Introduction

Internal audits have emerged as an essential tool for organizations that seek stakeholders to don effective corporate governance mechanisms, control risks, and improve internal operations. In corporate India, the need for internal audits has rapidly gained much importance due to mandatory compliance and complicated corporate scenarios. The following article explains the entities that need internal audits in India, what it provides and how expert services like Starters’ CFO can help businesses in the right implementation of this necessary process.

Understanding Internal Audit

An internal audit is a systematic, independent, and objective assurance/consulting activity that assists an organization in achieving its objectives. It provides a systematic assessment of an organisation’s internal controls, risk management as well as governance structures. For this reason, internal audits enable organisations to optimise specified areas so as to attain their strategic goals while reducing adverse risks such as legal non-compliance.

Internal audits therefore are reflected to be different from External audits based on their scope and objectives. External audits are largely concerned with assessing reports that are given to outside stakeholders while internal audits assess existent operations, financial and strategic elements of a business.

Legal framework for Internal Audits in India

India’s internal audit regulatory legal framework can be traced from the Companies Act 2013, though the Companies Act 1956 was in force before it was repealed. In line with Section 138 of the Act, certain categories of firms are required to reinstate an internal auditor, who could be an individual or a panel. Below are the categories of companies that fall under this mandate:

1. Listed Companies

Through the listing agreement, all Indian-flagged companies are expected to have an internal auditor on board. This blanket mandate guarantees that any organization that has the public interest is scrutinized regularly.

2. Unlisted Public Companies

Unlisted public companies meeting any of the following criteria during the preceding financial year are required to conduct internal audits:

·       Incorporation filed with paid-up share capital of not less than fifty crore rupees.

·       All organisations or companies who have reported turnover of ₹200 crore or more in income from the sale of goods.

·       Borrowings including loans considered on an outstanding basis in the balance sheet over ₹100 crore.

·       Prominent balances of more than ₹ 25 crores.

3. Private Companies

Private companies meeting the following thresholds are also required to appoint internal auditors:

· Having a net worth of not less than ₹ 500 lakhs paid-up capital or such higher amount as specified by the regulator, if applicable.
· Borrowings, loans other than deposits which is over ₹ 100 crore.

It is important to note that these provisions are designed to guarantee the appropriateness of internal control measures for large organizations with wide exposure to the public or money.

Beyond Compliance: Why Internal Audits Matter

Although being able to show regulatory compliance is one of the strongest arguments in favour of internal audits, the advantages are much wider than just that. Here are some intrinsic advantages:

1. Enhanced Risk Management

Internal audits because one of the critical components of risk management, encompassing the financial, operational or strategic risks. Together with determining risks within the company, internal audits contribute to producing actions that will prevent or offer a response to these risks.

2. Better operations

The internal audits involve a critical assessment of the process and documentation and the presentation of solutions to overcome noted weaknesses. This encourages cost-effective functioning in an organization and also cultivates a culture of incrementality.

3. Legal Compliance Markup

They also help in checking that the organizations are operating in compliance with the laws, codes regulations policies and standards of that organization. This is especially so in industries that are highly controlled, that is, the finance, health and manufacturing industries.

4. Fraud Detection and Prevention

Internal audits also serve as a way of discouraging fraud by offering a well-developed system of controls. They contribute to the identification of irregularities and initiate actions to avoid their occurrence again.

5. Strategic Decision Support

In their recommendations, internal audits are very useful in identifying how the business is doing and the various difficulties that may be experienced within the business environment. It is useful in supporting strategic programmes throughout the organization to help senior management in decision-making.

Who Will Stand To Benefit From Internal Audits?

Apart from the entities mandated by the Companies Act, several other organizations can derive substantial value from internal audits:

1. Small and Medium-sized Enterprises (SME)

SME while expanding experience more operational issues along with the legal compliance concerns. Internal audits are essential for SMEs in need of organizational development, management control, risk management, and forecasting potential growth. For instance, supply chain management is a vital area where internal audit can assist a manufacturing SME increase efficiencies while at the same time, ensuring penalties of a green supply chain.

2. Startups

In its broad sense, internal audits are highly useful for startups, particularly companies that are looking for investors. A proper internal audit entails the right measures of control hence proper governance and assists in developing investors’ confidence through conveying the aspect of accountability and financial discipline.

3. Non-Governmental Organizations (NGOs).

Most NGOs should oversee large amounts of public or donor funds; there is the need to be answerable for the same. Internal audits assist NGOs in effectively ascertaining the management of funds and provide proper stewardship to demonstrate the operations of the organizations are in line with their stated mission and vision.

4. Family-Owned Businesses

Companies that are moving from a family management structure to a professional management, can benefit from internal audits as a means of setting norms in an effort to ensure continuity of operation as well as dealing with conflicts of interest.

Starters’ CFO role in internal audits

Starters’ CFO is a company that offers outsourced financial management services for startups, SMEs and all types of organizations. Another point that speaks in favour of representatives of this profession is the fact that their multi-level strategies for internal audits guarantee companies not only compliance with existing standards but also business values. Here’s how they excel:

1. Dedicated Expertise

Starters’ CFO utilizes specialized teams of financial experts working directly on clients’ situations in order to respond to their specific needs. With prior experience in diverse sectors, they can easily grasp special risks inherent to this or that industry.

2. Streamlined Processes

The accountant of a Starters’ CFO uses Standard Operating Procedures (SOPs) and checklists as they adopt tried and tested accounting and audit SOPs and checklists.

3. Quality assurance

Under the standard practice of accuracy enhancement, Starters’ CFO is under a three-tier quality assurance technique. The following approach is very rigorous in its execution and guarantees that no aspect is missed.

4. Systematic Reporting

They are also daily updated via MIS, dashboards, and work trackers. All of these tools give tangible recommendations so that clients can make the right decisions.

5. Technology Integration

With the assistance of modern tools, it becomes possible to accumulate and analyze the information in the field of CFO at Starters’ CFO. This helps to minimize manual mistakes and at the same time enhances the speed with which audits can be conducted.

Conclusion

Formal internal audits have evolved from the routine annual assessment of compliance to a valuable strategic corporate weapon. In India, auditing requirements under the Companies Act require organizations that hold large proportions of public or financial risk to have strong internal controls intact. However, internal audits are crucial for not only large organisations but also SMEs, start-ups, NGOs, and Family-run businesses and this is where Starters’ CFO play its vital role.