The document outlines the requirements, objectives, and general areas of focus for internal audits according to Indian law and auditing standards. It notes that Section 138 of the Companies Act 2013 mandates internal audits for certain large or publicly traded companies. The objectives of internal controls are to ensure reliable information, prevent errors and fraud, and ensure compliance with policies and procedures. General areas that internal audits examine include cash/bank transactions, purchases, sales, creditors, debtors, stocks, indirect expenditures, and statutory compliance. The effectiveness of controls depends on factors like organizational structure and management supervision.

1. -Brahmayya & Co, Visakhapatnam

2. Introduction:
1. Control is basic human requirement.
2. Without control human behavior tends to deviate.
3. Management decision making is based on financial statements.
4. Internal Audit reviews environment under which operations are carried
out.
5. Internal audit reviews both Accounting & other control like cost,
production.
-Brahmayya & Co.Vishakapatnam

3. Section 138 of the Companies Act 2013 mandates Internal Audit for certain
class of companies.
1. Every listed company.
2. Every unlisted public company having
Paid up capital 50 cr or more
Turnover 200 cr or more
O / s loans or borrowings from Banks or PFC 100 cr or more
O / s deposits of 200 cr or more
3. Every private company having
Turnover 200 cr or more ; or O/s loans or borrowings 100 cr.
-Brahmayya & Co.Vishakapatnam
Applicability

4. -Brahmayya & Co, Visakhapatnam
Internal Audit Standards
• Issued by AASB under the authority of ICAI.
• Separate authority called as Internal Audit Standard Board.
• A total of 20 internal audit standards have been issued.
• Apart from these Technical guidance on conduct of internal audit of specific
industry are issued under the authority of IASB.

5. Objective Of Controls
1. To ensure that information generated is reliable.
2. Prevent frauds & errors.
3. Policies, procedures & plans are properly implemented.
4. Transactions are executed in line with management general or specific
authorization.
-Brahmayya & Co ,Visakhapatnam
Effectiveness of controls depends upon environment under which
controls are operated.

6. Factors Effecting Control Environment
1. Organization Structure.
2. Management supervision.
3. Personnel.
Control Environment means overall attitude & awareness of mgmt
regarding control system.
SA-315 requires auditor to obtain understanding of control
environment.
-Brahmayya & Co.Vishakapatnam

7. General Areas of Internal Audit
1. Cash & Bank Transactions
2. Purchases
3. Sales
4. Creditors Review
5. Debtors Review
6. Stocks
7. Indirect Expenditure
8. Other income
9. Statutory compliances
10. Costing
-Brahmayya & Co.Vishakapatnam

8. Cash & Bank Transactions
1. Vouchers are pre numbered.
2. Payments are properly authorized.
3. Alterations in payment records are to be enquired into.
4. Acknowledgement for payment to be obtained for cash transactions.
5. Compliance with Indian Stamps Act, Income Tax Act 1961.
6. Physically cash verification( including petty cash) & verify BRS at periodic
intervals.
7. Write back of stale cheques.
8. Verify ‘I Owe You’ with relevant expense bills or advance accounts.
-Brahmayya & Co.Vishakapatnam

9. 9. Pay special attention to huge cash balances.
10. Whether adequate insurance is taken against cash balances.
11. Whether organization has practice of deposit cash above prescribed level into
bank on daily basis.
-Brahmayya & Co, Visakhapatnam

10. Purchases
1. Purpose for purchase should be backed up by purchase requisition from
stores dept with requisite details.
2. The budget for the proposed purchase should be within the annual budget
granted.
3. Whether a list of approved suppliers is maintained.
4. Are quotations called from requisite no of suppliers.
5. Is comparative quotation analysis sheet drawn.
6. If lowest quotation is not accepted, special approval obtained ?
-Brahmayya & Co.Vishakapatnam

11. 7. Are receipt of goods supported by GRN & are inspected, counted etc.
8. Whether all eligible goods are considered for Cenvat credit purpose.
9. Periodic reconciliation of Excise, Vat records with books of account.
10. Are debit notes issued checked for prices.
11. Are all pending purchase orders compiled after reasonable period.
12. Suppliers invoice, GRN , Purchase orders are forwarded to accounts dept for
payment.
-Brahmayya & Co, Visakhapatnam

12. Creditors Review
 Whether schedule of creditors with general ledger balance.
 Whether advance payments made to creditors are made under proper
authorization.
 Verify schedule of creditors with general ledger balances.
 Regularly carrying out ageing analysis.
-Brahmayya & Co, Visakhapatnam

