Key things to know about Internal Audit

As a leading name in Internal Audit Services, we at MBG Corporate Services bring you a primer on this important part of doing business. While an internal audit is mandatory by law for many companies in India, including all publicly listed companies, it is a critical part of running a successful business organization as both a compliance enabler and a key performance driver. At MBG Corporate Services, our team delivers top quality internal audit services for your business to perform to its peak potential.

The risk of uncertainty has always been a part of business but as the Covid-19 pandemic has shown us, never has it loomed larger than in these fast-changing times. Risk management and control are a key driver of business strategy today. That is where Internal Audit Control comes in.

What is an internal audit?

In a nutshell, what is an internal audit is an assessment of the effectiveness of the internal systems and processes of an organization in controlling and mitigating the various risks that the business faces. This meaning of internal audit is intuitively easy to understand. But what is an internal audit goes beyond that.

The meaning of internal audit in practice today is a wider one encompassing internal controls over risk mitigation, operational efficiency, and the successful meeting of strategic objectives. The meaning of internal audit, therefore, also includes adequate and effective controls over such operational variables as productivity and cost savings, or special projects such as process reengineering, IT infrastructure overhaul, or mergers and acquisitions.

Internal audit controls are comprehensively set and holistically take in their scope all key aspects of the business. Accordingly, the types of the internal audit include financial audit, operational audit, compliance audit, systems and information technology audit, and environmental audit.

From the governmental and regulatory standpoints in India, internal audit is governed by the Companies Act, 2013. The government requires it of companies to gauge their regulatory compliance as well as to ensure responsibility of key company personnel, reliable financial reporting and the health of businesses, a vital component of the economy.

To sum up what is an internal audit, it is an independent, objective assurance and consulting activity mandated for all listed companies and certain unlisted companies in India and designed to add value to an organization by improving its operations and helping it accomplish its objectives through adequate and effective internal controls.

Internal audit applicability in India

Internal audits are mandatory for all publicly listed companies in India. It is also mandated for certain other types of business as follows

Internal audit applicability for unlisted public companies

• Paid-up share capital of Rs 50 Crores or more during the preceding financial year
• Turnover of Rs 200 Crores or more during the preceding financial year
• Outstanding loans and borrowings from banks and public Financial Institutions exceeding Rs. 100 Crores at any point in time during the preceding financial year
• Outstanding deposits of Rs. 25 Crores or more at any point during the preceding financial year

Internal audit applicability for private companies

• Turnover of Rs 200 Crores or more during the preceding financial year
• Outstanding loans and borrowings from banks and public Financial Institutions exceeding Rs. 100 Crores at any point in time during the preceding financial year

Irrespective of mandate, the many benefits of internal audit recommend it to any organization as a key tool for business success.

Advantages of Internal Audit

There are many advantages of internal audit for an organization. Internal audits enable organizations to identify priority and/or concern areas for appropriate action and remedial measures. These include:

• Control weaknesses - Internal audit acts as a risk management system to identify potential failures in the implementation or effectiveness of internal controls that can lead to serious repercussions such as asset loss, fraud, and legal penalties.
• Corporate Governance weaknesses - Internal audit plays an important part in corporate governance by internally monitoring and tracking key governance elements such as management responsibilities, transparency, and accountability, ensuring compliance, and flagging concerns on issues that may be against stakeholder interests.
• Cost control opportunities - Evaluate internal controls set up for tracking, monitoring, and conserving expenses to identify opportunities for cost-cutting and better cost management as well as overall financial management, finance operations, and financial reporting.
• Procedural and legal non-compliance - Identify areas of non-compliance and/or reporting errors and ensure reliability and accuracy of financial and accounting statements, correct computation and payment of taxes, and so on.
• Operational inefficiencies - Identity and correct operational inefficiencies across non-financial functions such as marketing, IT or HR and thereby boost productivity, achieve cost savings, and drive higher toplines.
• IT and cybersecurity weaknesses - Identify and fix vulnerabilities in IT systems and networks, as well as monitor both hardware and their compliance with security policies.

These are only a few key benefits of internal audit, with many more that can be detailed under each header area. Overall, the combination of benefits across strategic, financial, operational, and regulatory benefits makes internal audit control and quality internal audit services must-haves for business organizations.

Types of Internal Audit

As mentioned above, internal audits run the gamut of organizational functions, systems, and processes. The following are the main types of internal audit:

• Financial audit - financial management system including accounting and financial reporting.
  • Fraud detection – uncovering fraud , especially financial fraud
• Operational audit - processes across functions such as production, HR, logistics, marketing, etc.
• Compliance audit- regulatory compliance, including documentation, and policies & procedures
• Environmental audit- Environment Social Governance (ESG), an important recent addition
• IT audit - organizational IT- and cyber systems in terms of safety, security, and compliance
• Performance audit - operational and managerial results in achieving business goals
• Special audit - one time audit of specific issue/s initiated by the management

Winning with MBG’s Internal Audit Services

As a leading name in the field, MBG Corporate Services ensures a successful high quality Internal Audit Services for your business organization.

Internal Audit Methodology

MBG’s proven five-step methodology is a comprehensive and thorough assessment-plus-remedial methodology across all your key business areas.

• Process Review: Review of the process - system, physical and documentation. Areas of review include
  • Finance & Accounts, Administrative expenses, Capital expenditure, Order to Cash, Procure to Pay
  • Production, Payroll and Human Resources, IT, Maintenance
  • Logistics and Distribution, Inventory and Warehouse Management
  • Legal and Sectorial compliances
• Transaction Analysis: Analytics of the reports being extracted at various stages of the process and identification of exceptions and aberrations
• Detailed Transactions Review: Review of documentation for exceptions identified at the previous stages as well as other critical transactions
• Route Cause Analysis: Detailed root cause analysis and recommendations for improvement of the control environment
• Reporting: Discussion and reporting to the management

Deliverables include detailed observation logs, root cause analysis report, executive summary, and recommendations (both Process and Transactional)

Internal Audit Talent, Experience, and Expertise

As a leading transnational consultancy and advisory firm with presence across four continents, we have the best top-of-class internal audit team with deep field expertise and wide experience across geographies and sectors. We draw from the best domain experts in each relevant vertical and subject area to ensure a high quality successful internal audit for our clients.

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