Internal Audit is a critical regulatory requirement and governance pillar for NBFCs in India. It acts as the third line of defense. 
Here are its key objectives: 

 Ensure Compliance with RBI Regulations NBFCs are regulated by the Reserve Bank of India (RBI). 

1.  Risk Management NBFCs deal with credit risk, operational risk, liquidity risk, and even cyber risks. Internal audit helps in identifying high-risk areas, reviewing control systems, recommending preventive steps 
2.  Fraud Detection and Prevention Internal auditors check for unauthorized transactions, fake documents and misreporting of loans or NPAs. Early detection means less damage and faster resolution.
3. . Evaluate Internal Controls An NBFC needs effective internal controls for performing its functions. Internal audits assess the adequacy, effectiveness, and reliability of the internal control framework across all operations. 
4.  Improve Operational Efficiency Internal audit finds gaps like delays in loan processing, inefficient use of staff or tools and duplication of tasks. 
5.  Financial Accuracy Audits ensure proper bookkeeping, reliable financial statements, accurate asset valuation They also review the reliability of management information systems (MIS) used for decision-making and reporting. 
6.  Support Decision-Making by Management They offer timely, accurate, and objective information to the Audit Committee of the Board and senior management on the state of controls, risks, and compliance.

Types of Internal Audit for NBFC

• Financial & Accounting Audits
• Compliance Audits
• Credit or Loan Portfolio Audit
• Information Technology Audits
• Operational Audits
• Treasury & Investment Audits
• Fraud  / Forensic Audits
• Concurrent Audit
• Thematic Audit
• Management Audit

Applicability 

Non-deposit-taking NBFCs (NBFC-ND): Applies to NBFC-NDs (including Core Investment Companies) with asset size ≥ ₹5,000 crore. Following are the broad steps in conducting a risk-based internal audit are: 

1. Understanding of the Organization & its business, the industry under which it operates. 
2. Prepare Audit Universe to map the entire auditable area. 
3. Undertake Risk Assessment where by potential risk are indentified and assessed. 
4. Preparation of Annual Audit Plan basis all risk mapped and given ratings. 
5. Initiate and execute the audit assignment as per plan or ad hoc as per need arises. 
6. Analyse audit findings and its significance. 
7. Preparation of formal audit report, giving audit recommendations & obtaining management response.
8.  Follow up on the given recommendations after completion of timeline & evalute the proof of implementation. 
9.  Continuous Monitoring and Improvement. 
10.  Quality Check on the audit work generally by quality reviewer which enables standardization and effectiveness of the audit work.