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Cost and Management Audit · Internal Control and Internal Audit

Internal Audit: Meaning, Scope and Objectives

Updated 11 October 2026 · Fact-checked

Internal audit is an independent, objective review of a company's functions and activities, done for management and the Board. It checks controls, risk management, compliance and efficiency, and suggests improvements. To answer exam questions, define it, state scope and objectives, then compare it with external audit and note its limits.

Understand Internal Audit: Meaning, Scope and Objectives

An internal audit is a review of a company's own operations, systems and records, carried out by someone appointed by the company to help its management and Board. The auditor does not certify the financial statements for shareholders. The aim is to tell the Board whether things are working and what should be fixed.

Start from the purpose. Management cannot watch every plant, depot and ledger. Internal audit acts as the Board's eyes. It tests whether controls work, whether assets are safe, whether rules and policies are followed, and whether resources are used economically and efficiently.

Scope is wide and covers more than accounts. It can include financial records, cost and stores controls, purchases, production, marketing, HR, IT systems, compliance with laws, and risk management. The scope is decided by management or the Audit Committee and the Board, so it can change from year to year. This differs from statutory audit, whose scope is fixed by law.

Objectives fall in three groups. Primary: check that accounting and other records are reliable and that controls operate. Protective: safeguard assets and detect and prevent errors and fraud. Advisory: recommend better systems, cost savings and process improvement. Modern internal audit is also risk-based, focusing on areas of greatest risk.

Under Section 138 of the Companies Act, 2013, prescribed classes of companies must appoint an internal auditor. The auditor must be a chartered accountant, a cost accountant, or such other professional as the Board decides. The Central Government prescribes by rules the manner and intervals of the audit and its reporting to the Board. The Act itself does not list the classes; the Rules do. Producer Companies have a separate rule: Section 378ZF requires internal audit of accounts by a chartered accountant.

Key rules to remember

Who can be internal auditor (Section 138(1))
Chartered accountant OR cost accountant OR other professional decided by the Board
Applies to such class or classes of companies as are prescribed. The Act does not name the classes; the Rules do.
Manner and intervals (Section 138(2))
Central Government prescribes by rules how often internal audit is done and how it is reported to the Board
Reporting goes to the Board, not to the members.
Producer Company (Section 378ZF)
Internal audit of accounts by a chartered accountant, at the interval and in the manner specified in the articles
Here only a chartered accountant (as defined in the Chartered Accountants Act, 1949) qualifies.
Audit Committee link (Section 177(5))
Audit Committee may discuss related issues with internal and statutory auditors and management
Shows internal audit feeds the Audit Committee.

How to solve Internal Audit: Meaning, Scope and Objectives questions

Use this order for any question on meaning, scope, objectives or comparison of internal audit.

  1. 1Define internal audit in one or two lines: independent review of functions and activities for management and the Board.
  2. 2State who appoints and who reports: appointed by the company, reports to management, Audit Committee or Board.
  3. 3List scope points that fit the case: financial, cost, operational, compliance, IT and risk areas.
  4. 4List objectives in groups: reliability of records, safeguarding assets, detecting fraud and error, compliance, efficiency and advice.
  5. 5If asked about law, cite Section 138: prescribed companies, eligible persons, and rules on manner and intervals.
  6. 6If asked to compare with external audit, use fixed heads such as appointment, purpose, scope, independence, report and timing.
  7. 7Add advantages and limitations briefly, then link the answer to the case facts and give a conclusion.

Quickest way: Heads-list method

When to use it: For MCQs and 5 to 8 mark theory questions when time is short.

  1. Remember the keywords: Independent, Appointed by company, Wide scope, Advises management.
  2. For MCQs, test each option against these: statutory audit is for members; internal audit is for management.
  3. For comparison questions, write 6 heads in two columns and one line each.
  4. Close with one line on Section 138 if the question mentions a company.

