Summer Internship Project On

THE ROLE OF INTERNAL AUDIT

IN
FINANCIAL STATEMENT
submitted for the partial fulfilment of the requirement of the degree of
POST GRADUATE DIPLOMA IN MANAGEMENT (PGDM)
Approved by
All India Council of Technical Education (AICTE)

Submitted by
Jitesh Ravindra Shetty
Roll No. 40
Specialization:

FINANCE

Submitted To

Dr. Hitesh Suthar

ATHARVA SCHOOL OF BUSINESS (ASB)
MALAD-MARVE ROAD, CHARKOP NAKA,
MALAD (WEST), MUMBAI 400095
AUGUST, 2024-25

1
 DECLARATION BY THE CANDIDATE

I JITESH RAVINDRA SHETTY hereby certify that the work which is being presented in
this Summer Internship Project Report entitled- “The Role of Internal Audit in Financial
Statement ” in partial fulfillment of the requirement for the award of the Degree of Post
Graduate Diploma In Management and submitted to the Atharva School of Business
Mumbai, is
an authentic record of my own work carried out during a period from 24th April , 2024 till 31st
July, 2024 at AAC & ASSOCIATES CHARTERED ACCOUNTANTS under the
guidance of CA AMIT CHAUHAN(Proprietor).
The matter presented in this project report has not been submitted by me for the award of any
other degree of this or any other Institute.
Wherever references have been made to intellectual properties of any individual / Institution /
Government / Private / Public Bodies / Universities, research paper, text books, reference
books, research monographs, archives of newspapers, corporate, individuals, business /
Government and any other source of intellectual properties viz., speeches, quotations,
conference proceedings, extracts from the website, working paper, seminal work et al, they
have been clearly indicated, duly acknowledged and included in the Bibliography.

Name of the Student: Jitesh Shetty

Signature of the Student:

This is to certify that the above statement made by the candidate is correct to the best of our
knowledge.

Signature of Faculty Mentor: ___________________________

Name of Faculty Mentor: Dr. Hitesh Suthar

CERTIFICATE BY THE COMPANY

2
3
 CERTIFICATE

This is to certify that Mr. JITESH RAVINDRA SHETTY is a bonafide student of the two-
year full-time Post Graduate Diploma in Management (PGDM),
(Finance), Roll No. 40 of the institute.

As a part of the All India Council of Technology (AICTE) guidelines, the student has carried
out the Summer Internship Project_ The Role of Internal Audit in Financial Statement at
AAC & Associates Chartered Accountants during the period from 24th April, 2024 to 31st
July, 2024 under my guidance in partial fulfilment of requirement for the completion PGDM
as prescribed by the All India Council of Technical Education (AICTE). This Summer
Internship Project Report is the record of authentic work carried out by him/her during the
period from April 2024 to July 2024.

Name & Signature Name & Signature

(Faculty Mentor) (Director)

Dr. Hitesh Suthar Dr. Shivakant Upadhyaya

Place:
Date:

4
 ACKNOWLEDGEMENT

I would like to express my profound gratitude to the Management of Atharva school of

business and our director sir, Dr. Shivakant Upadhyaya for providing me with this
opportunity. My sincere Gratitude to my mentor Dr. Hitesh Suthar, for his guidance in the
completion of the project. His constant support and encouragement helped me to complete
the project work. I am deeply thankful to CA Amit Chauhan, my proprietor, for their
insightful advice, encouragement, and expertise, which have been instrumental in the
successful completion of this study. Finally, but equally crucially, I would like to extend my
sincere gratitude to my dear parents for their blessings, my friends for their assistance, and
best wishes for the accomplishment of this undertaking.

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 CONTENTS
Chapter
Details Page No.
No.
Title Page
Candidate’s Declaration
Certificate by the Company
Certificate by the Institute
Acknowledgement
1 INTRODUCTION 7
2 LITERATURE REVIEW 11
3 RESEARCH METHODOLOGY 16
4 DATA ANALYSIS & INTERPRETATION 23
5 FINDINGS 29
6 CONCLUSION 31
BIBLIOGRAPHY & REFERENCES 34

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1. INTRODUCTION

In current fast changing and integrated global economy, accuracy and reliability of the
financial information has significant importance to the decision makers like the investors,
regulatory authorities and the managers. A key role that is offered by financial statement
audits is to give reasonable assurance about the financial reports of an organization. These
audits assist in reducing the risks of material misstatements in the financial statements in as
much as it is due either to fraud or error, hence improving on the reliability of the information
presented.

Internal audit as an organizational control function is ideally positioned in regard to the

financial statement audit and thus provides substantial support to the auditor. Historically,
internal audit’s core functions revolved, to a large extent, around compliance and operations.
Originally, it was a small department, but as the years have passed it has been broadened to
incorporate risk management, corporate governance and the evaluation of internal controls.
They have been replaced by similar one that reflects the evolution of the internal audit
function when the importance of the area has been realized as complementing the financial
reporting and organizational governance processes.

The internal auditors are required to assess the strength of the internal controls and the risks
with which the management might be exposed to, and also the alignment of the implemented
management processes to the organizations strategic plan. What their work offers is
important information about the sufficiency and efficiency of the controls that are part of the
financial reporting process. Through the evaluation and enhancement of these controls,
internal auditors are in a position to minimize dangers that would bring about material
misstatements on the financial statements.

