Internal audit reviews your business processes, controls and financial records to identify gaps and reduce risk. As operations grow, regularly assessing how these systems function becomes essential.
In India, internal audit applicability is governed by the Companies Act, 2013, based on turnover, borrowings or listing status. Even where it is not mandatory, many businesses use internal audits to identify weaknesses, minimise risks and improve efficiency.
What is an internal audit?
An internal audit is an independent review of your business’s internal systems, controls and operations. It focuses on verifying whether processes are being followed correctly and whether controls are effective.
Unlike external audits conducted for regulators or stakeholders, internal audits are meant for internal use. The findings remain within the organisation and are used to correct gaps, improve systems and reduce risks.
In practical terms, it helps identify control weaknesses, process inefficiencies and areas that require corrective action.
Applicability of internal audit in India
Understanding whether an internal audit applies to your business is the first step before setting it up.
Legal framework Companies Act, 2013
Internal audit applicability is defined under Section 138 of the Companies Act, 2013, read with Rule 13 of the Companies (Accounts) Rules, 2014. These provisions require specific classes of companies to appoint an internal auditor. The Board of Directors is responsible for this appointment.
Companies in which an internal audit is compulsory
The requirement depends on the type of company and prescribed financial thresholds. The following companies are required to conduct internal audits:
Listed companies:
These companies must appoint an internal auditor, regardless of size or turnover.
Unlisted public companies:
These companies must comply if they meet any of the following conditions:
- Turnover of ₹200 crore or more
- Paid-up share capital of ₹50 crore or more
- Outstanding loans or borrowings of ₹100 crore or more at any time during the financial year
- Outstanding deposits of ₹25 crore or more
Private companies:
These companies must conduct an internal audit if:
- Turnover exceeds ₹200 crore, or
- Outstanding loans or borrowings exceed ₹100 crore at any time during the financial year
For smaller businesses, an internal audit is not mandatory. However, many micro, small and medium enterprises (MSMEs) adopt it voluntarily to strengthen controls and reduce risk.
Role and scope of internal audit
The scope of an internal audit is not fixed. It is determined by the Board or the audit committee based on the nature and complexity of the business.
Typically, internal audits focus on the following areas:
- Financial review: Checks whether accounting records are accurate, complete and properly maintained.
- Process evaluation: Examines workflows to identify delays, duplication or inefficiencies in operations.
- Compliance check: Ensures that the business follows Goods and Services Tax (GST) laws, company regulations and internal policies.
- Risk identification: Highlights areas where the business may face financial loss, fraud or operational disruption.
- Control assessment: Reviews whether approval systems and internal checks are functioning effectively to prevent errors.
Types of internal audits
Internal audits can be designed based on the area being reviewed. Each type focuses on a specific aspect of the business.
- Operational audit: Reviews day-to-day processes to assess whether resources are used efficiently and tasks are completed without delays.
- Compliance audit: Ensures that the business follows applicable laws, regulations and internal policies.
- Internal financial review: Reviews financial statements and transactions to ensure accuracy and proper reporting.
- IT audit: Assesses system security, data protection and access controls to reduce the risk of cyberattacks.
- Forensic audit: Detects fraud, suspicious transactions or financial irregularities.
- Performance audit: Evaluates how effectively the business achieves its objectives using available resources.
Benefits of an internal audit to your business
Internal audits are not limited to compliance. They also help improve how your business operates.
- Improves efficiency: Internal audits identify process gaps and remove unnecessary steps, helping operations run more smoothly.
- Strengthens risk management: They identify potential risks early, allowing you to take corrective action before they escalate.
- Supports compliance: Regular audits help ensure the business follows legal and regulatory requirements.
- Enhances financial accuracy: They help detect accounting errors and improve the reliability of financial records.
- Prevents fraud: Internal audits review controls in areas such as payments and procurement to reduce the risk of fraud.
- Builds trust: Effective audit systems help build trust among banks, investors and business partners.
How to implement internal audit in your business
Follow a structured approach to implement an internal audit effectively:
- Assess applicability: Check whether your business meets the legal thresholds for a mandatory internal audit.
- Appoint an auditor: Choose a qualified professional such as a chartered accountant, cost accountant or another suitable professional, as decided by the Board. This may include an internal employee or an external expert.
- Define scope: Decide which areas will be audited and how frequently audits will take place.
- Conduct the audit: Review records, analyse processes and test internal controls across departments.
- Prepare reports: Document findings clearly and highlight areas that require improvement.
- Follow up: Ensure corrective actions are implemented and track improvements over time.
Key roles in internal audit
Internal audit involves different roles within the organisation, each with a specific responsibility.
- Internal auditor: Conducts the audit, reviews systems objectively and identifies gaps or risks.
- Audit committee or board: Approves audit plans, reviews reports and ensures accountability.
- Management: Provides data, supports the audit process and implements recommended changes.
Tips for effective internal audits
A structured approach helps ensure internal audits deliver meaningful outcomes.
- Plan in advance: Define objectives and scope clearly before starting the audit.
- Maintain proper records: Ensure financial and operational data is organised and easily accessible.
- Ensure independence: Assign audits to individuals who are not directly involved in the process being reviewed.
- Use reliable data: Base audit findings on accurate and complete information.
- Involve the team: Help employees understand the purpose of audits, so they cooperate effectively.
Final Remarks
Internal audit helps ensure your business runs with fewer gaps, errors and unmanaged risks. Before setting it up, assess whether it applies to your business and identify the areas that need regular review.
Focus on high-risk functions such as financial records, GST compliance and operational processes to make the audit meaningful. Consistent reviews help detect issues early and keep processes aligned with regulatory requirements.
Maintaining accurate and up-to-date records reduces last-minute corrections and makes audits easier to manage. With TallyPrime, you can keep your books organised, track transactions and access the reports required during an audit.
Review your current processes, identify gaps and take steps to strengthen internal controls where needed.
