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Principles and Practices of
Auditing
Unit 3 – Internal Audit
Topics covered under this chapter
• Meaning
• Importance
• Advantages
• Limitations
• Differences between Internal Audit and Statutory Audit
Meaning of Internal Audit
• “Internal Auditing consists of continuous, critical review of financial and
operating activities by a staff of auditors functioning as full time salaried
employees”.
• It is an independent appraisal function established within an organization to
examine and evaluate its activities as a service to the organization.
• It is a type of control which functions by measuring and evaluating the
effectiveness of other type of control.
• It deals primarily with accounting and financial matters, it may also properly
deal with matters of an operating nature.
Importance of Internal Audit
• It is important as it will help to maintain Reliability and Integrity of
Information
• It is critical as it will ensure smooth Compliance with policies, plans,
procedures, laws and regulations
• It is very useful in Safeguarding of company assets
• It is a method of Economical and efficient use of resources
• It will support the company in Accomplishment of established objectives
and goals for operations
Advantages of Internal Audit
• It will lead to discovery of errors or frauds which can be rectified before the
external final audit is conducted.
• It removes the need to employ external consultants to act as internal
auditors hence saving large sum of money.
• The internal auditors are intimately acquainted with the business and its
processes as they are continuously employed in the same company.
• It maintains a group of highly skilled people available to cope with non
recurring and exceptional jobs unlike other less skilled staff.
• It ensures that the company’s standard policy and procedures are running
smoothly.
• Internal auditors are very useful in areas like operational audits, internal
check controls and other forms of detailed auditing methods.
Limitations of Internal Audit
• Internal auditor’s report is not accepted by the shareholders or
tax authorities. They require the external auditor’s report.
• Since internal audit is done by the employees of the company
chances are that it may be biased and therefore company
cannot depend on such reports.
• As an internal audit is not done by the professional auditor,
chances of internal auditor not detecting the errors are high.
Differences - Internal Audit & Statutory Audit
InternalAudit
Appointment – Internal Auditor
is appointed by the
Management.
Qualifications – Need not
possess any specific expertise.
Status – Is an employee of the
company.
Conduct of Audit – Is a kind of
continuous audit.
Scope of Work – Determined by
the management.
StatutoryAudit
Appointment – Statutory
Auditor is appointed by the
Shareholders.
Qualifications – Must be
qualified as per Sec 226 of the
Companies Act 2013.
Status – Is an independent
person.
Conduct of Audit – After
preparation of final accounts.
Scope of Work – Determined
by Law.
Differences - Internal Audit & Statutory Audit
InternalAudit
Objective – To find out error or
frauds.
Determination of duty – Can be
reduced by management.
Report – No report required.
Prosecution – Cannot be
prosecuted for professional
misconduct under the CA Act
unless is a CA.
Remuneration – Fixed by the
Management.
Attendance at Meetings – No
right to attend meetings.
StatutoryAudit
Objective – To check the
conformity and fairness of
accounts.
Determination of duty – Not
possible, cannot be reduced.
Report – Mandatory report to be
submitted.
Prosecution – Can be prosecuted
under the CA Act.
Remuneration – Fixed by the
Shareholders.
Attendance at Meetings – Right to
attend meetings.

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Unit 3 Internal Audit

  • 1. Principles and Practices of Auditing Unit 3 – Internal Audit
  • 2. Topics covered under this chapter • Meaning • Importance • Advantages • Limitations • Differences between Internal Audit and Statutory Audit
  • 3. Meaning of Internal Audit • “Internal Auditing consists of continuous, critical review of financial and operating activities by a staff of auditors functioning as full time salaried employees”. • It is an independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization. • It is a type of control which functions by measuring and evaluating the effectiveness of other type of control. • It deals primarily with accounting and financial matters, it may also properly deal with matters of an operating nature.
  • 4. Importance of Internal Audit • It is important as it will help to maintain Reliability and Integrity of Information • It is critical as it will ensure smooth Compliance with policies, plans, procedures, laws and regulations • It is very useful in Safeguarding of company assets • It is a method of Economical and efficient use of resources • It will support the company in Accomplishment of established objectives and goals for operations
  • 5. Advantages of Internal Audit • It will lead to discovery of errors or frauds which can be rectified before the external final audit is conducted. • It removes the need to employ external consultants to act as internal auditors hence saving large sum of money. • The internal auditors are intimately acquainted with the business and its processes as they are continuously employed in the same company. • It maintains a group of highly skilled people available to cope with non recurring and exceptional jobs unlike other less skilled staff. • It ensures that the company’s standard policy and procedures are running smoothly. • Internal auditors are very useful in areas like operational audits, internal check controls and other forms of detailed auditing methods.
  • 6. Limitations of Internal Audit • Internal auditor’s report is not accepted by the shareholders or tax authorities. They require the external auditor’s report. • Since internal audit is done by the employees of the company chances are that it may be biased and therefore company cannot depend on such reports. • As an internal audit is not done by the professional auditor, chances of internal auditor not detecting the errors are high.
  • 7. Differences - Internal Audit & Statutory Audit InternalAudit Appointment – Internal Auditor is appointed by the Management. Qualifications – Need not possess any specific expertise. Status – Is an employee of the company. Conduct of Audit – Is a kind of continuous audit. Scope of Work – Determined by the management. StatutoryAudit Appointment – Statutory Auditor is appointed by the Shareholders. Qualifications – Must be qualified as per Sec 226 of the Companies Act 2013. Status – Is an independent person. Conduct of Audit – After preparation of final accounts. Scope of Work – Determined by Law.
  • 8. Differences - Internal Audit & Statutory Audit InternalAudit Objective – To find out error or frauds. Determination of duty – Can be reduced by management. Report – No report required. Prosecution – Cannot be prosecuted for professional misconduct under the CA Act unless is a CA. Remuneration – Fixed by the Management. Attendance at Meetings – No right to attend meetings. StatutoryAudit Objective – To check the conformity and fairness of accounts. Determination of duty – Not possible, cannot be reduced. Report – Mandatory report to be submitted. Prosecution – Can be prosecuted under the CA Act. Remuneration – Fixed by the Shareholders. Attendance at Meetings – Right to attend meetings.