The communication that takes place between the internal and external auditors is an
important part of carrying out the financial statement audits. The external auditors depend on
the internal auditor’s work in order to acquire knowledge on the organization’s control
environment in order to decide the extent to which to test. Integration of the internal and
external auditors makes the audit process consume lesser time and offers better auditee
assurance regarding the financial information.

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Due to the growth in the sophistication of financial operations, global regulations, and the
demands of other stakeholders, internal audit remains a key activity. An area where internal
audit becomes relevant is in ensuring that financial statements are transparent, verifiable, and
prepared in accordance with organizational standards. This makes internal audit much more
than a control over financial misstatements, but an effective partner towards improvement of
a company’s management of financial reporting systems.

The Importance of Accurate Financial Reporting in Today’s Business Environment.

The preparation of financial statements in the present business world is very important due to
the reliance of the users on such information. Businessmen, creditors, and consumers on the
other hand, rely on overall financial statements in order to determine the returns, stability and
future growth of the company to invest on. Different stakeholders use financial reports to
assess the condition of an organisation in order to grant or refuse credits. Financial reports
help the regulators enforce the law and standard in the various economic ventures for the
protection of the larger economy. It is also used by management in making strategic plans
and in directing resources to areas that it considers important as well as for assessing
organizational performance.

This paper has established that with proper financial reporting the stakeholders gain
confidence on the working of the organization. On the other hand, the preparation of the
wrong financial statements can lead to very negative effects. Business people may decide not
to invest hence a lower supply of capital, this results to a higher cost of capital whereby the
rate of return in investment is high than that of retaining capital in the business. Penalties in
the form of fines, sanctions and, even legal actions may be taken by the regulatory bodies in
case of discrepancies in the figures which would affect the company’s reputation and
functionality in the long run. Further, poor and improper information, which may be used by
the internal members such as the employees and the management in decision making, is
disadvantageous to the organization strategic goals.

In this regard, the internal audit becomes highly significant in the protection of the accuracy
of the financial statements. Organisations are assisted by the internal auditors to conduct
comprehensive assessments on the internal control systems which play an important role of
minimizing on errors as well as identifying instances of fraud. They review the effectiveness
of risk management activities and validate the accounting information to make sure that they

8
are accurate, consistent with accounting principles and any regulatory requirements. It is
through pointing out where the internal control system is deficient that internal auditors assist
organizations do away with problems before they reflect on the financial statements. This
initiative is not only fruitful for enriching quality of the financial reporting but also for
increasing efficiency and effectiveness of external audits.

However, financial reporting plays a crucial role in retaining the image of an organization
and enhances its sustainability. By increasing the level of credibility of IAS 38, investors and
stakeholders are more likely to support the company knowing full well that it is legitimate in
its practices. As corporate governance becomes a hot button issue, the assurance of true and
fair view in the financial statement can be a great source of competitive advantage. Thus, the
place of internal audit in financial reporting and specifically in guaranteeing the soundness of
a company’s financial statements is more important than ever. In this way, internal audit
contributes to creating and sustaining trust on which a sustainable growth and sustainable
confidence depends.

The Evolving Role of Internal Audit within Organizations and Its Increasing Relevance
in Financial Statement Audits.

History has shown that internal audit’s place in organizations is not stagnant and has
undergone quite a number of changes over the last few decades. Historically IA was
considered as a monitoring mechanism to ascertain compliance with organizational policies
and procedures, determination of the effectiveness of operations, and identification of cases
of fraud. However, globalization and increased complexity of business environments have
contributed to making the extent of internal audit the following. Contemporary internal
auditors are involved in risk management and corporate governance and they assist
organizations in increasing the efficiency of their financial reporting.

The following are the causes of this evolution: Fraudibility of organizations’ financial report
has therefore become complex due to; enhanced difficulty of financial transactions; more
frequent evolution in technologies and; stringent regulation of financial reporting. This means
that internal auditors are now required to focus on providing even more comprehensive
review of risk management and internal controls; not only report on the issues that may exist

9
but also ideas that may be adopted to strengthen them and improve performance and
compliance. They are engaged in the identification and control of new, risks, which include;
cyber risks and regulations changes that affect the reporting process.

With respect to financial statement audits, the broad responsibilities of internal audit has
changed in various ways. Internal auditors currently cooperate with external auditors to
contribute to an understanding of the basic internal systems of the organization as well as its
financial reporting. Their assessments assist the external auditors to direct their efforts most
effectively The scope of the external audit procedures may hence be lessened as well as the
overhauls of the entire audit procedures may be enhanced. Besides practising the audit
Cooperatives approach, this not only makes audit process efficient, but also increases the
credibility of financial statements.

Besides, in the last decades, internal audit’s engagement in the company’s strategic planning
and decisions has increased its significant role within organizations. Internal audit delivers
the actuality that internal controls operate effectively and financial information is reliable to
the management for use in decision-making processes that are strategic to the organization.
This way it supports the organizational strategy and addresses the increasing demand for
internal audit in keeping financial reports as truthful and credible.

All in all, it can be pointed out that the very changes in the concept of internal audit enhances
its importance at the present big picture of businesses. Its increased scope of activity for risk
management, control assessment, and strategic support proves its importance to the
enhancement of the reliability of financial statements. While organizations continue to adapt
to the shift in the play, the functional position of internal audit will stay core to preserving
value for financial reporting and governance.

