Internal Audit Applicability: Hidden Risks In 2025

CA Sansheer Sirajudheen — Tue, 22 Apr 2025 05:22:50 +0000

Internal audit applicability is often overlooked amid the whirlwind of today’s business landscape, where companies juggle financial management, regulatory compliance, stakeholder expectations, and risk mitigation. However, the reality is that neglecting the importance of internal audit applicability can lead to significant risks. At Long Green, we’re committed to shining a light on these hidden threats before they escalate into financial disasters.

This blog will explore why internal audit applicability is crucial, what it entails under the Companies Act 2013, and how businesses, both private and public, can safeguard themselves by prioritising internal audit services.

What is an Internal Audit?

An internal audit is an independent evaluation carried out within a company to examine its operations, finances, and compliance processes. Unlike a statutory audit, which is required by law and occurs annually, internal audits can be performed more regularly and are aimed at enhancing a company’s internal systems

It’s not just about crunching numbers; it’s about spotting weaknesses, boosting efficiency, and making informed decisions. The scope of internal audit extends far beyond just financial accuracy,it encompasses operational efficiency, risk assessment, and policy compliance.

Why Internal Audit Applicability Matters

Today, you might be asking, Does every company need internal audits?

The quick answer is no, but many do. Those that meet certain criteria are required to adhere to internal audit regulations as outlined in Section 138 of the Companies Act, 2013, and Rule 13 of the Companies (Accounts) Rules, 2014.

Overlooking these regulations can result in missed opportunities, compliance challenges, and even penalties. Moreover, it can compromise your adherence to internal auditing standards, which are vital for ensuring systematic, disciplined, and objective evaluations.

Who Needs to Conduct Internal Audits?

The Companies Act provides clear guidelines: Internal audits are mandatory for:

1. All listed companies,

2. Unlisted public companies that:

-Have a turnover of ₹200 crore or more

– Have a paid-up share capital of ₹50 crore or more

– Have outstanding loans of ₹100 crore or more from banks or financial institutions

– Have outstanding deposits of ₹25 crore or more

3. Private companies that:

– Have a turnover of ₹200 crore or more

– Have outstanding loans of ₹100 crore or more from banks or financial institutions

So, if your business checks any of these boxes, even if it’s just for a little while, you’re legally obligated to bring on internal auditing services.

The Hidden Risks of Skipping Internal Audits

1. Undetected Fraud and Errors

Internal audits are crucial for spotting fraud, misreporting, and human mistakes. Without them, these problems can linger unnoticed until it’s too late.

2. Penalties For Non-Compliance

Failing to meet the audit requirements set by the Companies Act can lead to fines of up to ₹2 lakh for the company and ₹50,000 for the individuals responsible.

3. Weak Risk Management

nternal audits play a key role in identifying and evaluating risks,whether they’re financial, operational, or compliance-related. Without them, you’re navigating without a map.

4. Loss of Investor Trust

Investors and stakeholders value transparency. Regular audits enhance your credibility and demonstrate that you take governance seriously.

Types of Internal Audits You Should Know

Depending on your industry and operations, you might need one or more types of internal audit services:

– Financial Audit – Ensures your financial records are accurate and complete.

– Compliance Audit – Confirms you’re adhering to relevant laws and regulations.

– Operational Audit – Evaluates the efficiency and effectiveness of your daily processes.

– Performance Audit – Reviews how well departments or teams are achieving their goals.

– IT/Technology Audit – Checks security, data privacy, and system integrity.

– Environmental Audit – Assesses your company’s environmental practices.

– Management Audit – Reviews management decisions and overall corporate strategy.

Each types of audits offers a unique perspective on your business, helping to uncover gaps and opportunities for improvement within the scope of the internal audit.

Who Can Be Appointed as an Internal Auditor?

According to the Companies Act, an internal auditor can be:

A Chartered Accountant (with or without a certificate of practice)
A Cost Accountant
Any other professional that the company’s board considers suitable
In some cases, even a qualified employee of the company

However, it’s important to note that a company’s statutory auditor cannot also serve as its internal auditor to maintain independence and objectivity.

The Appointment Process Simplified

If your company falls under the internal audit requirements, here’s a straightforward breakdown of the appointment process:

Identify Eligibility – First, check if your company meets the criteria mentioned above.
Board Approval – Schedule a board meeting to get the appointment approved.
Consent Letter – Obtain a written consent from the internal auditor.
File with ROC – Submit Form MGT-14 to the Registrar of Companies along with the board resolution.
Issue Appointment Letter – Send a formal letter to the auditor you’ve appointed.

How Long Green Can Help

At Long Green, we provide customized internal audit services, audit readiness and internal audit planning services to ensure you remain compliant, efficient, and secure.

Our team of expert consultants will:

– Assess whether your company needs to undergo internal audits

-Recommend the most suitable type and frequency of audits within the scope of the internal audit.

-Assist with documentation and audit assurance service, to ensure you follow best practices based on internal audit standards

Help you understand the benefits of internal audit and how it can create long-term value for your business

FAQ

1.Who's in charge of making sure internal audits are applicable in a company?

The responsibility falls on the company’s Board of Directors and senior management to assess and ensure that internal audits are applicable, following the guidelines set out in the Companies Act of 2013. Failing to meet these obligations can result in non-compliance and potential penalties.

2.What key internal audit standards should companies adhere to?

Companies should stick to internationally recognized internal audit standards, like those established by the Institute of Internal Auditors (IIA). These standards help maintain consistency, objectivity, and quality throughout the audit process and its reporting.

3. Can an employee of the company conduct the internal audit?

Absolutely! The Companies Act permits a qualified employee to serve as an internal auditor, as long as they remain independent from the operations being audited. However, to ensure objectivity and compliance with internal audit standards, many companies prefer to hire external professionals.

4. How does the scope of internal audit differ across various industries?

The scope of internal audit can differ quite a bit depending on the industry. For instance, a manufacturing company might concentrate on operational efficiency and inventory management, while an IT firm may focus more on data privacy, cybersecurity, and auditing tech systems.

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