Effectiveness of Internal Audit- A Tool for Management Control System: An Action Research Approach

Abstract

Internal audit emerged to have been an indispensable tool of management control system in Large Public Ltd. Companies in particular and Public Ltd Companies in general. Research on internal audit and its effectiveness has mainly so far focused on Public Limited Companies though an effective internal control system is a must for any organization including Private Limited Companies. Present study was administered in DMM Enterprise Private Ltd. Company within the meaning of the Companies Act, 2013 in order to examine the degree of effectiveness of internal audit for Private Limited Companies. The findings reveal that internal audit is a powerful tool to ensure that operational and financial functions carried out in succinct manner by timely detecting errors, financial frauds, exposing the risks involved and guiding the management in day-to-day commercial operations of the concerned organization. The appointment of internal auditor is mandatory for all the Listed Companies and ‘Producer Companies’. Unlisted Public Limited Companies having been subject to either of the criteria of a Paid-up Capital of INR 50 Cr. or more, the Turnover of INR 200 Cr or more and Loans and Borrowings of INR 100 Cr. from banks and financial institutions or having Outstanding Deposits of INR 25 Cr. at any point of time during the preceding financial year. As far as Private Limited Companies are concerned, internal audit has to be in place whenever the Turnover is INR 200 Cr. or more or the amount of Outstanding Loans and Borrowing is INR 100 Cr. or more at any point of time during the immediately preceding financial year. Internal audit for Private Limited Companies not covered within the criteria mentioned above assists efficiently in early detection of financial scam, frauds, errors, risk exposure , organizational performance evaluation and ensuring exercise of a robust management control throughout the length and breadth of the organization and save financial resources, ensures accuracy, authenticity, validity and reliability of financial information which in turn contribute to ensure quality decision making by the management.

Moreover, effective internal audit system can save financial resources from being spent on non- or non-timely compliances. This paper aims at examining effectiveness of internal audit through the ’Action Research Approach’. Effective internal audit has emerged to be a tool for exercising management control over large organizations for which it is mandatory and also the companies not covered under the canvas of mandatory internal audit requirements and any other organizations including and medium sized enterprises. Scope of internal audit includes identifying and assessing the financial and non-financial risks and the hurdles in achieving the mission, goals and objectives of an organization. The study has been conducted on the Action Research Model developed by Kurt Lewin in the 1930s. This approach helps the organizations bring about sustainable efficiency in the economic operations of a business in terms of improving productivity, profitability and financial solvency.