Common mistakes in Internal Audit: Meaning, Scope and Objectives

  • Saying internal audit is compulsory for every company.

    Students mix it up with statutory audit.

    Fix: Write that Section 138 applies to such classes of companies as are prescribed by the Rules.

  • Saying only a chartered accountant can be internal auditor.

    Section 378ZF for Producer Companies is remembered and applied to all.

    Fix: Under Section 138 it can be a chartered accountant, cost accountant or other professional decided by the Board. Only Producer Companies need a chartered accountant.

  • Writing that the internal auditor reports to shareholders.

    Confusion with the statutory auditor's report.

    Fix: Internal audit reports to management, the Audit Committee or the Board, as prescribed.

  • Treating internal audit as a check of accounts only.

    Textbook definitions of audit stress financial statements.

    Fix: Include operational, compliance, cost, IT and risk areas in scope.

  • Claiming internal audit is fully independent like external audit.

    The word 'independent' is used loosely.

    Fix: Say it is objective and functionally independent, but the auditor is appointed and paid by the company, so independence is relative.

Worked examples

Example 1

Distinguish between internal audit and external (statutory) audit on any five points. (5 marks)

Show the solution
  1. Choose heads: appointment, purpose, scope, reporting, independence.
  2. Appointment: internal auditor is appointed by management or Board; statutory auditor is appointed by members at the general meeting (Section 139), except in cases such as first auditors or Government companies.
  3. Purpose: internal audit evaluates controls, efficiency and compliance and advises; external audit gives an opinion on the true and fair view of financial statements.
  4. Scope: internal audit scope is set by management or the Board and is wide; external audit scope is set by law.
  5. Reporting: internal audit reports to management, Audit Committee or Board; external audit reports to members.

Answer: Internal audit is a management tool with a flexible scope, reporting to the Board or Audit Committee. External audit is a statutory function with a fixed scope, giving an opinion to members. Independence is higher in external audit.

Example 2

Sundaram Textiles Ltd is a company in a class prescribed for internal audit. Its Board wants to appoint a cost accountant in practice as internal auditor. Can it do so, and who prescribes how often the audit is done? (4 marks)

Show the solution
  1. Section 138(1) requires prescribed classes of companies to appoint an internal auditor.
  2. The auditor can be a chartered accountant, a cost accountant, or such other professional as the Board decides.
  3. A cost accountant is expressly named, so the appointment is permitted.
  4. Section 138(2): the Central Government prescribes, by rules, the manner and intervals of the audit and its reporting to the Board.

Answer: Yes, the Board can appoint a cost accountant. The manner and intervals of audit and reporting to the Board are prescribed by the Central Government through rules.

Exam tips

  • Comparison with external audit is the commonest theory question. Use a clean two-column format with 5 to 6 heads.
  • In MCQs, watch for the options 'appointed by shareholders' or 'compulsory for all companies'. Both are wrong for internal audit.
  • Quote the eligible persons in Section 138(1) exactly, since MCQs test them.
  • For case questions, tie scope to the facts given, such as stores, cost controls or IT systems, and end with a recommendation.

Practice questions from Internal Control and Internal Audit

Internal Audit: Meaning, Scope and Objectives in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Internal Audit: Meaning, Scope and Objectives: frequently asked questions

What is the meaning of internal audit?

Internal audit is an independent review of a company's functions and activities, done for management and the Board. It checks controls, compliance, asset safety and efficiency, and recommends improvements.

Who must appoint an internal auditor under Section 138?

Section 138 applies to such class or classes of companies as are prescribed. You should state the classes from the Rules, as the Act itself does not list them.

Who can be appointed as internal auditor?

A chartered accountant, a cost accountant, or such other professional as the Board decides. Producer Companies must use a chartered accountant under Section 378ZF.

What is the main difference between internal and external audit?

Internal audit serves management and the Board, has a flexible scope and is about controls and efficiency. External audit is statutory, serves members and gives an opinion on the financial statements.