13. Sales:
1. Are written orders received before order is booked ?
2. Numerical controls over sale orders, sales invoices.
3. Are any Credit limits fixed in respect of customers.
4. Are these limits checked before accepting new orders.
5. Are prices checked with price list or agreements, discounts are as per
agreement
-Brahmayya & Co.Vishakapatnam

14. 6. Sales tax is charged correctly.
7. Dispatch of goods are authorized by Gate passes.
8. Sale invoices, gate pass are forwarded to accounts dept.
9. Sales / Gross receipts are periodically reconciled with RG – 1 register, Excise
returns or service tax returns as the case may be.
10. Credit notes issued are checked for prices.
-Brahmayya & Co, Visakhapatnam

15. Stocks
 Periodic physical verification is performed.
 Treatment of slow moving, non moving stocks.
 Whether Bin cards are updated & matching with store records.
 Reconciliation of quantities of stock.(opening stock + purchases/ production
– sales).
 Consumption records.
 Reconciliation with stock statements submitted to banks.
-Brahmayya & Co, Visakhapatnam

16. Debtors Review
 Basis for fixation of credit limit. System of review of limits at reasonable
intervals.
 Preparation & review of ageing analysis.
 Adjustments to debtors on account of bad debts, rebates to be reviewed etc.
 Old bills are pending but new bills are fully settled, repeated dishonor of
cheques.
 Collections barred by limitations. Receipt of post dated cheques.
 Verify secondary schedule with general ledger balance.
 Analytical review procedures i.e. reconciliation with sales.
-Brahmayya & Co, Visakhapatnam

17. Indirect Expenditure
 Generally in form of Administrative nature.
 The concept of propriety audit may relevant to a limited extent(For PSU’s).
 Generally salaries, rates & taxes, advertisement, business promotion, interest
on loans or advances.
 Expenditure of this nature are generally subjected to TDS.
 Verify expenditure with relevant supporting evidence as under:
Rent Paid – Rental agreement
Commission - Sales report
Interest - Bank statements/ loan repayment schedule/ agreements.
 These form of expenditure are recognized on Accrual basis.
-Brahmayya & Co, Visakhapatnam

18. Other Income
 Generally in the form of Interest Income, Dividends, Rent, Gain on sale on
assets, Scrap sales.
 Is Recognized on accrual basis.
 Board resolution for sale on investment.
 Verify Loan agreements, bank statements for accounting of interest.
 Internal controls on Miscellaneous income should be effective because
chances of fraud are very high.
-Brahmayya & Co, Visakhapatnam

19. Statutory Compliances
1. Fiscal Laws
 Income Tax Act 1961
 Finance Act 1994
 Central Excise Act 1944
 Customs Act 1962
 EPF,ESI Acts
 VAT, CST Acts
 AP Trades, Professional & Employees Act
2. Labour Laws
 Payment of Wages Act
 Bonus Act
-Brahmayya & Co.Vishakapatnam

20. 3. Economic Laws
 SEBI
 FEMA
4. Industry Specific Laws
 Banking – Banking Regulation Act
 Electricity - ERC Act
 Insurance - IRDA Act,
 Manufacturing – Factories Act
5. Nature of Organization
 Partnership Act or LLP Act
 Companies Act

21. Costing
1. Method of costing in use.
Pharma Sector – Batch costing
Automobile sector - Job costing
2. Verification of Production log books or job cards.
3. Method of recording wages, salaries, overtime.
4. Method of stock taking & its valuation – FIFO, Weighted average etc.
5. Basis of allocation of overheads to cost center.
6. Treatment of interest, R & D, Royalty expenses.
7. Valuation of Inter branch transfer.
-Brahmayya & Co.Vishakapatnam

22. Misc Areas
 Sub contracts works with work orders , bills etc.
 HR operations – Payroll processing.
 Discharge of Statutory liabilities like Gratuity etc. computations.
 Inter unit reconciliations.
 Reconciliations between statutory records & books of account.
 Interest calculations on CC accounts.
-Brahmayya & Co, Vishakapatnam

23. Disadvantages
 Internal auditor is appointed by management. Scope of audit is decided
mutually by the auditor & auditee.
 Provides assurance of control only at a point of time.
 Inherent limitations of audit.
Collusion among employees.
Change in conditions of operation.
-Brahmayya & Co, Visakhapatnam

24. -Brahmayya & Co.Vishakapatnam