Expert verified Foreign businesses operating in India need to comply with local regulations. That’s where an internal audit for foreign companies in India becomes critical.
Understanding internal audits can help avoid penalties, fraud, and compliance issues. Learn all about the internal audit of foreign companies in India in our depth guide with a Free Checklist.
Understanding Internal Audits for Foreign Companies in India
An internal audit for a foreign company is an independent, objective review of a company’s operations, financial controls, compliance, and risk management.
It helps:
- Ensure accuracy of financial records
- Verify compliance with Indian laws (Companies Act, GST, FEMA, RBI rules)
- Identify fraud/errors
- Improve efficiency and risk management
Benefits of Internal Audit for Foreign Companies
- Compliant With Indian Laws: Internal audits ensure that the company follows Indian regulations, tax laws, and corporate compliance requirements, avoiding penalties and legal issues.
- Protection From Fraud and Misuse: They help detect and prevent fraud, financial irregularities, and misuse of resources by reviewing internal processes and controls.
- Money Saving: By identifying inefficiencies, leakages, and unnecessary expenses, internal audits help save costs and improve profitability.
- Improved Decision-Making: Audit reports provide accurate and timely insights that support better strategic and operational decisions.
- Strong Internal Controls: Internal audits strengthen internal systems, ensuring checks and balances are in place to safeguard assets and ensure smooth operations.
- Boosts Investor and Stakeholder Confidence: Transparent audit practices build trust among investors, partners, and stakeholders, reflecting good governance and financial discipline.
- Helps During External Audits or Government Scrutiny: Well-maintained audit records and practices make it easier to respond to external audits, inspections, or government reviews confidently.
Legal Framework for Internal Audits of Foreign Companies in India
Main Statutes and Regulations
- Companies Act, 2013: Section 138 and Rule 13 of the Companies (Accounts) Rules, 2014, mandate internal audits for certain companies, including foreign subsidiaries and Joint Ventures (JVs).
- FEMA: Regulates foreign investment and related compliance for foreign companies.
- Income Tax Act & Transfer Pricing: Internal audits assess tax compliance, especially in cross-border transactions.
- GST: Ensures adherence to indirect tax laws.
- Sectoral & State Laws: Industry-specific and regional laws may also apply.
Applicability of Internal Audit Requirements
Mandatory Internal Audit applies to:
- All listed companies in India
- Unlisted public companies with:
- Turnover ≥ ₹200 crore
- Paid-up capital ≥ ₹50 crore
- Loans/borrowings > ₹100 crore at any point during the previous financial year
- Deposits > ₹25 crore at any point during the previous financial year
- Private companies with:
- Turnover ≥ ₹200 crore
- Loans/borrowings > ₹100 crore at any point during the previous financial year
Foreign Companies must comply if their Indian JV or subsidiary meets these thresholds.
Even if not mandatory, many foreign companies choose to conduct internal audits in India to align with global governance standards and mitigate operational risks
Frequency & Scope of Internal Audits for Foreign Companies
Frequency
The frequency of internal audits for foreign companies in India is not fixed by law but is set by the audit committee and internal auditor under Section 138 of the Companies Act, 2013.
The frequency depends on the company’s size, complexity, and risk profile.
While many firms opt for quarterly or biannual audits, the frequency remains flexible to align with business needs and risks.
Generally a good practice is:
- Quarterly or Half-Yearly: For large or high-risk foreign companies
- Annually: Small or mid-sized businesses
- Monthly spot checks: For critical departments like finance or inventory
- Event-Based: Before mergers/acquisitions, After entering new states (e.g., GST registration changes), Post-fraud incidents
Scope
1. Financial Controls
- GST Compliance: Input tax credit reconciliation, invoice matching (GSTR-2A/2B), e-way bills.
- TDS/TCS: Deduction accuracy, quarterly returns (Form 24Q/26Q), challan payments.
- Transfer Pricing: Documentation for cross-border transactions .
- FEMA/RBI: Foreign funding reporting (Form FC-GPR), ODI compliance, repatriation limits.
2. Operational Risks
- Supply Chain: State-specific GST rates, vendor documentation (e.g., Maharashtra’s E-Tribazzar for MSMEs).
- Payroll: EPF/ESI contributions, PT compliance across states.
- IT Systems: Data localization (RBI rules), cybersecurity (ISO 27001).
3. Regulatory & Statutory
- Companies Act: Related-party transactions, director remuneration.
- Labour Laws: Contract labour compliance (especially in Karnataka/Tamil Nadu), POSH Act implementation.
- Industry-Specific: Pharma, E-commerce, etc.
4. Fraud & Ethics
- Vendor kickbacks, fake invoicing, bribery risks (PCA compliance).
