APPLICABILITY OF INTERNAL AUDIT CONT…. Companies Act - 2013 Particulars Listed Companies Unlisted

APPLICABILITY OF INTERNAL AUDIT CONT….

Companies Act - 2013

Particulars Listed

Companies

Unlisted public

Company

Private

Company

Paid share capital

Always

applicable

> 50 Crore N.A

Turnover Always

applicable

> 200 Crore > 200 Crore

Outstanding loans or borrowing from

banks or public financial institutions at

any point of time during the preceding

financial year.

Always

applicable

> 100 Crore > 100 Crore

Outstanding deposits at any point of

time during the preceding financial

year.

Always

applicable

> 25 Crore N.A.

An exiting company covered under any of the above criteria shall comply with the

requirement of section 138 and this rule with six months of commencement of such

section i.e. 1st April 2014.

Dr. B. K. Vatsaraj

Chartered Accountant 1

ELIGIBILITY OF APPOINTMENT OF IA

The internal auditor shall be either Chartered Accountant or Cost Accountant

or such other professional as may be decided by the board.

The internal auditor may or may not be an employee of the company.

“Chartered Accountant” shall mean a Chartered Accountant whether

engaged in practice or not – therefore, every registered member of the

Institute of Chartered Accountants of India is eligible for appointment as

Internal Auditor of company.

Thus, the board of company via the Audit Committee has been given freedom

to appoint any professional and competent person to be its internal auditor.

Statutory auditor appointed under section 139 of Act is not eligible to

provide the service of Internal audit whether rendered directly or indirectly

to the company or its holding company or subsidiary company.

Dr. B. K. Vatsaraj


SCOPE AND FUNCTIONS OF IA

The scope and functions of Internal Auditors has not been

defined in Companies Act, 2013 nor in the Rules prescribed.

The Audit Committee of the company or the Board shall, in

consultation with the Internal Auditor, formulate the scope,

functioning, periodicity and methodology for conducting the

internal audit – Sub-rule 2 of Rule 13 of Companies (Accounts)

Rules, 2014.

Dr. B. K. Vatsaraj


Clause 49 in Listing agreement

SEBI inserted clause 49 in the listing agreement, to

ensure good Corporate Governance, specially in view of

various scandals

Focused accountability on listed company managements

which are generally divorced from ownership

This is also known as Corporate Governance Clause

Dr. B. K. Vatsaraj


Need for Corporate governance

Emerging Needs:

Sound Reporting of Financial situation and governance of the company

Building investors confidence

Providing motivating work environment

Compliance with laws & regulations

Compliance with contracts/covenants

Safeguarding shareholders interest

5

“Corporate governance is the acceptance by management

of the inalienable rights of shareholders as the true owners

of the corporation and of their own role as trustees” - N R

Narayana Murthy

Dr. B. K. Vatsaraj

Chartered Accountant

Standards on Internal Audit (SIA)

Why are SIA’s Introduced?

• To provide a benchmark for quality of services during an internal audit.

• With the introduction of SIA’s the ICAI aims to codify the best practices in the area of internal audit services.

7 Dr. B. K. Vatsaraj


SIA The ICAI has Prescribed 18 Standards on internal audits, which have

been enumerated below: • SIA 1 : Planning an internal audit • SIA 2 : Basic principles governing Internal audit • SIA 3 : Documentation • SIA 4 : Reporting • SIA 5 : Sampling • SIA 6 : Analytical Procedures • SIA 7 : Quality assurance in internal audit • SIA 8 : Terms of internal audit engagement • SIA 9 : Communication with management • SIA 10: Internal audit evidence • SIA 11: Consideration of fraud in an internal audit • SIA 12: Internal control evaluation • SIA 13: Enterprise risk management • SIA 14: Internal audit in an information technology environment • SIA 15: Knowledge of the entity and it’s environment • SIA 16: Using the work of an expert • SIA 17: Consideration of laws and regulations in an internal audit. • SIA 18: Related Parties



