Indian organizations are at par with global standards in compliance management, with 78% of companies doing enterprise-wide compliance risk assessments, according to this Deloitte survey. Internal and statutory audits are pivotal in ensuring that you are fully compliant, transparent, and credible from the point of view of your stakeholders.
Although statutory audit is mandatory for all public and private limited companies, internal audit is dependent on conditions such as public listing, turnover, paid-up share capital, outstanding loans, and deposits. Regardless of whether your business needs an internal audit according to the Companies Act, it is good practice to have a detailed assessment of your financial statements, and internal controls regularly.
Internal Audit vs. External Audit
Though the primary function of both audits is to check the credibility of your financial statements and level of compliance, there are some essential differences between internal and external audits.
- Internal audit is meant for internal consumption by the management and leaders to understand the financial health and compliance of the business. Whereas an external audit is meant for the shareholders and the government to make sure that your financial statements and records are accurate.
- Internal audit can be carried out by an employee in the finance or legal department, who might or might not be a Chartered Accountant. External audit is conducted by individuals outside the organization, who are practicing Chartered Accountants, or Audit firms.
- Internal audits can be conducted at any frequency as decided by the management. External audits have to be conducted annually as prescribed by the government.
- Internal audit reports are presented to the management for corrective action. External audit reports need to be published to the stakeholders of the company, and to the government.
- Internal auditors focus on operational efficiency, risk management, and internal processes inside the organization. Statutory auditors focus on checking the accuracy of financial statements filed by the business.
Internal Auditors – What they do and why?
An Internal Auditor is from within the organization, somebody proficient in the areas of finance, legal, and compliance. In order to make the audit quicker and more efficient, it is essential that the internal auditor has experience in conducting audits, and sufficient number of years spent within the organization to understand your specific, unique needs.
The primary task in an internal audit is to ensure that all books of finance are in order, licenses required by the government are procured or renewed on time, any discrepancies are brought to the attention of management, and internal processes are in alignment with the business goals. Internal auditors report to management, help identify areas for improvement, and provide recommendations for better operational efficiency.
Key Functions of Internal Auditors
Internal Auditors will assess different aspects of an organization’s financial health, as well as compliance. Some of the key functions performed by them include:
Internal financial audit helps determine the accuracy, timeliness, and authenticity of financial statements like balance sheet, profit and loss statements, monthly MIS, accounts receivables and payables, and so on. The findings are recorded meticulously, monitored, and rectified since this audit is also done in preparation for the annual statutory audit.
Legal and compliance audit
The internal auditor looks at all the regulatory and legal compliances, licenses, and certifications required by the organization to ensure that they are procured or renewed on time. Failure to comply with government regulations can result in penalties or even legal issues. Finavi CFO has crafted the perfect compliance management tool, COMPLY to help ensure that your organization is fully compliant.
All organizations face economic, political, and environmental uncertainties, for which they should be prepared all the time. Internal auditors run risk assessment audits to identify potential risks that could affect the organization and implement mitigation measures. This can help you stay agile and poised to adapt to market conditions that can affect your organization negatively.
Internal Controls Audit
Internal Controls ensure that your organization follows systematic, regulated, and monitored processes for better operations and financial efficiency. Internal auditors review these operational procedures to ensure that they are adequate and capable of driving your business towards profitability.
Maintaining records and monitoring
Internal auditors are responsible for presenting audit reports to the management, and also for highlighting shortcomings and discrepancies noticed during the audit. These have to be recorded, monitored, and corrected. Each internal audit must start by reviewing the previous audit report to ensure that corrective actions are implemented effectively.
Statutory Auditors -What they do and why?
A Statutory Auditor is an external party appointed during the Annual General Meeting (AGM), by the company’s shareholders to assess the company’s financial statements independently. The primary purpose of a statutory audit is to check the accuracy and fairness of the company’s financial statements.
The very term ‘Statutory’ means that it is required by the government. Subject to certain conditions, all businesses have to do a statutory audit annually, and submit the records to the government.
Key Functions of External Auditors
Similar to Internal Auditors, Statutory auditors also examine the financial statements of the company like Balance sheet, Income statement, Cash flow statement, Accounts receivables, and Accounts payables. These statements are checked for their accuracy and compliance with accounting standards.
Here are some of the key functions performed by external auditors:
- The external or statutory auditor has to inspect all books of accounts, debts, loans, and investments.
- The auditor has the right to request for more information from the directors or management in order to form an accurate understanding of the company’s operations.
- The auditor will investigate the loans granted by the company, to ensure that they are secure and non-prejudicial.
- Statutory Auditor will monitor bank statements and cash flow statements to understand the liquidity and financial health of the company.
Independence and Objectivity
The Statutory auditor, being an external member has the right to give an unbiased opinion on the financial statements to the management and stakeholders. Statutory audit report gives the shareholders the assurance that the company’s books are in order, and that the data is trustworthy. It presents a true and credible view of the company’s financial position.
Audit Report Findings
Once the audit is complete, a detailed report is created expressing the opinion of the auditor, and also highlighting any discrepancies noticed. Once these are presented to the shareholders, the onus is on the company to take corrective action immediately.
Audit reports are filed with ROC for the records.
Why both Internal and Statutory Audits are essential?
Internal Auditors and Statutory Auditors play an important role in ensuring credibility, transparency, and compliance of businesses. Internal audits are essential for management to understand if they are complying with all industry and government regulations. Without internal audits, the annual statutory audit becomes a nightmare for the founder when an independent body will examine the financial records more closely.
Since internal audits give you confidence about your company’s performance, most founders appoint a Chief Compliance Officer or a senior employee from the Finance Department to be in charge of internal audits. If you are still struggling with completing your internal audits on time, reach out to Finavi CFO today. We have extensive experience in doing internal and statutory audit for emerging businesses, and hence understand the challenges faced by founders running start-ups and emerging companies.