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2. REVIEW OF LITERATURE

Some authors stress the internal auditing functions in the context of financial statement audits
and present diverse viewpoints and results in the analysed literature which support the
significance of internal audit functions in providing reasonable and accurate financial
statements.

1. From the literature of Krishnamoorthy (2002), internal auditors are in a central position
in offering relevant information to external auditors about the effectiveness of control
measures that protect organizational assets. This contribution is indispensable to providing an
overall cheque of the credibility of financial reports. Krishnamoorthy found that while
internal controls are actualized as per the prescription of the CoCo, the strong inference
gained from internal audit validation reduces the risk of material misstatements in the
financial statements. The internal audit function undertakes the responsibility of a second line
of defense since it reports on the weaknesses in internal controls and guarantees action on the
reported issues. Besides, it helps to improve the organization’s internal control environment
and, therefore, increases external auditors’ level of assurance. Consequently, external auditors
can rely more on the work of internal auditors and this enhances efficiency of the external
audit. All in all, Krishnamoorthy’s work highlights the role of an effective internal audit to
buttress the credibility of the financial report and the external audit process.

2. Beasley, Carcello, and Hermanson (2001) examine the important relationship of internal
audit quality with financial reporting and find out that there is a high influence of a robust
internal audit function on the accuracy and reliability of the financial statements. The results
indicate that higher quality of internal audits is linked with lower rates of financial
restatements and substantially reduced misreporting rates. This relationship underlines the
critical contribution of internal auditors in spotting mistakes or irregularities early enough and
having them corrected before they develop into serious issues that may question the integrity
of the financial reporting. Through comprehensive assessments of the financial processes and
controls involved, internal auditors ensure that there are no material misstatements in the
financial statements, thus increasing their reliability. The focus of Beasley, Carcello, and
Hermanson's study is on the fact that a robust internal audit function basically acts as a
deterrent, which reduces the risk of restatements and increases the quality of general financial

11
reporting. Their findings prove the incredible value of internal audit in the protection of the
accuracy and credibility of the financial information, which finally enhances stakeholders'
trust and confidence in the organization's financial disclosures.

3. Prawitt et al. (2009) investigate the relationship between internal audit quality and audit
fees. They find a significant positive relationship that evidences the value of an effective
internal audit function. The results suggest that those companies with a higher quality of
internal audit functions have lower external audit fees. In this way, the audit fees for the
external auditor will be reduced because the workload will be decreased since external
auditors can have confidence in the internal audit work. Proper and effective internal auditing
means that it shall help provide a great deal of useful assurance regarding internal control,
accuracy of financial reporting, and detection of potential risks. It means that, therefore,
external auditors can reduce the scope of their own procedures, knowing that the internal
auditors would have already covered most areas of interest. The reliance will, therefore, not
only work in streamlining the process of external audit but also cost-saving to the client
through less use of time and other efforts of the external audit team. Prawitt, Sharp, and
Wood demonstrate how investments in a high-quality internal audit function might yield
financial and operational benefits by delivering more efficient external audits at reduced
associated costs while maintaining the integrity of the audit process.

4. Cohen and Sayag (2010) explain the intrinsic aspect of internal auditing regarding risk
management and how this has a direct impact on the accuracy of financial reporting. The
results of this study indicate that a good internal audit function significantly contributes to an
organization's ability in general to deal with risks. Internal auditors, through a properly
organized examination and monitoring of risk areas, provide assurance that potential threats
to the financial integrity of the organization will be dealt with promptly. This approach
enables enhancement in internal controls and reduces the occurrence of errors, fraud, or other
irregularities that may affect the financial statements. According to Cohen and Sayag, the
existence of internal auditing functions increases reliability and credibility of the financial
reports. This is because more accurate and reliable financial disclosures are achieved as a
result of increased risk identification and management promoted by an effective IAF. As
such, stakeholders, including investors, regulators, and management, can place greater
confidence in the financial information presented. This research finds the important
contribution of internal auditing to the integrity of financial reporting through its critical role

12
in managing risks, which provides assurance of the general soundness and stability of the
organization's finances.

5. According to Raghunandan and Rama in 2006, the most important point is the
communication and coordination between the internal and external auditors; it places
emphasis on the fact that internal audit reports can make huge differences in properly
planning and performing the external audits. Their study underlined that efficiency in
performing the internal audit function assumes a very important role in taking the shape of
the external audit process. An efficient and effective internal audit team provides insight and
information useful to the external auditors to utilize while performing their assessment. Such
collaboration makes the external audit easier by avoiding duplication of work and thus
providing more time to those areas where risks are higher, hence giving maximum usage of
audit resources and time.Raghunandan and Rama conclude that if the internal audit function
is performing well, then the external audit process will be easier to conduct and require fewer
resources. Internal auditors create favorable ground for external auditors by providing
assurance on strong internal controls, risk management, and accurate accounting records.
This seamless integration will not only improve the quality of the audit in its entirety but also
boost the confidence of the external auditors in the financial statements under review. As
such, it would be proper from this research that an effective internal audit function supports
the organization in matters of governance and management of risk and makes the external
audit a more seamless and focused exercise, consequently leading to more reliable and
credible financial reporting.

