Internal Auditing Checklist


Internal audit refers to an independent process to evaluate entity internal controls, its corporate practices, processes, and methods. An internal audit helps in securing compliance with the various laws applicable to the entity. An entity can prepare its books and accounts as per the applicable legal requirements and reporting.

In other words “Internal Audit provides independence assurance on the effectiveness of internal control and risk management process to enhance the governance and achieve organizational objectives. Further, Internal auditing need not to be limited financial transactions only.

An entity may have their own set of rules for operations, such rules like Inviting Purchase requisition, placing orders, accepting deliveries, and making payments etc. An internal audit also helps in knowing whether the employees follow the internal operational standards setup by the management.

Applicability of Internal Audit 

Who are required to appoint an Internal Auditor? 

A company which fulfills any one of following condition mention below shall be required to appoint an internal auditor:

        1. Listed Company.

        2. Unlisted Public Company having

    • Paid up Capital up to Rs. 50 crores or more; or
    • Turnover Rs. 200 crores or more; or
    • Outstanding loan or borrowing 100 crores or more (From bank and other financial institutions); or
    • Outstanding deposits Rs. 25 crores or more

   3. Private Company having

    • Turnover Rs. 200 crores or more; or
    • Outstanding loan or borrowing 100 crores or more (From bank and other financial institutions);

Who can be appointed as an Internal Auditor? 

  • Chartered Accountant or Cost Accountant; or
  • May or may be employee of company or
  • He/she must be regarded as part of management and not merely as an assistant and must have authority to investigate every activity in the organization to meet the objectives. 

Thus, it can be seen that internal audit service can be provided by both in-house employees or it may also be outsourced to external consultants. 

Main Responsibility of an Internal Auditor: 

  • Maintain adequate system of internal control system by continuous examination of accounting procedures, receipts and payments, and provide adequate safeguards from misappropriations.
  • The internal auditor must enjoy an independence status at all time.
  • Operate independently of the accounting staff
  • Not involving in the performance of execution of functions in order that objective outlook does not get obscured by the creation of vested interest.
  • Observe facts and circumstances and bring to the notice of authorities, also critically appraise various policies of the management and draw its attentions to any deficiencies.
  • Keep knowledge up to date by being informed about all important occurrences and events affecting business and changes made in the business. 

An internal audit can ensure that the management can secure compliance on timely manner with applicable law and regulations. The internal audit provides a degree of safety and helps manage risk emerging from fraud, abuse of power, or any other misappropriations.

An internal auditor provides the management with their objective assessment of the processes and accounts. The management can improve their operational and financial performance by an internal auditor. 

Statutory Compliance 

  1. Compliances of Direct Tax Laws (Income Tax Act 1961)
    • Verify whether related party transactions are reasonable and not excessive having regard to fair market value of such goods/ services/ facilities.
    • Whether any cash payments against expenses above 20,000 or 35,000 for goods carriages in contravention of the Act. otherwise than through account payee cheque or account payee bank draft.
    • Verify whether payments (certain payables like tax, duty, cess or fees, provident fund, bonus interest or loan and borrowings from banks etc) have actually been made on or before the due date of filing of Income Tax Return otherwise the same will be disallowed under the Act.
    • Verify the compliance of issues relating to TDS and observe the following:
      • Deduction of TDS at correct rate
      • Deduction and Deposit of TDS within Due dates
      • Filing of TDS return in time and as per procedure prescribed
      • Issue of TDS certificate
      • For payment made outside India proper TDS has been deducted and form 15CA and 15CB has been uploaded
    • Whether the repaid loans/ advances/ deposits in cash of ` 20,000 and above in contravention of Section 269T.
    • Whether the unit has received loans/ advances/ deposits in cash of ` 20,000 and above in contravention of Section 269SS.
    • Whether Income Tax Return has been filed in time.

 2.  Compliance under Indirect Tax Laws (Goods and Services Tax Act 2017)

    • GST sales invoices format meet the requirements described in the Act.
    • Components of taxes properly mention in the invoices.
    • Tax dues paid timely basis.
    • Input tax credit must be claimed as per available eligible invoices.
    • Input tax credit should be shown separately in the accounts.
    • In case of Export without payment of tax, then check existence of LUT.
    • Verify whether any ineligible Input credit not taken.
    • Reconciliation of GSTR3B Vis a Vis GSTR 1 & GSTR 2A.
    • Whether Interest and penalty calculate and paid appropriately.
    • Reviewing e-way bill via a via invoices.
    • Confirm the stock lying the job workers

     3. Compliance of Accounting Standard and Standard on Auditing

    • AS 1 Disclosure of Accounting Policies.
    • AS 2 Valuation of Inventories.
    • AS 11 The Effects of Changes in Foreign Exchange Rates.
    • AS 12 Accounting for Government Grants.
    • AS 18 Related Party Disclosures.
    • SA 230 Audit Documentation.
    • SA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements.
    • SA 330 The Auditor’s Responses to Assessed Risks.
    • SA 550 Related Parties.
    • SA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management.
    • SIA 18 Related Parties.

