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Internal audit refers to an independent service to evaluate an organisation’s internal controls, its corporate practices, processes, and methods. An internal audit helps in securing compliance with the various laws applicable to an organisation. An organisation can prepare its accounts and records as per the applicable legal requirements and reporting.
Understanding Internal Audit
The purpose of an internal audit is to check the effectiveness and operational standards framed by an organisation. An organisation may have a set of rules for operations, such as placing orders, accepting deliveries, and making payments. An internal audit also helps in knowing whether the employees follow the internal operational standards.
An internal audit helps in identifying problems or inefficiencies and taking necessary corrective steps. Internal audits can identify any frauds by employees, such as embezzlement of funds. The audit can also identify whether there are deliberate cost overruns, whether a particular vendor is getting preference over other low-cost suppliers.
There may be a need to identify employee rotation between different roles and functions. An internal audit can check any potential threats or financial losses. An organisation can plug in financial leakage. The process enables the identification and correction of a lapse in procedures before the statutory audit.
An internal audit can be on an annual basis or monthly or quarterly. The choice depends on the need of the organisation. In certain cases, a company should mandatorily appoint an internal auditor, such as under the Companies Act, 2013. There are different types of assessment or analysis techniques an internal auditor may adopt for performing an internal audit.