6. In the research, Gramling, Maletta, Schneider, and Church follow a descriptive survey
research design in an attempt to determine the role of internal audit function in corporate
governance. Indeed, their study results establish the significant impact of internal audit on
compliance with prescribed standards of governance and, accordingly, on compliance with
legislation related to governance. Internal auditors, the research points out, play a significant
role in ensuring that firms meet all the needed regulatory requirements for their operations
and also in ensuring the putting in place of relevant governance structures. An internal audit
function helps prevent non-compliance, financial irregularities, and unethical practices by
ensuring there are timely active monitoring and assessments of the effectiveness of internal
controls. According to the study, sound financial reporting and strong corporate governance
require an effective internal audit function as a precondition. It goes on to prove that if the

13
internal audit is properly conducted, it would not only protect the accuracy and integrity of
the financial statement but would also enhance the entire governance structure in an
organization. These two roles of internal audit—improving compliance and strengthening
governance—taken for the long-term stability and success of companies underline its
criticality in the corporate environment.

7. As concluded by Johl, Kaur and Cooper (2015), the internal audit nature plays a crucial
role concerning the quality of the financial statement audits to the effect that internal audit
carries an extended effect. Their focus tells that the degree of financial audit quality is largely
determined by the way how effective internal audit operates since the internal audit teams
have the responsibility of appraising and ensuring the materiality of audits. This means,
therefore that solid internal audit function straight forward helps in accurate, correct
preparation of the financial statements. Johl, Kaur, and Cooper highlight that it is highly
crucial that tight internal control on information is practiced if properly constructive financial
statements that are not free of any material misstatements are to be obtained. By continuously
enhancing their standards and practices, internal audit departments significantly contribute to
the overall quality of the financial reporting process and, therefore, play a key role when
moving in favor of effective and sound financial statement audits.

8. Glover and Prawitt (2011) identify the critical role of internal auditing processes in fraud
detection, which impacts materially on maintaining truthfulness in financial statements.
Internal auditors were found to be instrumental in identifying fraudulent activities that may
undermine the reliability of financial reporting. In this regard, internal auditors lessen the
risks of threats to the integrity of financial statements by searching for signals of fraud and
assessing areas vulnerable to financial misrepresentation. The research emphasizes that
internal auditing is mainly a preventive measure intended to detect and solve potential fraud
before it becomes a serious issue. Such a proactive approach will help ensure the accuracy of
the financial statements and, at the same time, enhance the overall control environment
within the organization. Their findings indicate that an effective internal audit function is
imperative for preventing fraud and ensuring the credibility of the financial reporting.

9. This paper was designed to summarize the conclusions of Knechel and Vanstraelen,
2007, as related to the internal and external audit processes. Their research shows that
internal audit functions have the leading importance for the effectiveness of the external audit
in providing comprehensive and detailed information about the organization's internal control
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system. Knechel and Vanstraelen show further that, in the case of a rigorous and properly
performed internal audit, this represents valuable information and assurance concerning the
internal control system, which external auditors can utilize. This will help external auditors
risk-profile the areas of their audit work and improve the allocation of their efforts better,
therefore making the process of the external audit more efficient and effective accordingly.
The findings of the study confirm that the internal audit function makes external audit not
only complementary but also strengthening by making available the essential data and
insights that go to make the audit process more streamlined and effective.

10. A more comprehensive coverage of the role of internal auditing in an emerging market is
provided by Al-Twaijry, Brierley, and Gwilliam, who conclude from their 2003 research
that it is precisely internal audit practices that seem to fill the gaps in financial reporting
systems of countries with the less-developed regulatory framework. The authors underline
that internal auditing can enable the delivery of solutions to enhance the reliability and
transparency of the financial reporting in such emerging markets. With improved internal
controls and compliance measures, internal audit fills the regulatory structure deficiencies
and furthers better standards of financial reporting. This publication reaffirms that internal
audit will continue to play a vital role in the improvement of financial reporting around the
world and further recognizes its role in developing sound financial systems and structures of
good governance in less mature markets.

All these studies put together therefore highlight the importance of internal auditing in
increasing the integrity of financial statements, decreasing audit risks as well as contributing
to good corporate governance. They demonstrate how enhanced internal audit activities
support the provision of coherent and relevant financial information, which are useful during
the external auditors ‘engagement, and give a clear insight into the overall significance of the
internal auditors during the financial statement audit process.

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3. RESEARCH METHODOLOGY

Objective of Study

To understand importance of internal audit in vouching of income and expenses

Vouching is one of the most elementary audit procedures fraud that entail ensuring the
validity of transactions recorded in the books of accounts, especially those concerning
income and expenditure. It acts as the framework for any auditing since it provides assurance
that the financial statements give a correct and accurate picture of the financial picture of the
firm. In this context, the role of internal audit in the vouching of income and expenses is
crucial for several reasons:In this context, the role of internal audit in the vouching of income
and expenses is crucial for several reasons:

1. Verification of Authenticity and Accuracy:Verification of Authenticity and Accuracy:

Internal auditors have a formal responsibility in the documentation, authorization, and

validation of all income and expense transactions. Depending on the type of audit, the
transactions are checked against supporting documents such as invoices, receipts, contracts,
payment vouchers, and other documents as the case may be in the vouching process by the
internal auditors. This process enable identify errors and omissions or fraudulent transactions
which inhibit the reliability of financial statements.

