Internal vs External Audit in Nepal: Key Differences

Managing a business requires clear oversight of financial health. You must distinguish between different types of reviews. Most businesses find themselves choosing between internal audit vs external audit in Nepal. This choice impacts your compliance and your operations. Nepal has specific laws for both types of audits. Understanding these rules helps you avoid penalties and improve profit.

Internal audit is an ongoing, internal process. It is performed by the company’s own staff or an outsourced firm to evaluates risk, strengthens internal controls, and improves operational efficiency throughout the year.

External audit is an independent, statutory review of a company's financial statements, conducted once a year by a licensed Chartered Accountant registered with the Institute of Chartered Accountants of Nepal (ICAN). Under the Companies Act 2063, every private and public limited company in Nepal must appoint an external auditor to make it a legal obligation, not a choice.

Aspect	Internal Audit	External Audit
Purpose	Improve operations & controls	Verify financial statement accuracy
Performed by	In-house team or outsourced firm	ICAN-licensed Chartered Accountant
Frequency	Monthly or quarterly	Once a year (post Ashad)
Reports to	Management / board	Shareholders & government
Mandatory?	Depends on company size & type	Yes — Companies Act 2063

Who performs the final audit?
An ICAN-registered CA appointed at the company's AGM

Submission deadline: Within 6 months of fiscal year-end (by Poush)

Why You Need Internal Audit in Kathmandu?

Operating a business in a busy market requires vigilance. If you run a company, an internal audit in Kathmandu helps you stay organized. It identifies weaknesses before they become big problems. Many businesses face issues with inventory theft or payroll errors. Internal audit finds these gaps. It provides you with actionable insights to fix them.

You gain a better understanding of your cash flow. In Nepal, many businesses struggle with credit management. An internal auditor tracks your receivables. They ensure your staff follows up on late payments. This keeps your business liquid. You also ensure your company follows the latest tax circulars. The Inland Revenue Department changes rules frequently. Your internal audit team keeps you updated.

Internal Audit: Who Can Perform It?

Unlike the external audit, Nepal's legal framework does not mandate that an internal auditor hold a specific professional licence (like a Chartered Accountant license). This makes the internal audit function considerably more flexible in terms of who can perform it.

In practice, internal audits in Nepal are carried out by one of three arrangements:
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- In-house internal audit department. Large companies, banks, and financial institutions regulated by the Nepal Rastra Bank (NRB) are required to maintain a dedicated internal audit department. These staff members are employees of the company and report directly to the audit committee or the board of directors.

- Outsourced audit firm. Small and medium enterprises (SMEs) commonly hire an external accounting or consultancy firm on a monthly or quarterly retainer to perform internal audit functions. The firm conducts periodic reviews of specific departments. Finance, procurement, inventory, payroll and submits findings with these departments to management.
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- Individual internal auditor. Some companies appoint a single qualified individual, often a CA or a semi-qualified accountant, to manage the internal audit function on a part-time or contract basis.
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The critical distinction is the reporting line. The internal auditor can be whether in-house or outsourced reports to the company's management or board, not to shareholders or the government. Their findings are internal documents used for operational improvement. They do not carry the legal authority of an external audit opinion.
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Best Practice for Internal Audit in Nepal: ICAN has published an Internal Audit Manual 2025. It aims to establish a standard and encourages only the qualified professionals for auditing to ensure conformity with international standards.

Why You Need External Audit in Kathmandu?

The law mandates an annual review for companies. External audit in Kathmandu satisfies the requirements of the Companies Act and the Income Tax Act. You must submit an audited report to the Office of the Company Registrar every year. Failure to do so leads to fines. External auditors provide credibility. If you need a loan from a commercial bank, the bank will ask for your audited financials.

Investors also look at these reports. A clean audit report shows your business is transparent. It proves your financial health to outsiders. The auditor checks if you paid the correct amount of Value Added Tax and Income Tax. This prevents future audits from the tax office. You sleep better knowing your compliance is in order.

Who Performs the Final Audit of a Company in Nepal?

