Unique Healthcare Ltd. is a radiological instruments manufacturing company in Northern India having its registered office and factories in New Delhi. Company deals in wide range of radiological instruments supplying its

CS Professional · Internal and Forensic Audit · PYQS · June 2026
Unique Healthcare Ltd. is a radiological instruments manufacturing company in Northern India having its registered office and factories in New Delhi. Company deals in wide range of radiological instruments supplying its products to private and public sector hospitals and healthcare centres. In recent past, due to increasing demand of the company's products, several new products have been added in its product line. Company's operations with new technology, sales turnover and customer base are increasing leaps and bounds. Company's Managing Director and CEO a Professional Entrepreneur, appreciates that an internal audit is an independent objective assurance and consulting activity to add-value and improve an organization's operations. It helps an organization in accomplishing its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. Considering potential of internal auditing, CEO Gupta has high expectations from internal audit activity. He believes that internal audit provides a value-added service to the management and to the board of directors by detecting and correcting weaknesses in a process before external audits discover them. This protects the organization from loss of reputation and regulatory fines. He believes that the objective of an Internal Audit is to evaluate compliance with procedures, applicable laws, regulations and international standards. Data and reports are reviewed to assure consistency and compliance. Currently, company has a small in-house team lead by an unqualified person for internal audit function guided by the company's statutory auditors. Now, company, realizing the benefits of sound internal control systems that ensure compliance with laws and regulations, enhancing efficiencies and minimizing losses, has decided to outsource the internal audit activity, instead of creating a new full-fledged internal audit department in the company. This would also help company avoid huge costs in managing and in-house internal audit department. You, a qualified Company Secretary practising mainly in internal auditing, have been approached by the MD. You have been offered the internal audit of the company for next three years. In your letter of appointment of internal auditor, in the scope of audit and in the terms of reference paragraphs, management has entrusted you to carry out a comprehensive review of all operations of the company and to evaluate and assess the existence, adequacy and effectiveness of internal controls therein, pointing out weaknesses if any in and suggesting measures to control them in an actionable manner. Apart from the above, company management has specifically mandated you to minimize non-compliance and penalties and also the adverse comments in statutory auditors' reports. With reference to the above, you as a Company Secretary are required to answer the following questions: What are the factors that company's statutory auditors are mandated to examine to ensure whether company's internal audit system is commensurate with the size of the company and nature of its business ?

Answer & Explanation:

ICAI has issued a Guidance Note on The Companies (Auditor's Report) Order, 2020. As per this Guidance Note, the auditor needs to examine the following aspects to evaluate whether the internal audit system is commensurate with the size of the company and the nature of its business: The size of the internal audit department considering the nature of the business of the company, the number of operating locations, the extent to which internal controls are decentralized, the effectiveness of other forms of internal control, etc. Qualifications of the persons who undertake the internal audit work is a necessary aspect to be reviewed to ensure that there are adequate number of qualified personnel. In cases where external agencies are appointed, the auditor would need to evaluate their competency, objectivity and the independence. The auditor may do this by assessing the qualifications, experience and the professional standing. Reporting responsibility of the internal auditor: It is expected that the internal auditor would report to those charged with governance. As per section 138 of the Companies Act, 2013, the internal auditor reports to the Board/ Audit Committee. In case of listed companies, compliance of provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with regard to review of internal audit function by audit committee, presence of head of internal audit in the audit committee meetings, audit committee involvement in appointment, removal and terms of remuneration of the chief internal auditor, a direct communication link between the internal auditor and audit committee, etc. shall be verified by the auditor. Involvement of Board or Audit Committee in formulation of scope, functioning, periodicity and methodology of Internal Audit shall be examined by the auditor. As per guidance note, it is a good practice that statutory auditors are also involved by the internal auditor/those charged with governance in determining the scope of work and periodicity of reporting. Technical assistance to the internal auditor: In companies where the operations are highly technical or automated in nature, an internal auditor cannot function effectively unless he has adequate technical assistance. Statutory auditor shall review the availability of technically qualified persons (either full time or assignment based). Reports submitted by the internal auditor. Existence of adequate follow-up system to ensure that the deficiencies pointed out are corrected and remedial action taken on the deficiencies are reported upon. Minutes of the meetings of the Board of Directors and audit committee to get useful evidence regarding the efficiency and efficacy of the internal audit system. Existence or otherwise of other forms of internal control: Internal audit system is a part of the overall internal control system. Therefore, the scope of the internal audit and the extent of its coverage will, to some extent, depend upon the existence or otherwise of other forms of internal control. This is also a factor to be considered when evaluating the adequacy of the internal audit system. If the statutory auditor determines that the internal audit system is not commensurate with the size and nature of business of a company, then the auditor should communicate with the Audit Committee or Board and seek their inputs as part of "Communication to Those Charged with Governance" and accordingly report the fact under this report.

Topics: Internal Audit

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