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Role of Internal Audit in Corporate Governance Bimal R Bhatt 9825408120.

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Presentation on theme: "Role of Internal Audit in Corporate Governance Bimal R Bhatt 9825408120."— Presentation transcript:

1 Role of Internal Audit in Corporate Governance Bimal R Bhatt

2 Where Do I Stand? Self-Governance Ethics, Values, Principles, Transparency Self-Control Self-Monitoring Self-Discipline Self-Knowledge Self-Image Self-Confidence Self-Love 2Bimal R. Bhatt

3 Interaction of a Corporation/ Company with Civil Society for Accountability To investors and lenders: areas of accounting, auditing, laws, stock market and thereby, Governance. To the direct participants in the corporate value creation process : customers, employees, vendors, consumer protection, labour laws, commercial contracts, etc. as a principal focus of corporate management For the effect of operations on the physical environment 3Bimal R. Bhatt

4 For the human condition around their operations: related to health, education, employment, cultural need of the community. For the political health of the societies in which they operate: human rights, fair democratic practices, etc. 4Bimal R. Bhatt

5 Internal Control Internal control is broadly defined as a process, affected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: --Effectiveness and efficiency of operations. --Reliability of financial reporting. --Compliance with applicable laws and regulations. 5Bimal R. Bhatt

6 Internal Audit According to The Institute of Internal Auditors, “Internal Audit is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance process”. This definition has dealt with following aspects: – Independence and objectivity – Assurance and consulting activity 6Bimal R. Bhatt

7 – Value addition for improvement in efficiency – Systematic and disciplined approach – Improves the effectiveness of risk assessment, management, control and governance process. Thus, internal audit is a most important activity in support to the Board of Directors and Top management for having a sound governance practices for the interest of stakeholders. 7Bimal R. Bhatt

8 Corporate Governance Sir Adrian Cadbury Committee-- “In a simple way, corporate governance is the system by which companies are directed and controlled.” Deepak Parekh-- “Corporate governance is about the spirit in which you do business and about credibility and accountability as shareholders want to be assured of a board’s independence and its willingness to act in their best interests.” 8Bimal R. Bhatt

9 Governance-Part of Integrated Reporting The ethical standards of a company are an important aspect that a stakeholder is concerned about when investing. Transparent reporting on the governance process helps reassure stakeholders and builds trust. 9Bimal R. Bhatt

10 Tata Steel The scope and authority of the Corporate Audit division is derived from the Audit Charter approved by the Audit Committee. The Charter is designed in a manner that the Audit Plan is focused on the following objectives: All operational and related activities are performed efficiently and effectively. Significant financial, managerial and operating information that is relevant, accurate and reliable, is provided on time. Review the process of identification & management of business risks. 10Bimal R. Bhatt

11 Resources are acquired economically, used efficiently & safeguarded adequately. Employees’ actions are in accordance with the Company’s polices & procedures, Tata code of conduct and applicable laws & regulations. Significant legislative & regulatory provisions impacting the organization are recognized & addressed appropriately. Opportunities identified during audits, for improving management control, business targets,& profitability, process efficiency & the organizations image, are communicated to the appropriate level of management. 11Bimal R. Bhatt

12 Shareholders’ and other Stakeholders’ wealth and welfare are preserved, protected and enhanced. 12Bimal R. Bhatt

13 Understanding of Role Internal Auditor. Statutory Auditor. Executive Director. Non-Executive Director. Company Secretary. Chief Finance Officer. 13Bimal R. Bhatt

14 National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business i.e. Sustainability Business should conduct & govern themselves with Ethics, Transparency and Accountability. Provide goods & services that are safe & contribute to Sustainability “throughout their life cycle”. Provide the well being “of all employees”. Respect the interests of & be responsive towards all Stakeholders, especially those who are disadvantaged, vulnerable & marginalized. 14Bimal R. Bhatt

15 Respect & promote human rights. Respect, protect & make efforts to restore the environment. When engaged in influencing public & regulatory policy, should do so in a responsible manner. Support inclusive growth & equitable development. Should engage with & provide value to their customers & consumers in a responsible manner. 15Bimal R. Bhatt

16 16Bimal R. Bhatt

17 Clause 49-Audit Committee-Role i.e. Responsibility 6. Reviewing, with the management, performance of statutory and internal auditors, and adequacy of the internal control systems. 7. Reviewing the adequacy of internal audit function, if any, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure coverage and frequency of internal audit. 8. Discussion with internal auditors any significant findings and follow up there on. 9. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. 17Bimal R. Bhatt

18 Clause49-Audit Committee-Review i. e. Responsibility The Audit Committee shall mandatorily review the following information: 1. Management discussion and analysis of financial condition and results of operations; 2. Statement of significant related party transactions (as defined by the audit committee), submitted by management; 3. Management letters / letters of internal control weaknesses issued by the statutory auditors; 4. Internal audit reports relating to internal control weaknesses; and 5. The appointment, removal and terms of remuneration of the Chief internal auditor shall be subject to review by the Audit Committee 18Bimal R. Bhatt

19 Example –Scope of Internal Audit 1.Accounting System Manuals Updating--Yearly 2.Adequacy of Internal Controls more so about adherence to Financial Powers--Half Yearly 3.Risk Management Systems and it’s Adequacy- Quarterly Review 4.Physical Verification of Fixed Assets--Yearly 5.Physical Verification of Inventories--Yearly 6.Project Expenditure Monitoring--Quarterly 7.Bank Reconciliation—100% Monthly 19Bimal R. Bhatt

20 8. Related Party Transaction Pricing say for Sales, Purchase, Loans, Advances, Services, etc.-Arms Length Pricing—100% 9. Verification of Sales with Excise Payment and Security Gate Register and Transport Bills-Monthly Reconciliation. 10. Adequacy of Tendering Process 11. Balance Confirmation for Debtors, Creditors, Loans, Advances and other Debits & Credits—Yearly and Need base with Impact Analysis on Financial Portfolio 12. Correctness of Debtors Age Analysis--Quarterly 20Bimal R. Bhatt

21 13. Inter-Unit Transfer Pricing—Base Verification 14.Verification of Standard Costing of Products Manufactured/ Service Provided. 15.Reconciliation of Traded Goods –Opening Stock, Purchase, Sales and Closing Stock 16.Adherence to Provisions of Statutory Payments like Service tax, Income tax, Tax deducted at source, Sales tax, VAT, P.F., ESI, Wealth tax, Municipal taxes, Gram Panchyat taxes, etc. 17.Verification about correctness of Monthly Statement of Inventories and Book-debts as submitting to Banks 21Bimal R. Bhatt

22 18.Salary payments with attendance records—Test Check at Random base for every quarter 19,Wages payments including to Contractors with attendance records—Test Check at Random base for every quarter 20.Verification of Receipt-Payment Vouchers 21.Verification of Journal Vouchers 22Bimal R. Bhatt

23 Can we conclude -Internal Audit -Lifeline of any organization? If yes, Who is Best to Perform? Re-look to 1 st Slide. 23Bimal R. Bhatt

24 Be Positive. Great Future Ahead for ALL of US. Let’s Join together to help “Corporate India” and thereby, “Mother India” to improve Governance Practices. 24Bimal R. Bhatt


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