The final audit of a company in Nepal is the external audit, and it is a statutory requirement & not optional. Under the Companies Act 2063, Section 111, every private and public limited company registered in Nepal must appoint an auditor to examine its financial statements at the end of each fiscal year. This auditor must be an independent professional entirely separate from the company's management, ownership, or internal staff.

Institute of Chartered Accountants of Nepal (ICAN) Role for Final Audit

The Institute of Chartered Accountants of Nepal (ICAN) is the main authority in Nepal that provides licenses and regulates auditors. Established under the Nepal Chartered Accountants Act 2053, ICAN sets the professional standards, issues Certificates of Practice, and governs the conduct of all auditors operating in the country.
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For an auditor to legally perform an external audit in Nepal, they must meet all three of the following conditions:

Hold a Chartered Accountant (CA) designation or be a Registered Auditor (RA) under ICAN
Possess a valid Certificate of Practice (CoP) issued by ICAN for the current fiscal year
Maintain independence from the company being audited, meaning they cannot hold shares, be a director, or have any financial interest in the client entity

ICAN also mandates that its members follow the Nepal Standards on Auditing (NSA), which are aligned with the International Standards on Auditing (ISA) issued by the IAASB. This alignment means an external audit conducted in Nepal meets internationally recognised benchmarks, which matters when seeking foreign investment or bank financing.
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If your auditor does not hold a current ICAN Certificate of Practice, their audit report has no legal standing. The OCR can reject the submission and the company remains non-compliant.

Appointment Process Under the Companies Act 2063

The Companies Act 2063 establishes a clear, mandatory process for appointing the external auditor. Failing to follow this process correctly is itself a compliance violation, separate from the audit submission deadline.
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Step 1 Appointment at the Annual General Meeting (AGM). Under Section 111 of the Companies Act 2063, the appointment of the external auditor must be approved by the shareholders at the company's Annual General Meeting. The board may propose a candidate, but the final appointment authority rests with the shareholders through a resolution.
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Step 2 ICAN eligibility verification. Before formally appointing an auditor, the company must confirm that the proposed CA or RA holds a valid Certificate of Practice from ICAN for the current fiscal year. Appointing an auditor without a current CoP renders the appointment invalid.
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Step 3 Notification to the Office of the Company Registrar. Following the AGM resolution, the company must formally notify the OCR of the appointed auditor's name, ICAN registration number, and Certificate of Practice details. This notification must be filed within the prescribed timeline.
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Step 4 Audit completion and submission. The appointed auditor has until six months after the end of the fiscal year (i.e., by mid-Poush/January) to complete the audit and submit the audited financial statements to the OCR. The fiscal year in Nepal runs from 1st Shrawan to the last day of Ashad (mid-July to mid-July).
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Step 5 Reappointment or rotation. At the following AGM, shareholders either reappoint the same auditor or appoint a new one. While Nepal's law does not currently mandate mandatory auditor rotation for all companies, NRB-regulated institutions have specific rotation requirements under Nepal Rastra Bank directives.
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‍Note: A company that fails to appoint an auditor at its AGM, appoints an unqualified individual, or misses the submission deadline faces financial penalties from the OCR, potential delisting, and difficulties renewing its business licence.

Internal Audit vs External Audit in Nepal: Differences

The primary difference lies in the objective. Internal audit aims to improve operations. External audit aims to verify financial accuracy for outsiders. Internal audit vs external audit in Nepal also differs in timing. You conduct internal audits monthly or quarterly. You conduct external audits once a year after the fiscal year ends in Mid July.

The scope also varies. Internal auditors look at everything. They look at human resources, procurement, and IT systems. External auditors focus mostly on financial records. They check your bank balances, assets, and liabilities. They want to ensure no material misstatements exist in your ledger.

The reporting structure is different. Internal auditors report to your board or your management. Their reports stay inside the company. External auditors report to the shareholders. Their report is a public document in many cases. It goes to the government.

Comparing Internal Audit vs External Audit for Scope, Timing & Cost

Most business owners in Nepal understand that both audits exist. Fewer understand how fundamentally different they are in when they happen, what they examine, who they report to, and what they cost. This section breaks down each dimension clearly so you can plan both functions with confidence.