Types Of IA

• Operational Audits

• Financial Audits

• Information Systems Audits

• Compliance Audits

• Follow-up Audits



Internal audit, thus can be positioned as a risk management tool to support top and middle management in their pursuits





The Audit Process Model

Internal Audit

Knowledge

and Skills

Computers,

Software and

IIA Standards

Time and

Money

Reputation

for Integrity

and Fairness

Internal Audit

Practices and

Procedures

Analyses,

Appraisals,

Recommendations,

Counsel and

Information

Promote the

Effective use of

Internal Control

Supporting the

Organization in

the Discharge of

their

Responsibilities

INPUTS PROCESSES OUTPUTS OUTCOMES



Characteristics Of An Internal Auditor

Care

Professional

Internal

Auditor

Integrity

Objectivity

Independence Competence

Confidentiality

Skills



IA Planning

• Charter / Mandate

• Audit Plan

• Scope Determination

• Scope Review

• Resource Mobilisation

• Pre Preparation



Critical areas that need to be focused

during an IA can be categorized

under these three spheres

People Process Technology

• Organization roles

and relationship

• Change in job

descriptions

• New KPIs and

performance

measurement

systems

• Technology

savviness

• Training on new

software

• Roles in ERP

• Internal controls in

a fully automated

environment

• Standard operating

procedures

• Customer accounts

reconciliation

status

• Inter-office

transactions

• Employee related

transactions like PF,

ESI

• IT Strategy vs.

Business growth

• Data conversion

• Mapping business

processes to IT

• Marrying standard

operating

procedures to

Oracle

functionalities

• IT Organization

• IT Controls –

authorization

Dr. B. K. Vatsaraj


Process

• Treasury related

processes

• Bank

reconciliation

• Deposit of

customer

collection

• Inventory control

• Processes relating to

advances – control

account vs. subsidiary

ledgers

• MIS - Reporting

mechanisms, data

integrity etc

Process Process

• Control, valuation and

effective project

management relating

to Capital Work in

Progress

• Verification of capital

work in progress

• Assistance in Royalty

and Technical Know-

How Payments

• GOs – verification,

follow up and analysis

of consequential effect

on operational

transactions

• Taxation related

processes such as

• TDS

• Annual taxation

• Income

exemption

• Costing systems

Critical areas that need to be focused

during an IA can be categorized

under these three spheres

Dr. B. K. Vatsaraj


KEY TAKEWAYS….

Board, management, independent directors are expected to seek

increased comfort from Internal Audit on areas of :-

Compliance;

Fraud;

Internal financial controls;

Corporate social responsibility;

Related party transactions

to comply with their fiduciary responsibilities.

Dr. B. K. Vatsaraj


17

KEY TAKEWAYS…. CONT…

Many new companies, including mid-sized listed companies,

without structured IA set-up, are now required to comply with

Section 138

Internal auditors are now covered under class action suits

Potential use of IA documents as evidenced in class action suits

IA will be required to play an enhanced role in “Assurance

Coordination” - an activity to outline who provides assurance on

what aspects of the entire assurance universe

Dr. B. K. Vatsaraj


18

The final word…

Internal audit may be performed across organizations and units and will have to be customized to the requirements of the auditee, but the process can be standardized and can be used as your brand identity.



Whistleblower Responsibilities

It basically means a formulated complaint-making

process. It is also called the employee

“whistleblower” programs

The whistleblower process should be viewed as an

opportunity to strengthen the Board as an

independent counterbalance to management.

It is an opportunity to prevent or mitigate the effect

of misconduct and the resulting liability, as well as

to enhance the company’s reputation and boost

public in its business.

It is said amongst legal professionals that the

sooner one learns of the problem, the easier and

less costly it is to resolve it.

Dr. B. K. Vatsaraj


20

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APPLICABILITY OF INTERNAL AUDIT CONT…. - icsi.edu 2015/presentation 2015/PPT... · APPLICABILITY OF INTERNAL AUDIT CONT…. Companies Act - 2013 Particulars Listed Companies Unlisted