How are internal control and internal audit defined in China?

Internal control is a process designated to provide assurance that the company is:

• Effectively and efficiently operating;
• Providing reliable financial reporting;
• Complying with applicable laws and regulations; and
• Safeguarding assets from misappropriation, embezzlement or any other illegal means.

Internal audit, then, is a way to evaluate the effectiveness, with a designated and systematic approach, of a company in relation to its risk management, control and governance processes.

For foreign-invested enterprises, the two processes are intimately linked because the result of internal audit needs to be communicated to the foreign headquarters. For instance, an internal audit is ordered by headquarter to be conducted on a local level. Yet, if an internal audit of a local subsidiary is conducted, such result will only reflect the performance of that local subsidiary. So, there might be problems such:

• The local subsidiary overlooking the illegal behavior; or
• Illegal behavior happening on a cross-subsidiary level without being discovered.