When Does Each Audit Happen?

Internal audit operates on a continuous cycle throughout the fiscal year. There is no single "audit season." Instead, the internal audit function runs scheduled reviews across departments at regular intervals. The key principle is that internal audit findings reach management while there is still time to correct problems within the fiscal year.
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External audit is a point-in-time exercise tied directly to Nepal's fiscal calendar. Nepal's fiscal year runs from 1st Shrawan to the last day of Ashad. Under the Companies Act 2063 and the Income Tax Act 2058, companies have six months from the end of the fiscal year to complete the external audit and submit audited financial statements to the Office of the Company Registrar (OCR) and the Inland Revenue Department (IRD). Missing this six-month deadline is a compliance violation in its own right, separate from any findings within the audit itself.

Aspect	Internal Audit	External Audit
Frequency	Monthly / Quarterly / Ongoing	Once per year
When it runs	Throughout the fiscal year	After the fiscal year closes
Tied to fiscal calendar?	No	Yes — must complete within 6 months of Ashad end
Deadline governed by	Internal management policy	Companies Act 2063 + IRD requirements
Legal Basis	Management Discretion / NRB Directives	Companies Act Section 111
Primary Goal	Risk Mitigation & Efficiency	Statutory Compliance & Fair View
The "Auditor"	Can be staff or firm	Must be ICAN-licensed CA/RA
OCR/IRD Submission	No	Yes (Mandatory)
Cost Basis	Salary or Retainer	ICAN Minimum Fee Directive

Reporting Lines: Who Sees Each Report?

Internal audit reports travel upward within the organisation. The internal auditor submits their findings to the audit committee (where one exists) or directly to senior management and the board of directors. The internal audit findings commonly consist of identified weaknesses, control failures, and recommendations. In banks and financial institutions, Nepal Rastra Bank directives require that internal audit findings be reported to the board-level audit committee, not just to management, specifically to prevent management from suppressing unflattering findings.
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These reports are confidential and do not go to the government, shareholders, or the public. Their purpose is corrective that gives management the information needed to fix problems before the external auditor finds them, or before they become financial losses.
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External audit reports move in the opposite direction, outward and upward, beyond the company itself. The external auditor's report is addressed to the shareholders of the company, not to management. It is presented at the Annual General Meeting and filed with the Office of the Company Registrar as a public document. The Inland Revenue Department relies on the audited financial statements for tax assessment. Banks require the external audit report before extending or renewing credit facilities. Any investor conducting due diligence on your company will examine this report.
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This means the external audit report carries legal and public accountability that the internal audit report does not. A qualified or adverse opinion from an external auditor is a serious public finding with direct consequences for banking relationships, regulatory standing, and investor confidence.

Aspect	Internal Audit Report	External Audit Report
Addressed to	Management / Board / Audit Committee	Shareholders
Confidentiality	Internal document — not public	Filed with OCR — public record
Seen by	Senior management, directors	Shareholders, OCR, IRD, banks, investors
Legal standing	Advisory — no statutory opinion	Statutory — carries legal authority
Used for	Operational decisions, control improvement	Tax assessment, loan applications, compliance

Cost Comparison and Budgeting in Nepal

Internal audit costs are structured as an ongoing operational expense rather than a single annual fee. Companies in Nepal typically fund this function in one of three ways:
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- An in-house internal audit team involves a fixed salary cost. A qualified internal auditor in Kathmandu typically commands a monthly salary depending on experience and qualifications.
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- An outsourced internal audit retainer with a professional firm is the most cost-effective model for small and medium-sized businesses in Nepal. This is the model most businesses in Kathmandu use for audit functions that do not require a dedicated full-time resource.
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- A project-based internal audit engagement. They will hire a firm for a one-time review of a specific department or process
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External audit costs are governed by the ICAN Minimum Audit Fee Guidelines (issued under the Guideline for Audit Firms and Fixation of Fees Directive 2078), which set a floor below which a licensed CA cannot legally charge. ICAN established these minimum fees taking into account the complexity of assignments, professional knowledge required, time spent, and prevailing market conditions.
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Source: ICAN Minimum Audit Fee Guidelines, Directive 2078 (effective 2078-04-01). Fees are minimum thresholds; actual fees may be higher based on complexity and firm seniority.