2. Strengthening Internal Controls:

Internal audit has the responsibility of undertaking ongoing evaluations of the adequacy and
effectiveness of the internal control systems for the financial operations. When vouching, the
internal auditors assess the possibility of the organization’s internal controls deterring the
accomplishment of improper or unauthorized transactions. Concerning their relationship with
the management, through noting that some controls’ areas are weak and have issues like
uncontrolled overlapping of duties, or no approval procedures in place, internal auditors assist

16
in fixing measures that will mitigate the risks of having misstatements in the income and
expense accounts.

3. Ensuring Compliance with Policies and Regulations:Ensuring Compliance with Policies

and Regulations:

Income and expenses ensure that transactions are in compliance with the organisation’s
internal control and other regulations as well as accounting standards. This includes ensuring
that expenses incurred are as approved and correspond to the appropriated expenses and
incomes earned is in conjunction with fixed accounting standards. It is of paramount
importance that companies adhere to these guidelines in order to avoid disputes that may go
to the court and to made sure that the financial statements that is presented gives a true and
fairness view of the company’s financial position.

4. Detection of Fraud and Irregularities:Detection of Fraud and Irregularities:

Perhaps one of the greatest values of internal audit in the vouching process is its prevention
of frauds. Vouching enables detection of such things as duplication of cheque payments,
imaginary expenses, or simply changing of figures as in revenue alteration. This is because
internal auditors are also trained in the identification of peculiar features which, if noted,
suggest fraud. When performing the detail analysis of the intellectual documentation
identifying income and expense transactions, internal auditors contribute to the organization’s
protection against fraud, as they result from the detailed approach.

5. Providing Assurance to Management and Stakeholders:Providing Assurance to

Management and Stakeholders:

The fact that internal audit vouches income and expenses give a surety to the management
and other stakeholders that the accounts are accurate and reliable. This assurance is very
important for decision process since it helps in attesting the reliability of the financial data
used for assessment of performance, allocation of resources and controlling for the future. It
also raises the credibility of internal auditors’ work; external auditors may use the work of
internal auditors in their own audits.

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6. Supporting Financial Reporting Integrity:

Relevance of income and expenses is vital to the general credibility of the presented
financial statements. They are kept free of material misstatements by internal audit, through a
vigorous performance of vouching procedures. This support is critical so as to ensure
accurate preparation of financial statements that will represent the real status of the
organization’s financial position and its performance with a view of meeting its social
contract obligation to the stakeholders and other related legal bodies.

To understand significance of internal audit in verification of assets and liabilities

Verification of assets and liabilities constitutes a very important part of any financial audit as
it entails something which is the basis of the financial statements. This is where internal audit
comes in handy, this function is responsible for reviewing the organizations assets and
liabilities, its value and its disclosures. The significance of internal audit in the verification of
assets and liabilities can be understood in several key areas:The significance of internal audit
in the verification of assets and liabilities can be understood in several key areas:

1. Ensuring Accurate Valuation and Existence of Assets:Ensuring Accurate Valuation and

Existence of Assets:

Some of the internal audits’re main tasks include ascertaining the existence and accurate
values of the balance sheet reported assets. This also comprises of tests on recurring and non-
recurring assets that include testing of property, plant, and equipment, among others, testing
of patents, and testing of goodwill. Another area of check and balance is to ascertain that
assets are not inflated or under stated to give a true and fair view of the state of affairs of the
organization. For instance a company’s internal auditors may go round carrying out actual
observation of assets that are fixed with a view of establishing whether or not the
depreciation expenses have been estimated accurately.

2. Assessing the Integrity of Liability Reporting:Assessing the Integrity of Liability

Reporting:

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It is always the role of the internal audit to ensure that all the liabilities are recognized and
appropriately classified. This involves checking out balance sheet, account payables,
commitments and other contingent assets which form part of liability in the statement. From
time to time internal auditors evaluate the value of liabilities and whether the organization has
adequately seen prepared for liabilities in the future. For instance, they might assure
themselves that accounts payable depict the actual amount of the suppliers’ balances and that
any or all contingent liabilities are properly acknowledged.

3. Evaluating Internal Controls Over Assets and Liabilities:Evaluating Internal Controls Over
Assets and Liabilities:

The internal auditors as part of their work evaluate the strengths of the internal control over
assets and liabilities. This is because appropriate internal controls help to avoid a
misappropriation of assets, any unauthorised transaction, and even the misstatement of assets
that may lead to a misstatement of liabilities. For example, internal audit may conduct
examination of the controls in relation to its inventories with an aim of its protection against
theft or deterioration as well as accurate stock valuation. Likewise, they assess the controls
for recognizing the liabilities so as to see that all the obligations are accounted for properly.

4. Identifying and Preventing Fraud:

Therefore, internal audit acts as an essential key line of defence if fraud involve assets and
liabilities. Internal auditors need to conduct adequate verification procedures to reveal that
the controls do not work as they should, and this often involves discovering that an
organisation has misleading assets, inflated values, or underreported liabilities, which might
be evidence of fraud. For instance, it is not unusual for internal auditors to come across such
situations as, some assets may be created on the balance sheet that are fictitious or certain
balances on the liabilities side that are deliberately left out with a view of making the balance
sheet look healthier than it actually is. Efforts by internal audit in the fight against fraud are
always preventive for the organization to avoid loss making and financial mal practices.

