How to do Audit of foreign SUBSIDIARY

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INTERNAL AUDIT OF FOREIGN SUBSIDIARY

 

The world is a global village. Where it is  a boon on one hand, on the other it also means  that the competition faced by the business in our country are no longer confined to the domestic boundaries, they too are coming from across the globe. An opportunist will however take it as the market gone global. Whichever way we take it, one thing is something everyone will agree to and that is the need to expand- the need to the go beyond the domestic boundaries and face the completion head front. The scenario is slowly but steadily changing and we have seen more and more Indian MNCs emerge. Videocon is a good example.

Setting up a subsidiary in a foreign land comes with a lot of challenges. The law that is applicable to the holding company may not be the same as applicable its foreign subsidiary. The law that will be applicable to a foreign subsidiary will be that which is prevalent in the foreign country.   Apart from that work environment and cultural differences are also there. One must cope up with all of them and then only the organization can flourish. One of the many concerns of the management while setting up a foreign subsidiary is control. They wish to have effective control over the subsidiary while sitting miles away. To ensure the same, internal audit is one of the ways to ensure the existence and effectiveness of control. The management can place reliance of the internal audit report and rest assured with the fact that management of the subsidiary in foreign land is organized and well in order.

Internal auditing is a catalyst for improving an organization’s governance, risk management and management controls by providing insight and recommendations based on analyses and assessments of data and business processes.

 

Internal audit is not just a tool for the management to ensure that the controls are in place and running effectively but also mandatory under various laws in different countries. Almost In all the countries there exists a law that makes internal audit for a certain class of companies compulsory. Therefore we can say internal audit is not only a need of the management but a requirement of law.

As companies expand globally, internal audit functions need to determine whether to provide audit coverage from a central location or from a satellite or branch operation aligned geographically with the expanded business operations. This is a matter of choice. While some organizations prefer local auditors which are well versed with the situations and practices of the land in which the subsidiary is incorporated while others prefer auditors from the country of parent company with a view that parent company’s management rely on them. At times the assignment is outsourced. This approach may be adopted either for quality or cost effectiveness.

 

While conducting an internal audit of a foreign subsidiary, the auditor faces many challenges. The major obstacles in performing internal audits of overseas subsidiaries are language and differences in local business practices. In addition, the operations of many overseas subsidiaries are based on different systems than those of their parent company, making it difficult to perform an efficient risk based internal audit in a short period of time. Furthermore, business and accounting information may not reach the parent company in a timely manner, and it is not uncommon for there to be significant amounts of improper usage of funds and fraudulent accounting when you are able to evaluate the situation. However the same can be overcome by proper research and planning in advance.

What differentiates internal auditing from most other professions, though, is the single, global nature of its standards. Our worldwide profession is shaped and guided by the International Standards for the Professional Practice of Internal Auditing. These standards, from The Institute of Internal Auditors (IIA), engender quality and consistency for internal audit organizations throughout the world. Yet flexibility and adaptability underscore the standards; as the internal audit profession continues to evolve, so does our understanding of its parameters.

The standards on internal auditing issued by the Institute of Chartered Accountants of India are also very much in line with the international standards and thus making the Indian internal auditors competent to perform the said assignment. Today Indian internal auditors are nowhere behind when it comes to the audit of foreign companies; Infosys being a leading example. These audits when performed by Indians are not only high quality and cost effective but also completed with a time boxed approach.

One of the distinct features of the internal auditing standards (whether issued by IIA or ICAI) can be summed up to highlight their flexibility and adaptability. On one hand they are strong enough to ensure uniformity and high quality and on the other they are adaptable so that the practices and methods can be varied as per the environment of the auditee.

We can sum up to state that globalization has changed the competitive scenario and expansion seems to be the need of the hour. With more and more Indian companies going cross borders the issues regarding effective management and controls arise. Internal audit serves the purpose in this situation. They are not only need of the management but mandatory as per various statutes. However due to various barriers such as linguistic, environmental cultural etc, the task becomes more and more cumbersome. Internal audit due to its uniform approach globally tries to overcome those barriers. The standards issued by ICAI which are in line with those issued by IIA ensure quality and standardization in the internal audit assignment. Thanks to their flexibility and adaptability, they help the conduct of internal audit assignments across the globe and make the Indian professionals stand shoulder to shoulder with professionals anywhere in the world and thus reinstating the fact of world being a global village.

 

CO Authored by :- CA Alkit Jain & CA Manisha Jain

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