Why Your Business in Nepal Needs Both Audits

Internal and external audit are not competing options. They serve entirely different purposes and fill different gaps. Choosing one over the other is not a cost-saving decision; it is an exposure decision. Here is what each gap actually costs.

Consequences of Skipping Internal Audit in Nepal

No Immediate Penalty, But High Long-Term Risk
Internal audit has no statutory deadline in Nepal, leading many businesses to ignore it—until issues compound into serious financial and compliance problems.
Accumulation of Financial Errors
Mistakes in VAT filings, payroll, and purchase records go unchecked throughout the year, resulting in audit qualifications, IRD notices, or costly write-offs.
Increased Risk of Fraud and Leakage
Lack of internal checks allows inventory losses, procurement fraud, and cash mismanagement—especially in SMEs where roles are not segregated.
No Early Warning for Tax Compliance Issues
Without internal audit, businesses fail to track frequent changes in VAT and TDS rules by Nepal’s IRD, leading to penalties and non-compliance.
Poor External Audit Outcomes
Absence of internal audit leads to disorganized records, increasing the likelihood of qualified audit reports and extended audit timelines.

How Internal Audit Improves External Audit Outcomes

Stronger Internal Controls Reduce Audit Effort
Well-maintained records allow external auditors to rely on internal systems, reducing testing and audit costs.
Faster and More Efficient Audit Process
Pre-prepared documents like bank reconciliations, debtor aging, and creditor confirmations save time and avoid last-minute stress.
Accurate Inventory and Financial Reporting
Regular stock reconciliation and proper documentation eliminate common audit disputes.
Better Tax Compliance Throughout the Year
Quarterly reviews of VAT, TDS, and advance tax ensure error-free final tax computation.
Cleaner Audit Opinions and Reduced Risk
Businesses with internal audit functions typically receive unqualified audit opinions and fewer IRD queries.
Cost Savings in the Long Run
Internal audit costs are significantly lower than penalties, extended audit fees, or tax disputes.

The Legal Framework of Internal Audit and External Audit in Nepal

The Companies Act 2063 mentions the need for internal controls. Large companies often establish an audit committee. This committee oversees the internal audit function. Banks and financial institutions have stricter rules from the Nepal Rastra Bank. These institutions must have a dedicated internal audit department.

Non-governmental organizations also use internal audits in Nepal. The Social Welfare Council requires transparency in fund usage. Internal auditors ensure donors see their money is spent well. This maintains the reputation of the organization. Small businesses use it to prevent fraud. When one person handles cash and accounting, the risk of fraud is high. Internal audit breaks this cycle.

Every private and public limited company must appoint an auditor. This appointment happens at the Annual General Meeting. You must inform the Office of the Company Registrar about this appointment. The auditor must be a member of the Institute of Chartered Accountants of Nepal. They follow the Nepal Standards on Auditing.

These standards align with international rules. This means your external audit in Nepal meets global benchmarks. The auditor checks your balance sheet and profit and loss account. They verify your tax calculations. In Nepal, the fiscal year runs from Shrawan to Ashad. You have six months after the year ends to finish your audit.

Internal Audit and External Audit in Kathmandu Practical Steps

You start by defining the scope. Decide which departments need a review. Most businesses start with the finance and store departments. Hire a professional firm to conduct the review. They will visit your office and check your documents. They will interview your staff.

The auditor will issue a report with findings. You must act on these findings. If they find a lack of documentation for expenses, you must implement a new voucher system. Internal audit in Kathmandu is only useful if you follow the recommendations. It is a tool for growth. Use it to streamline your operations.

Prepare your books early. Do not wait until the last month. Ensure all your bank reconciliations are complete. Gather all your purchase and sales invoices. The auditor will ask for proof of ownership for your assets. They will check your land titles and vehicle registrations.

