Master guide on mandatory internal audit under Section 138 of Companies Act, 2013, Internal Financial Controls (IFC) testing, inventory leakage prevention, and risk management in Chhattisgarh.
In This Article
5 SectionsAs commercial enterprises, manufacturing plants, and distribution networks across Raipur, Bhilai, Korba, and Kalahandi scale, management faces increasing operational risks — including inventory pilferage, unrecorded scrap sales, delayed receivables collection, and unauthorized cash disbursements.
While statutory audit evaluates historical compliance for tax authorities and shareholders, an Internal Audit & Internal Financial Controls (IFC) review focuses on operational efficiency, risk mitigation, and active fraud prevention.
Statutory Requirement (Section 138): Section 138 of the Companies Act, 2013 mandates the appointment of an Internal Auditor (who can be a Chartered Accountant or Cost Accountant) for specified classes of public and private companies.
1. Mandatory Internal Audit Thresholds under Section 138
| Entity Classification | Paid-Up Share Capital Threshold | Turnover Threshold | Outstanding Loans / Borrowings | Outstanding Deposits |
|---|---|---|---|---|
| Listed Companies | Mandatory for all listed entities | Mandatory | Mandatory | Mandatory |
| Unlisted Public Companies | ≥ Rs. 25 Crores | ≥ Rs. 200 Crores | ≥ Rs. 100 Crores | ≥ Rs. 25 Crores |
| Private Limited Companies | Not Applicable | ≥ Rs. 200 Crores | ≥ Rs. 100 Crores | Not Applicable |
2. Core Pillars of Internal Financial Controls (IFC)
Under Section 134(5)(e) and Section 143(3)(i) of the Companies Act, auditors must explicitly report on whether the company has an adequate Internal Financial Controls system in place and operating effectively:
[Control Environment] ➔ [Risk Assessment] ➔ [Control Activities] ➔ [Information & Communication] ➔ [Monitoring & Testing]
- Procure-to-Pay (P2P) Controls: Three-way matching of Purchase Order (PO), Goods Receipt Note (GRN), and Vendor Tax Invoice before approving payments.
- Order-to-Cash (O2C) Controls: Credit limit approvals for wholesale dealers, automated aging reports, and mandatory balance confirmations.
- Hire-to-Retire (H2R) Controls: Ghost employee audits, biometric attendance cross-verification with payroll registers, and PF/ESIC deductions.
- Inventory & Warehouse Controls: Perpetual inventory counting, scrap sale gate pass controls, and raw material conversion ratio tracking.
3. High-Risk Leakage Areas in Industrial Units (Raipur Belt)
During internal audits conducted for manufacturing and trading units in Urla, Siltara, and Rawabhata, common operational vulnerabilities identified include:
A. Raw Material Yield & Outturn Variances
In steel re-rolling mills, sponge iron plants, and rice mills, comparing actual production output against standard technical yields isolates unaccounted production losses or unbilled cash sales.
B. Scrap & By-Product Sales
Scrap sales conducted on cash terms without serial-numbered weighbridge slips or gate passes are a primary source of revenue leakage.
C. Freight & Transportation Overcharges
Transport bills verified without cross-referencing vehicle weighbridge receipts, e-way bills, and destination unloading confirmations lead to inflated freight expenses.
4. Internal Audit Plan & Execution Methodology
[Scoping & Risk Assessment] ➔ [Process Walkthrough] ➔ [Sample Testing & Data Analytics] ➔ [Drafting Audit Observations] ➔ [Management Discussion & CAP]
- Data Analytics (CAATs): Using computer-assisted audit techniques on ERP systems (Tally, SAP, Busy) to detect duplicate payments, split purchase orders below approval thresholds, and unusual weekend transactions.
- Physical Verification: Performing surprise physical counts of cash, high-value inventory, and fixed assets.
- Corrective Action Plan (CAP): Presenting findings with actionable recommendations, assigning implementation ownership, and establishing target remediation dates.
5. Case Study: Steel Trading & Processing Firm in Raipur
An industrial supplier in Bhanpuri, Raipur with an annual turnover of Rs. 85 Crores experienced declining operating margins despite rising gross revenues.
Internal Audit Findings:
- Unmonitored Credit Terms: 35% of customer accounts exceeded agreed credit periods by over 120 days without interest charges, inflating working capital interest expenses by Rs. 18 Lakhs.
- Weighbridge Discrepancies: Inbound scrap purchases lacked digital weighbridge integration, resulting in 2.5% phantom weight allowances totaling Rs. 24 Lakhs annually.
Remediation: Our internal audit team designed an automated ERP control gate, enforced 3-way matching, and integrated digital weighbridge software, restoring operating margins by 4.2% within 6 months.
Internal Audit & Risk Advisory Services
Our risk advisory practice at Rabi Agrawal & Associates provides outsourced internal audits, IFC framework implementation, fraud risk assessments, and SOP drafting for manufacturing plants, rice mills, and trading enterprises across Raipur, Bhilai, Korba, and Kalahandi.
Consult our internal audit team at Raipur Head Office or Jayapatna Branch.
Authored by CA Rabi Agrawal & Practice Team
Rabi Agrawal & Associates, Chartered Accountants — Head Office Raipur (CG), Branch Office Jayapatna (Odisha).