[Opinion] Consequences of Negligence | Company and its Directors Face a Penalty of Rs 3 Lakh for not Appointing an Internal Auditor – A Case Study

[2023] 155 taxmann.com 153 (Article)

1. Internal Audit

As per the definition given by the Institute of Internal Auditors, USA, internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. Internal audit is performed by professionals with an in-depth understanding of the business culture, systems, and processes, the internal audit activity provides assurance that internal controls in place are adequate to mitigate the risks, governance processes are effective and efficient, and organizational goals and objectives are met.

2. Purpose of internal audit

The internal audit is done by checking whether the company has complied with all the applicable laws and thereafter, a report is prepared by the Internal Auditor stating the compliances and material deviations if any. The internal auditor has to ensure that he should keep in mind the requirements with respect to internal audit as per the Companies Act, 2013.

The Companies Act 2013 does not prescribe any format or procedure in the Act to conduct an internal audit or to prepare a report thereof. Therefore, the companies have the privilege to conduct the internal audit as per their size and requirements. However, the report so prepared is required to mention the compliances and the deviations found if any and the method to rectify the errors so found. The process should be given due weightage as it analyses the state of affairs of the Company and should be conducted fairly and transparently with reference to the risk and internal checks and internal control mechanism.

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