ICAI proposes mandatory internal audit standards, peer review framework

The Institute of Chartered Accountants of India (ICAI) has released exposure drafts of the Preface to the Standards on Internal Audit (SIA) and associated Quality Standards on Internal Audit (QSIA) , proposing a major overhaul that will make internal audit standards mandatory in India.

The move, spearheaded by the Internal Audit Standards Board (IASB) aims to standardize internal audit practices, enhance transparency, and introduce **peer review and third-party assessment for the first time.

“Compliance with Standards on Internal Audit shall be considered a mark of professional excellence and ethical responsibility,” the draft notes.

Mandatory standards and framework

The Preface, first issued in 2004 and revised in 2007 and 2018, was previously recommendatory. The ICAI Council now proposes that it, along with the SIA, become mandatory from a date to be notified.

The draft lays out a comprehensive framework covering:

Basic Principles: Independence , integrity, due professional care, confidentiality, risk-based audit, and continuous improvement.

Core Concepts: Engagement terms, audit management, internal controls, risk management, compliance, and value addition.

Standards on Internal Audit (SIAs): Principle-based criteria for conducting audits.

Guidance Notes and Technical Guides: Non-mandatory advice on industry-specific or technical issues

Internal auditors will be required to document deviations from SIAs with justification, and may conflict with regulatory mandates must be disclosed in audit reports.

Quality and peer review standards

For the first time, ICAI has introduced QSIA1 and QSIA 2, covering internal audit quality and peer review/ third-party assessment respectively. The standards are designed to benchmark audit practices and ensure impartiality.

“The standards aim to bring consistency, benchmarking and accountability in internal audit practices,” the draft states.

Series-based structure and audit execution

The exposure drafts include 26SIAs divided into:

Series 100: Core concepts and principles (SIA 110-160)

Series 200: Audit Execution (SIA 210 – 290)

Series 300: Internal Audit Reporting (SIA 310-340)

Each SIA defines the objective, requirements, application guidance, and effective date, with auditors expected to implement standards on a “substance over form” basis.

Standard-setting and stakeholder consultation

The IASB follows a structured process:

1. Identify topics and timelines for drafting SIAs
2. For Study Groups of ICAI members and experts
3. Board review and finalisation of exposure drafts
4. Public consultation for at least 30 days, including regulators, industry bodies, and the general public.
5. Council approval and issuance of the final standards

Key stakeholders include the Ministry of Corporate Affairs, RBI, SEBI, IRDAI, CAG, CBDT, CBIC, ICSI, ICMAI, stock exchanges, banks and industry associations.

The deadlines for submitting comments in October 23, 2024, with recommendations expected to cite relevant paragraph numbers and rationale.

Impact on internal audit

The draft defines internal audit as providing independent reasonable assurance on internal controls and risk management to support governance and organisational objectives. The standards emphasize ethics, independence, competence, and stakeholder sensitivity, signaling a shift toward regulated, quality-assured internal audit practices.

“This Preface and the associated standards provide clarity on key components governing internal audit to ensure standardisation and quality in discharge of internal auditor’s responsibilities,” the draft says.