Importance of Internal Audits for SME’s
Published on May 21, 2025
Internal audits are essential for businesses to evaluate the effectiveness of internal controls, risk management and compliance with the laws and regulations. In India, internal audits are becoming increasingly crucial for companies and organizations across sectors—not only to meet the legal obligations but also to strengthen the performance of the businesses.
This blog guided by Felix Advisory explanin the internal audit importance, its role in modern business environments, and how it benefits small and medium-sized enterprises (SMEs), startups, and corporations operating in India.
What Is an Internal Audit?
An internal audit is an independent evaluation of a company’s internal processes and systems. The main objectives are to:
- Assess the efficiency of internal controls
- Ensure compliance with policies and regulations
- Identify operational, regulatory or financial risks
- Recommend corrective measures
Internal audit is often misunderstood as being solely compliance-driven. However, it is also an operational tool that enables better decision-making.
Why Internal Audit Is Necessary?
The following table summarizes the key reasons why internal audits are important for any business:
| Purpose | Why It Matters |
| Risk Identification | Highlights operational, financial and compliance specific risks & opportunities |
| Compliance Assurance | Helps you to ensure that you meet regulatory obligations like GST, Companies Act, etc. |
| Process Improvement | Identifies inefficiencies and suggests improvements in processes |
| Fraud Detection | Detects anomalies such as duplicate payments, misstatements, or unauthorized access |
| Enhances Accountability | Promotes transparent decision-making and clear responsibilities |
Regulatory Requirements for Internal Audit in India
Internal audits are mandated under Section 138 of the Companies Act, 2013 for certain categories of companies. Here’s a quick reference:
| Company Type | Threshold for Mandatory Internal Audit |
| Listed Companies | Mandatory |
| Unlisted Public Companies | Turnover of ₹200 crore or more or Outstanding Loans exceeding ₹100 crore |
| Private Companies | Turnover of ₹200 crore or more & Outstanding Loans greater than ₹100 crore |
Even if not mandatory, internal audits are increasingly becoming popular and are getting adopted by businesses to strengthen their internal control frameworks.
What Are The Benefits Of An Internal Audit?
Here are the internal audit benefits especially relevant for growing businesses and startups:
- Cost Savings
Identifies leakages or inefficiencies in spending, procurement, or payroll.
- Regulatory Readiness
Ensures all tax and compliance filings are accurate and timely.
- Operational Improvement
Assesses how processes can be simplified or digitized for better productivity.
- Better Governance
Encourages a culture of transparency and structured decision-making.
- Supports Growth Planning
Offers valuable insight into whether internal systems can scale with the business.
Internal Audit vs. External Audit
Understanding the difference between internal and external audits is crucial. Let’s explore the key distinctions between them:
| Internal Audit | External Audit | |
|---|---|---|
| Objective | Improve internal operations and controls | Express opinion on financial statements |
| Performed by | In-house or outsourced audit team | Independent audit firm |
| Frequency | Periodic or ongoing | Annual or as mandated |
| Reported to | Management/Board of Directors | Shareholders and regulatory bodies |
Both are necessary, but internal audits are more embedded into the continuous operational improvement process.
Common Internal Audit Areas
Internal audits are typically focused on the following functions:
| Department | Typical Audit Focus |
| Finance | Expense accuracy, vendor payments, reconciliations |
| HR & Payroll | Attendance tracking, statutory compliance |
| Procurement | Vendor selection process, pricing validations |
| IT & Data Security | Access control, data backup, cybersecurity protocols |
| Operations | Production, Inventory tracking, service delivery efficiency |
Limitations of Internal Audit (and How to Address Them)
Despite its importance, internal audit limitations may occur:
| Limitation | Recommended Solution |
| Scope may be narrow | Conduct a risk-based audit covering high-impact areas |
| Possibility of bias | Outsource to third-party professionals like Felix Advisory |
| Resistance from staff | Create awareness about the benefits of audit-led process for improvements |
FAQs
- What is the purpose of internal audit?
To evaluate the effectiveness of internal controls, identify operational risks and ensure compliance with laws and regulations.
- Is internal audit mandatory for all companies in India?
No, it is mandatory only for certain companies under Section 138 of the Companies Act, 2013.
- Can a company outsource internal audits?
Yes. Many companies prefer outsourcing to experienced audit firms like Felix Advisory to gain independent, professional insights.
- How often should an internal audit be conducted?
Ideally once a year, or quarterly for dynamic or high-risk operations.
- What are the internal audit limitations?
Limited scope, potential bias if done in-house, and employee resistance—but these can be managed with the right approach and firms like Felix Advisory.
Final Say
The importance of internal audit extends beyond compliance—it is a foundational element of good governance, strategic risk management, and operational improvement. Whether mandated by law or implemented voluntarily, internal audits help businesses identify gaps, strengthen controls, and build lasting trust with stakeholders.
With a team of experienced professionals, Felix Advisory enables businesses to stay compliant, minimize risks, and build sustainable systems.
Ready to make your business audit-ready?
Contact Felix Advisory today.
Felix Advisory is a Full service professional firm with 350 team members and 5 offices in India. We are specialized in Advisory, Tax & Accounting Services with 24 partners with more than 20 years experience, including experience with Big4 in India as well as abroad. We are currently working with MNC, Indian Businesses & Startup across industry.