    4. Credit Assessment

    • Check credit policy and adherence of Credit Policy and report deviations, if any.
    • Whether credit worthiness of all new credit customers has been evaluated and documented for approval.
    • Whether overrides to the credit rules has been approved in accordance with the authority levels if any.
    • Whether credit assessments for all the major customers has been updated at least once in a year.
    • Check that no delivery order has been generated by the system if the customers had trade debts exceeding their credit terms/ limits and require pre-approval before the orders are processed.

    5. Sales Dispatch

    • Check sales policy and report deviations, if any. Policies and procedures for credit and collections management should be clearly documented.
    • Whether pre-shipment inspection has been carried and material has been dispatched as per invoice and contract.
    • Status of pending overdue sales order, reason and financial implication, if any.
    • Whether cancellation of sale order are properly approved by competent authority.
    • Sales Return Approval for taking sale return, receipt and inspection of returned goods and issue of credit note, etc.
    • Sales return reason, analysis and comment on sales return material lying in stock and the gain/ loss on resale of returned material.
    • On time performance trend and any loss caused due to delay in delivery.
    • Comment on avoidable/ controllable expenses, such as, air freight, demurrage, discount etc.,
    • Process of appointment of agents/ sub-agents/ broker, renewal of agreement and payment of commission to agents as per agreement and as defined in sales policy.
    • In case of non-payment by customer, whether the same has been recovered from agent’s commission. Whether commission payable has been reconciled with respective agents.
    • There should be sequential control over all Invoices, Credit Notes, Delivery Orders and Goods Returned Note.

    6. Reconciliation

    • Debtors ageing report should be reconciled with general ledger.
    • Taking independent confirmations for customer’s account balance with third parties.
    • Overall reconciliation
      • Raw materials
      • Finished goods
      • Billing
      • Debtors
      • Realizations
      • Write-offs.

   Purchase and Procurement

    1. Documents

    • Purchase / service policy of the entity
    • Purchase order/ service contracts
    • Original invoice
    • E-way bills
    • Lorry documents for freight payment and for TDS, if applicable
    • Gate-entry record
    • Material receipt note showing actual quantity.
    • Purchase register
    • Custom clearance and receipt for payment of custom duty, in case of import etc.

   2. Legal Compliance

    • Payment of state/ local entrance fees or availability of proper document showing exemption for such payment.
    • Payment of custom duty and custom clearance of imported material.
    • Deduction and payment of TDS on freight on purchases and services.
    • Payment of GST on the goods purchased from unregistered dealer.
    • In case of purchase from related party at arm’s length price, not contravene Companies Act, 2013.
    • The procurement price is reasonable Income Tax Act, if purchase is made from sister concern.
    • Government notifications and guidelines regarding compulsory purchases from Micro, Small and Medium Enterprises.

   3. Authorisation Matrix

    • Requisition for purchase of store material/ service contracts authorized properly.
    • Opening of tender or quotations signed by proper person.
    • Comparative chart of technical and financial biddings approved by top level.
    • Purchase order or service contracts including amendments or modifications.
    • Inward entry at company gate.
    • Quality check and its approval or satisfactory report from user.
    • Material receipt note by authorized person.
    • Approval of rates, in case purchase order is not raised.
    • Issue of debit or credit note for return or rejection of material singed by proper authority.

   4. Compliance of Accounting Standard and Standard on Auditing

    • AS 1 Disclosure of Accounting Policies.
    • AS 2 Valuation of Inventories.
    • AS 11 The Effects of Changes in Foreign Exchange Rates.
    • AS 18 Related Party Disclosures.
    • SA 550 Related Parties.
    • SIA 18 Related Parties. 

   5. Procedures & Controls

    • The company has clear and comprehensive procurement policy or service contract whether purchases or services are centralised department or purchases or services are made from approved authorities.
    • Internal purchase requisition is properly validated and authorized by proper person.
    • The internal requisition clearly mentions the specification and quantity of material or service to be procured and also the supply date.
    • Purchases and procurement of services are based on competitive quotations as received from two or more suppliers.
    • Whether comparative quotation analysis sheet drawn before purchases are authorized.
    • If lowest quotation is not accepted, whether the purchases has been approved by senior official.
    • Whether purchase or service orders are pre numbered and strict control exists over unused forms.
    • Whether list of pending purchase or service order is complied by appropriate department, at least once in every quarter.
    • Whether quotations are called as per company’s policy from the registered vendors only.
    • Whether quotations are opened and registered and a comparative chart is prepared and authorized.
    • Purchase or service order is given to lowest bidder subject to satisfaction of all other conditions.
    • One copy of each purchase order or service order should be made available to store and accounts department.
    • Material is supplied as per purchase order and material receipt note is prepared after quantity and quality checks and authorization.
    • Service is executed as per service order.

   6. Transaction Recording

  • Raw materials have been recorded as ‘Raw Material’ and stores and spares have been recorded as ‘Consumables’ and service has been recorded to ‘Direct Expenses’.
  • Procurement for capital expenditure is not recorded as revenue expenditure.
  • The value of purchase or service is recorded net of GST and VAT credit, if claimed.
  • All the related expenditure, such as toll tax, freight, etc. is included as part of purchase.
  • TDS, if applicable, should not be charged to purchase or service.