5. Supporting Accurate Financial Reporting:

The confirmation of assets and liabilities can be regarded as the basis of preparing accurate
financial statements. Internal audit also confirms that the value of all assets and the record of

19
all liabilities corresponds to the correct figures and are labelled correctly and in full
disclosure as is required by accounting standard as well as by the regulatory agencies. For
instance, internal audit may confirm that all the financial risks are correctly classified a short-
term or long-term balance sheet obligation, giving a holistic view of the organisation’s
payables.

6. Enhancing Stakeholder Confidence:

Another benefit internal audit brings when it undertakes confirmation of assets and liabilities
is that it increase the confidence of the stakeholders in the financial statements. These
statements are very much important to investors, creditors, regulators, and any other
stakeholder interested in the organization. Through confirmation of assets and liabilities, the
internal auditors contribute to establishment of credibility with stakeholders since
stakeholders invest their money on the company with the aim of getting better returns in
future.

7. Facilitating Better Asset Management:

During the verification process, therefore internal audit can be of great assistance in the
evaluation of asset management practices. This includes things like recognizing possible
unutilized fixed assets, slow moving or even obsolete stocks or even possible overstocked
liabilities that may affect the organization. These challenges are discussed by internal audit
hence leading to improved decision making on the use of assets and liabilities, hence
increasing financial performance.

8. Ensuring Compliance with Accounting Standards and Regulations:Ensuring Compliance

with Accounting Standards and Regulations:

Internal auditors are responsible of ascertaining that the organization events pertaining to the
recognition and measurement of assets and liabilities are in accordance to the IFRS or GAAP
and other regulations. This kind of compliance is important to prevent penalty, legal action,
and the related negative impact to the public image. For instance, internal audit might check
that financial instruments are classified, measured using standards and reported objectively.

20
Lastly, internal audit’s role in the confirmation of the assets and liabilities is to provide
assurance that the financial statements of the organisation are credible, accurate and free from
any irregularities. It means internal audit significantly contributes to successful financial
management, stakeholders’ confidence, and organization’s risk mitigation concerning
improper asset and liabilities reportage.

Limitation of the Study

- The analysis of this study was based on information provided by the firm.

-Due to time constraints, only 14 respondents were included.

- The outcome is entirely dependent on the information provided by the Firm where Auditing
is done.

Sources of Data

Primary Data Sources:

Primary data are newly obtained and have never been used before, making them unique.
Direct, in-person interviews were used to gather the primary data, along with open-ended and
closed-ended questionnaires.

Sample Size

A total of 17 individuals were selected. The study was created with input from workplaces,
neighbourhoods, and investors. The method used to select the respondents was basic random
sampling.

Period Of Study

The period of study is from May 2024 to July 2024 which is two months of study.

Need of Study

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Ensure Financial Reporting Accuracy: To understand how internal audit contributes to the
accuracy and reliability of financial statements, thereby safeguarding stakeholder trust.

Identify Best Practices: To identify best practices in internal auditing that can be adopted to
improve financial statement audits and overall financial reporting quality.

SCOPE OF THE STUDY

1. Internal Control Assessment: This study shall focus on how internal audit functions assess
and improve the system of internal controls over financial reporting, especially during the
process of risk identification and mitigation that may impact the accuracy and reliability of
financial statements.

2.Impact on Financial Reporting Quality: The influence that internal audit effectiveness has
on the overall quality of financial reporting, including the accuracy, completeness, and
timeliness of financial statements.

3. Interaction with External Auditors: Relate internal auditors with external auditors by
assessing how internal audit findings and reports affect external audit planning, execution,
and overall effectiveness.

4. Fraud Detection and Prevention: It will also indicate whether the internal audit function
plays a role in detecting and preventing fraud within financial reporting processes and assess
the degree to which internal audits contribute to minimizing the risk of financial misstatement
from fraudulent activities.

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5. Regulatory Compliance and Governance: The research will be focused on the contribution
of internal auditing to ensure that there is compliance with regulatory requirements and
standards of corporate governance; it shall assess the role of internal auditing in ensuring that
financial statements are presented as per the relevant applicable accounting and legal standard

4.DATA ANALYSIS AND INTERPRETATION

The given data represents the gender distribution in a particular sample. Out of the
total population, 86.7% are male, and 13.3% are female. The data presented here only
accounts for the binary gender categories of male and female, and does not take into
account non-binary or gender non-conforming individuals who may exist in the
population. Overall, the data on gender percentage can provide some insight into the
gender demographics of a particular population, but it is important to approach this
data with sensitivity and recognize the limitations of binary gender categorization.

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The above pie diagram represents the age distribution of the respondents The sample size for the
research was 17 participants. The research witnessed a majority of participants of the age group of 18 -
25 years is 94.1% participants. The least having the other age groups participants were included in the
survey. Maximum people who have filled up the primary data are from the age group 18 to 25 years.

Q1

From the above pie chart, we can analyze that 52.9% people think the role of internal audit is
ensuring compliance with regulations in the organization. Some people that are 29.4% thinks
that the role of auditing is Risk Assessment and Management and few of them that is 17.6%
thinks that the role of auditing is Monitoring internal controls.

Q2.

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The pie chart below displays how many responses indicated the following: an internal audit
team looks over the financial statements before the external audit, on a quarterly basis. For
most of these, 47.1% have the answer quarterly, showing that a fair number of these teams
are not only reactive in nature but do take a proactive attitude towards the oversight of the
finances. The financial statement is reviewed on an annual basis by 23.5% of the teams;
17.6% do so semi-annually, while 11.8% review such statements every month. Such is
consistent with the requirements to check financial activities on timely and consistent bases
so that good and reliable checks could be made before external audits. This distribution
points out the trend toward greater frequency of reviews - especially by quarter.

