CMA Final · Cost and Management Audit

Operational Audit and Internal Audit under Companies Act, 2013

Internal audit is a review of a company's functions and activities by an appointed internal auditor under Section 138. Operational audit checks whether operations are economical, efficient and effective. To solve questions, state the legal rule first, then apply it to the case and give a clear recommendation.

What this chapter covers

This chapter covers two linked ideas. The first is internal audit as the Companies Act, 2013 requires it. The second is operational audit, which is a way of judging how well a function or process performs.

On the law side, you study Section 138, which applies to prescribed classes of companies, and Section 378ZF, which applies to Producer Companies. The two sections differ on who can be the internal auditor and on how the rules are set. Section 138 allows a chartered accountant, a cost accountant or another professional decided by the Board. Section 378ZF names a chartered accountant.

On the practice side, you study how an internal audit function is scoped, planned and reported, and how an operational audit is designed, carried out and reported. This links to the rest of Paper 17, where cost audit, management audit and audit reporting use the same logic: evidence, findings, and recommendations. Case-scenario MCQs and written questions often ask you to apply these rules to a named company.

This chapter mixes a short legal part with a practical part, so it rewards students who learn both. The legal rules are easy to test in MCQs, especially with a one-word trap such as the wrong professional or the wrong company type. The practical part suits case-based written answers, where a clear scope, plan, findings and recommendation earn marks. Since Section A of Paper 17 includes a case scenario with MCQs, you gain from knowing the rules precisely and from reading a case carefully.

Operational Audit and Internal Audit under Companies Act, 2013: topics in the order to study them

1Internal Audit under Section 138 of Companies Act 2013This is the base rule. It tells you who must appoint an internal auditor, who can be appointed and who sets the manner and intervals.
2Internal Audit for Producer Companies (Section 378ZF)Study it right after Section 138 so you can compare the two and avoid mixing them up in MCQs.
3Internal Audit Function: Scope, Planning and ReportingOnce the legal basis is clear, learn how the function actually works: what it covers, how it is planned and how it reports to the Board.
4Operational Audit: Concept, Objectives and ApproachThis moves from the legal duty to the performance-focused audit, so you need the concept before the methods.
5Operational Audit Techniques and ReportingTechniques and reporting come last because they apply the concept and are the most useful for written case answers.

How to prepare Operational Audit and Internal Audit under Companies Act, 2013

Split your time between exact legal wording and application. The law needs memory. The practice needs worked structure.

Read Section 138 and Section 378ZF in plain words and write each in two lines: who must act, who can be the auditor, and who decides manner and intervals.
Make a small comparison table on paper for the two sections. Cover the type of company, the eligible professional and how the manner and interval are fixed.
Learn the internal audit flow as a sequence: scope, risk-based plan, fieldwork, findings, report to the Board, follow-up.
Define operational audit in your own words and tie it to economy, efficiency and effectiveness. Prepare one example for a manufacturing function, such as purchasing or stores.
Practise one case answer per topic: state the rule or objective, apply it to the facts, list findings, and end with a recommendation.
Attempt MCQs on both sections and check that each wrong option is wrong for a clear reason.
On the last day, reread your two-line law notes and your case answer outlines.

Common mistakes in Operational Audit and Internal Audit under Companies Act, 2013

Saying Section 378ZF allows a cost accountant as internal auditor.
Fix: Remember that Section 378ZF names a chartered accountant only, while Section 138 also allows a cost accountant or another professional decided by the Board.
Stating that every company must appoint an internal auditor under Section 138.
Fix: Write that the duty applies to such class or classes of companies as may be prescribed.
Saying the Board fixes the interval of internal audit under Section 138.
Fix: Note that the Central Government may prescribe by rules the manner and intervals. For Producer Companies, the articles specify them.
Treating operational audit as a check of only accounting accuracy.
Fix: Frame it around economy, efficiency and effectiveness of operations, and compare actual performance against a standard or target.
Writing findings without recommendations in case answers.
Fix: For each finding, add the cause, the effect and a specific recommendation the management can act on.
Writing a long generic answer that ignores the case facts.
Fix: Underline the company type, function and facts in the case, and use them in each point of your answer.

Last-day revision: Operational Audit and Internal Audit under Companies Act, 2013

Section 138: prescribed classes of companies must appoint an internal auditor.
Section 138 auditor: a chartered accountant, a cost accountant, or another professional decided by the Board.
Section 138 scope: internal audit of the functions and activities of the company.
Under Section 138, the Central Government may prescribe by rules the manner and intervals of internal audit and its reporting to the Board.
Section 378ZF: every Producer Company must have its accounts internally audited.
Section 378ZF: the auditor must be a chartered accountant, and the interval and manner are as specified in the articles.
Do not mix up the two: Section 138 is for prescribed classes and rules; Section 378ZF is for Producer Companies and articles.
Internal audit reports go to the Board in the manner prescribed.
Operational audit judges economy, efficiency and effectiveness of operations.
A good operational audit report gives findings, causes, effects and practical recommendations.
In case questions, always end with a clear recommendation tied to the facts.

Operational Audit and Internal Audit under Companies Act, 2013 practice questions

Operational Audit and Internal Audit under Companies Act, 2013 in other exams

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

Operational Audit and Internal Audit under Companies Act, 2013: frequently asked questions

Who can be appointed as internal auditor under Section 138?

A chartered accountant, a cost accountant, or such other professional as the Board decides. The internal audit is of the functions and activities of the company. The duty applies to the classes of companies that are prescribed.

How is Section 378ZF different from Section 138?

Section 378ZF applies to Producer Companies and requires internal audit of their accounts by a chartered accountant. The interval and manner are as specified in the articles. Section 138 applies to prescribed classes of companies and allows a wider set of professionals.

What is operational audit in simple terms?

It is a review of how well an activity or function is run. You judge it on economy, efficiency and effectiveness. The result is a report with findings and recommendations for management.

How should I answer a case-based question from this chapter?

State the rule or objective first. Apply it to the facts given in the case, list your findings, and end with a clear recommendation. Keep each point tied to the company in the question.

Are there negative marks for wrong MCQs in this chapter?

No. Neither the question papers nor the ICMAI prospectus provide for negative marking. You should still attempt every MCQ, but read the options carefully, since the legal ones often differ by one word.