- Whistleblower mechanism effectiveness.
Internal Audit Checklist for Foreign Companies in India
Here’s a sample of how an internal audit checklist for a foreign company in India may look like:
How to Prepare for Internal Audits for Foreign Companies?
If you’re a foreign company operating in India, preparing for an internal audit is a step that cannot be missed out.
Here’s a step by step approach:
1. Organize Your Financial Records
- Reconcile bank statements, GST returns, and TDS/TCS challans monthly.
- Match input tax credits with GSTR-2A/2B to avoid GST mismatches.
- Maintain invoice trails with GSTIN, HSN codes, and signed foreign remittance proofs.
- Record transfer pricing documents for cross-border transactions.
2. Review Legal & Regulatory Compliance
- Verify entity-specific documents: ROC filings for subsidiaries and valid RBI approvals for branch offices.
- Ensure GST return filings, e-way bills, and TDS/TCS deductions align with quarterly deadlines.
- Check labour law compliance like EPF/ESI returns and state-specific professional tax deductions.
- Validate FEMA documentation for foreign funding (Form FC-GPR) and repatriation limits.
3. Update Internal Policies and Procedures
- Revise expense policies to comply with Indian tax rules
- Standardize vendor onboarding with GST verification and MSME registration checks.
- Implement a whistleblower mechanism as mandated by the Companies Act, 2013.
- Create easy-to-follow compliance manuals for GST, payroll, and state labour laws.
4. Assign an Internal Audit Coordinator
- Appoint a local manager (e.g., Finance Head) as the single point of contact for auditors.
- Train them on critical Indian regulations like GST place-of-supply rules and FEMA reporting.
- Task them with gathering documents, coordinating department visits, and explaining India-specific processes.
- Empower them to escalate unresolved gaps, like pending GST notices from state tax departments
5. Test Your Internal Controls
- Run mock audits focusing on high-risk areas like GST input credits and payroll compliance.
- Use Indian accounting tools (e.g., TallyPrime) to test automated GST reconciliations.
- Verify EPF/ESI calculations and overtime payments against state wage rules.
- Simulate FEMA scenarios to check foreign fund utilization reporting accuracy.
6. Choose a Trusted Audit Partner in India
- Select a CA firm like PKC Management Consulting with expertise in Indian and industry-specific laws.
- Prioritize partners with multi-state presence if you operate across regions.
7. Create an Audit File for Easy Access
- Compile a digital dossier with GST returns, TDS certificates, and bank reconciliation statements.
- Include legal documents like stamped contracts, RBI approvals, and board resolutions.
- Store physical copies of statutory records.
- Back up files on RBI-compliant cloud platforms like Tally on Cloud or Microsoft Azure.
8. Prepare for Audit Exit Meeting and Follow-Up
- During the exit meeting, openly discuss India-specific challenges like state tax variations.
- Seek clarity on audit findings and request practical solutions for local compliance gaps.
- Prioritize fixes: resolve critical issues like GST mismatches within 15 days.
- Assign medium-risk tasks (e.g., payroll corrections) to Indian teams with 30-day deadlines.
Advantages of Outsourcing Foreign Company Internal Audits to PKC
✅Expert Indian regulatory compliance for foreign subsidiaries
✅Cross-border transaction audit specialization reduces transfer pricing risks
✅FEMA and GST compliance auditing for international operations
✅Cost-effective alternative to building internal audit teams
✅Advanced audit technology minimizes business operation disruptions
✅Proven track record with multinational corporation audits
✅Risk management frameworks tailored for foreign businesses
✅Fraud detection systems protect overseas investment integrity
✅Strategic insights improve India market decision-making capabilities
✅Multi-location audit coverage across major Indian cities
✅Real-time reporting enhances global headquarters communication
✅Continuous compliance monitoring prevents costly regulatory penalties
Frequently Asked Questions
- Do foreign companies need internal audits in India?
Yes, foreign companies must conduct internal audits if they meet certain criteria under the Companies Act, 2013. Even when not mandatory, it’s also highly recommended to manage compliance, risks, and operations better.
- Who can perform internal audits for foreign companies in India?
Internal audits must be conducted by qualified professionals like Chartered Accountants or internal audit teams. They should be independent and experienced with Indian regulations.
- What documents are needed for an internal audit of foreign companies?
You’ll need financial statements, tax returns, contracts, employee records, and compliance documents. Make sure to keep digital backups.
- Can foreign companies outsource internal audits in India?
Yes, most foreign firms hire third-party audit firms like PKC Management Consulting in India for transparency and efficiency. Make sure the firm is experienced with foreign operations.