This graph describes the effectiveness of the internal audit function in detecting and reducing
material misstatements in financial statements, based on the feedback obtained from the 17
respondents. Most of the respondents, 47.1%, rated the internal audit function as very

25
effective, while 41.2% rated it as effective. A minority of 5.9% thought it somewhat
effective, and the same percentage thought the function was not effective. In general, the
results show that most of the respondents are confident in the effectiveness of the internal
audit function; nearly 90% rated it effective or very effective, while a small portion expressed
reservations over its efficacy.

The graph illustrates the various ways through which, according to the respondents, the
internal audit function helps in improving the accuracy and reliability of financial reporting.
Fifteen to seventeen participants indicated that most respondents recognize that the internal
audit function makes a holistic contribution through identifying discrepancies and enhancing
internal controls, also providing recommendations for process improvements. Another 23.5%
highlight its contribution in terms of recommendations to process enhancements, while
11.8% of the respondents believe that it works mainly towards the improvement of internal
controls. Last but not least, a very small group of 5.9% thinks it contributes to checking
mainly by spotting discrepancies. On the whole, these results suggest that the majority of the
respondents view the internal audit function as having broad and important contributions
toward the accuracy and reliability of the financial reporting.

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This is well represented in the chart, showing that most respondents considered the internal
audit function to be partially involved in preparing the financial statements. However, 11.8
percent think that the function is minimally involved, while another 11.8 percent hold the
perception that the function is not involved at all. This represents varying perceptions of what
the audit function is doing with regard to financial statement preparation.

The challenges faced by internal auditing team of which 47.1% thinks there is Insufficient
training and expertise, while 23.5% thinks lack of resource and man power and other 23.5%
thinks they are given limited access to data. Remaining 5% thinks the Auditor gets Resistance
from other Departments.

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It follows from the survey results that 70.6 percent of the respondents think that the internal
audit function provided value-added insights other than for compliance purposes at least
occasionally, while 41.2 percent believe it happens frequently. At the same time, 29.4 percent
of the respondents indicated that these insights are rarely provided, and none of the
responding organizations have said this never occurs.

According to survey findings, a similar proportion of respondents believes the internal audit
function regarding the identification and addressing of financial statement risks is doing all
that needs to be done: each category is represented by 35.3% of respondents, with 35.3%
picking reporting risks to management and monitoring implementation of mitigation
strategies against risks. The balance is represented by "reporting risks," "monitoring
implementation" at 23.5% each, and "recommending mitigation strategies," 17.6%

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5. FINDINGS

Accuracy and Completeness: Internal audits ensure the accuracy of income and expense
transactions. They also ensure that such transactions are properly classified within the
financial statements. Internal auditors looking into and attesting processes in relation to
revenue recognition, recording, and recognition of expenses and the matching of expenses to
corresponding revenues also help in ascertaining that such accounts are accurate and that
nothing material is left out of the accounts. Until the end the financial statement reflects the
most exacting financial performance of the entity.

Detection of Irregularities: The internal auditors scrutinize income and expense accounts for
sarcastic errors, omission, and fraud. For example, through internal audits, inappropriate
procedures regarding the recognition of revenues such as premature recognition of revenues
or overvaluation of claims to income can be detected. Similarly, they see to it that the
expenses are neither understated nor inappropriately deferred, which would mislead the
stakeholders about the profit of a company.

Compliance with Policies and Regulations: Internal audit functions also review how income
and expenses are accounted for according to the organization's policy on accounting and
related regulations. As far as internal audits ensure that guidelines are followed, "from
happening" of non-compliance is avoided to a large extent, and thereby an organization can
escape financial and legal penalties.

Verification of Existence and Valuation of Assets: Among others, the key responsibilities of
an internal auditor are to verify that the assets reported actually exist and, more importantly,
are owned by the company. This will entail the physical verification of tangible assets like
inventories and fixed assets, and confirmation of the existence of intangible assets like
goodwill and patents. By validating that assets are properly recorded and valued, internal
audits ensure integrity in the balance sheet.

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Liability Assessment: The completeness and accuracy of liabilities are also established,
which ensures that all the obligations are identified, recorded, and correctly reported.
Accounts payables, debt obligations, accrued expenses, and contingent liabilities should be
checked. The internal auditors also check whether liabilities are appropriately classified as
current or non-current and verify the amounts at which they are recorded.

Protection of Assets: Internal auditors assess the controls in place that protect the
organization's assets from being stolen, misused, or lost. This includes the methods of
handling the assets, their physical security measures, and approval procedures. By
discovering control deficiencies in this regard and taking steps to correct them, internal
auditors reduce the chance of misappropriation of assets and ensure that the assets will be
available for operational requirements of the business organization.

Liabilities Monitoring and Valuation: One more consideration that internal audits take into
view is liabilities, ensuring that they are appropriate, valued, and divulged in the financial
statements. This would involve checking for obligations such as loans, accounts payable, and
accrued expenses to make sure that they reflect actual financial obligations and are properly
classified in the books.