If you have inventory, the auditor will attend your year end physical count. This is a standard procedure for external audit in Kathmandu. They want to see if the stock exists. They will also send letters to your debtors and creditors to confirm balances. Having these documents ready saves time and money.

What Are the Risks of Ignoring Internal Audit and External Audit

Ignoring internal audit leads to systemic failures. You might lose track of your expenses. Employees might find ways to bypass your rules. In Nepal, many businesses fail because of poor internal controls. They realize their money is gone only when it is too late.

Without an internal audit in Nepal, your business lacks a safety net. You become reactive instead of proactive. You spend your time fixing disasters instead of growing. Small errors in your tax filings will grow into large liabilities. You will face heavy fines from the Inland Revenue Department.

Ignoring external audits is illegal. The Office of the Company Registrar will fine you. These fines increase over time. Your company might even be delisted. You will not be able to renew your business license.

Without an external audit in Nepal, you cannot prove your income. The tax office will perform a best judgment assessment. This usually results in a higher tax bill than your actual income. You will also lose credibility with your stakeholders. No one wants to do business with a company that hides its financials.

Legal Penalties for Missing External Audit in Nepal

Penalties Under Companies Act 2063
- Failure to submit audited financials within 6 months leads to fines.
- Continued non-compliance results in annual fines (NPR 5,000–20,000).
- Directors may face personal penalties for delays.Penalties Under Companies Act 2063

Income Tax Act 2058 Consequences
- IRD may issue a best judgment assessment, often increasing tax liability.
- Amendments can occur within 4 years or anytime in fraud cases.

Operational and Business Restrictions
- Business license renewals may be blocked.
- Banks may refuse loan renewals without audited reports.
- OCR filings become publicly visible, impacting credibility and due diligence.

Why Choose GPR for Audit Services?

GPR provides both services to diverse clients. We understand the local market and the regulatory environment. We help you navigate the complexities of Nepalese law. Our team focuses on providing clear and actionable reports. We avoid technical jargon. We speak the language of business.

When you need an internal audit in Kathmandu, we look at your specific risks. We do not use a one size fits all approach. We study your workflow. We find where you are losing money. When you need an external audit in Kathmandu, we ensure your reports are accurate and compliant. We help you meet every deadline.

Your business needs both. Internal audit provides the internal strength to grow. External audit provides the external validity to exist. Together, they form a complete financial oversight system. You should view these not as costs, but as essential business processes.

Nepal is moving toward more transparency. The government is digitizing records. The tax office is becoming more efficient. You must keep up with these changes. Professional audit services ensure you stay ahead. You focus on your core business while we handle your compliance.

Manufacturing companies need to track raw materials. Internal audit checks the wastage in the factory. It ensures the production yield matches the input. This is vital for maintaining margins. Trading companies need to track inventory movements. Internal audit prevents the sale of goods without proper invoices.

Service sector companies like hotels or travel agencies need to track bookings. Internal audit ensures the revenue from every guest is recorded. It checks the commission paid to agents. Every sector has unique risks. A good internal audit in nepal addresses these specific needs.

Every business must follow the Nepal Financial Reporting Standards. These rules are detailed. They cover how you recognize revenue and how you value your assets. External auditors ensure you follow these rules. They check if you have made proper provisions for staff gratuity and leave.

They also check if you have complied with the Labor Act. This is a part of the overall compliance review. External audit in Nepal is a comprehensive check of your business health. It covers financial, legal, and tax aspects. It is the final word on your performance for the year.

To get the most value, be open with your auditors. Hide nothing. If there is a problem, let the auditor find it. This is the only way to fix it. View the auditor as a partner in your success. A transparent relationship leads to better insights.

Provide the auditor with a clean workspace and all requested documents promptly. This reduces the time they spend at your office. It also reduces your audit fees. Use the audit report to make strategic decisions. If the report shows a high cost of production, look for new suppliers. If the report shows high bad debts, change your credit policy.