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6.CONCLUSION

The overall findings concerning the role of internal audit in audits of financial statements,
with particular respect to income and expenses, and also assets and liabilities, establish how
internal auditing impacts the accuracy, reliability, and integrity of financial reporting. Internal
audits present an important line of defense in the robustness of financial statements, in that
they deal with potential issues before they become significant misstatements or fraud. This
conclusion draws together the various ways internal audits contribute to financial statement
accuracy and their broader implications for organizational governance and stakeholder
confidence.

Role in Income and Expenses

The internal auditors' contribution to ascertaining proper recording of income and expenses is
of considerable importance. Their tasks include a thorough checking of transactions in order
to verify that revenues and expenses are appropriately recognized under the applicable
accounting standards and organizational policies. On the income side, the internal auditors
review if the streams of income are valid; that is, revenue is received only when earned, not
prematurely, and its value is not overstated. This involves examining sales records, contracts,
and any other related documents for appropriate reporting of the income within the financial
statements.

On the expense side, internal auditors test whether expenses were accurately recorded and not
understated or improperly deferred. It involves checking expenditure reports, invoices, and
expense claims to ensure that all costs have been properly accounted for and classified. In
highlighting probable errors and irregularities in the reporting of income and expenses,
internal audits help prevent misstatements related to finance and ensure that financial
statements actually represent the financial performance of an organization.

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Furthermore, internal auditors ensure adherence to the accounting standards and regulatory
requirements applicable in the country. In this regard, they minimize non-compliance risk and
litigation arising from such risks. Their proactive monitoring and evaluation of financial
transactions check if the organization is following the set guidelines; this function plays a
very essential role in maintaining accuracy and reliability in the organization's financial
reporting.

Role in Assets and Liabilities

The role of internal auditing extends considerably to the verification and management of
assets and liabilities. Internal auditors must ensure that all the assets reported in the financial
statements are properly accounted for, valued, and also properly safeguarded. This will
involve the actual examination of tangible assets such as inventory and fixed assets, and
validation of existence and legal title to intangible assets like patents or goodwill. Internal
auditors ensure proper valuation and recording of assets to express a proper balance sheet and
overall financial health.

While managing liabilities, internal auditors ensure that all types of obligations are
recognized and reported accurately. Review of accounts payable, accrued expenses, and long-
term debt is done to confirm that liabilities are properly classified and recorded at the correct
amounts. The internal auditors also validate the completeness of liabilities, making sure that
no material obligation is left undetected in the books of accounts. In this way, there is
provided an extended frame of liability management so that the outstanding liabilities are
truly presented to the stakeholders and, accordingly, a proper perception about the company's
financial condition is sourced.

Broader Implications

In this respect, the internal auditing role related to financial reporting does not stop at the
accuracy of the financial statements. At the overall level of governance and control

32
environment, it is the internal audits that have immense contributions to make. This makes
internal auditors identify weaknesses in internal controls with recommendations for
improvements, hence strengthening the organization's internal control systems, which are
cardinal in ensuring that fraud is prevented and regulatory compliance observed. Their work
in this regard enhances an organization's ability to deal effectively with risks and supports
running robust practices in governance.

The findings note that the existence of an internal audit function is positively linked with the
quality of financial statements and stakeholders' confidence. That means that accurate and
reliable financial reporting forms the base of investor confidence, correct decision-making,
and, indeed, support for compliance with regulatory provisions. Internal audits improve
credibility and long-term success by supporting the integrity of the financial information.

The internal audit function is multi-faceted and very critical to a financial statement audit.
Internal auditors answer the criticality in ascertaining income, expenses, assets, liabilities,
and contribute toward governance within the framework of operations of the organization.
Their efforts include the integrity of financial reporting, stakeholder trust, and maintenance of
general financial health and compliance of the organization. The findings underline the fact
that internal auditing has an indispensable value in delivering reliable financial statements
and enforcing good organizational governance.

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BIBLIOGRAPHY

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The Institute of Chartered Accountants of India. (n.d.-a). AUDIT EVIDENCE.

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ANNEXURE - QUESIONNAIRE

What is the primary role of the internal audit function in your organization concerning
financial statement audits?

a) Ensuring compliance with regulations

b) Monitoring internal controls

c) Risk assessment and management

How often does the internal audit team review the financial statements before external audits?

a) Annually

b) Semi-annually

c) Quarterly

d) Monthly

In your experience, how effective is the internal audit function in identifying and addressing
material misstatements in financial statements?

a) Very effective

b) Effective

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c) Somewhat effective

d) Ineffective

What level of collaboration exists between the internal audit team and the external auditors
during the financial statement audit process?

a) High collaboration

b) Moderate collaboration

c) Low collaboration

d) No collaboration

How does the internal audit function contribute to improving the accuracy and reliability of
financial reporting?

a) Identifying discrepancies

b) Enhancing internal controls

c) Providing recommendations for process improvements

d) All of the above

To what extent does the internal audit function participate in the preparation of the financial
statements?

a) Fully involved

b) Partially involved

c) Minimally involved

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d) Not involved

What challenges does the internal audit team face when conducting audits related to financial
statements?

a) Limited access to data

b) Lack of resources or manpower

c) Insufficient training or expertise

d) Resistance from other departments

Does the internal audit function provide value-added insights beyond compliance when
reviewing financial statements?

a) Yes, frequently

b) Yes, occasionally

c) Rarely

d) No

How does the internal audit function handle identified risks related to financial statements
during audits?

a) Reports risks to management

b) Recommends mitigation strategies

c) Monitors the implementation of recommendations

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d) All of the above

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