Key Confirmations for the Nepal Context

Public Record: You are correct that external audits filed at the OCR become part of the public record, which is why they are vital for bank loans and investor due diligence in Kathmandu's business environment.
The ICAN Directive: The reference to Directive 2078 is spot on. ICAN (Institute of Chartered Accountants of Nepal) strictly enforces these minimum fee floors to prevent "low-balling" and ensure audit quality.
IRD Reliance: The Inland Revenue Department (IRD) uses the audited financials as the base for tax assessment. If your audit is missing or "qualified," the IRD frequently triggers a "Best Judgment Assessment," which almost always results in higher tax bills and penalties.
Operational Reality: For SMEs in Nepal, the point about VAT and TDS errors is the most common reason for internal audits. Because Nepal’s tax rules change frequently via the annual Financial Act (Aarthik Ain), internal audits act as a vital safety net.
Minor Detail to Keep in Mind:
While internal audit reports are "internal," keep in mind that Nepal Rastra Bank (NRB) or the Insurance Authority can demand to see internal audit reports during their own regulatory inspections of banks or insurance companies.

Conclusion

Internal audit vs external audit in Nepal is a topic every entrepreneur must master. By implementing both, you protect your assets and your future. You ensure your business remains a going concern. You build a foundation for sustainable growth in the Nepalese market.

Choose a firm that understands your niche. Choose a firm that provides clear advice. Audit is more than just checking numbers. It is about understanding the story behind the numbers. It is about ensuring your business story is a successful one.

You now have the information needed to make an informed choice. Evaluate your current systems. Identify your risks. Determine your compliance needs. Then, choose the right audit path for your business. Whether it is an internal audit in Nepal or an external audit in Nepal, the goal is the same. You want a strong, transparent, and profitable business.

Internal audit in Kathmandu provides the local insight you need to thrive in the capital city. External audit in Kathmandu ensures you meet all the city and national level regulatory requirements. Both services are available to help you succeed. Take the first step today toward better financial management. Contact a professional firm to discuss your needs.

Your business deserves the best protection. Proper auditing is that protection. It is the bridge between where your business is and where you want it to be. Move forward with confidence knowing your finances are in good hands. The process is straightforward when you have the right partners. Focus on your vision and let the auditors handle the verification. This is the path to long term success in Nepal.

The landscape of business in Nepal is changing. More companies are realizing the value of professional services. Stay ahead of the competition by adopting best practices now. Use an internal audit in Nepal to sharpen your edge. Use an external audit in Nepal to solidify your standing. Your commitment to transparency will pay off in the long run. Investors and partners will value your dedication to accuracy.

Kathmandu is the hub of economic activity. If your business is here, you face unique challenges and opportunities. Internal audit in Kathmandu helps you navigate these challenges. External audit in Kathmandu helps you seize those opportunities. Be prepared for growth. Be prepared for success. Ensure your audit functions are working for you.

This concludes the guide on audit types. You have the tools and the knowledge. Use them wisely. Your business in Nepal has great potential. Protect that potential with regular and professional audits. Success is within your reach when your foundation is solid. Auditing provides that solid foundation. Keep your books clean and your processes sharp. This is the secret to business longevity.

FAQs

1. What is the difference between internal and external audit?

Ans: Internal audit focuses on improving internal processes and risk management throughout the year. It reports to the management. External audit focuses on verifying the accuracy of financial statements once a year. It reports to the shareholders and the government.

‍2. Why is internal audit important for my business in Nepal?

Ans: It helps you find errors and fraud before they become major issues. It ensures your staff follows your policies. It also helps you stay compliant with changing tax laws in Nepal. It is a tool for operational efficiency.

‍3. Who can perform an external audit in Nepal?

Ans: Only a licensed Chartered Accountant or a Registered Auditor who is a member of the Institute of Chartered Accountants of Nepal can perform an external audit. They must hold a valid Certificate of Practice.

‍4. How often should I conduct an internal audit?

Ans: Most businesses conduct internal audits on a quarterly basis. Some large companies prefer monthly reviews. It depends on the volume of your transactions and the level of risk in your business.

‍5. What happens if I do not conduct an external audit?
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Ans: You will face legal penalties from the Office of the Company Registrar and the Inland Revenue Department. You will not be able to renew your business license or get bank loans. Your business reputation will also suffer.