Internal Audit

As per section 138 of Indian Companies Act 2013 read with Rule 13 Of Companies (Accounts) Rules, 2014, certain class of companies are required to appoint Internal Auditors. An extract of Rule 13 of Companies (Accounts) Rules, 2014 is as follows-

Extract of Rule 13 of Companies (Accounts) Rules, 2014

“13. Companies required to appoint internal auditor.-

(1) The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors, namely:-

(a) every listed company; Always applicable

(b) every unlisted public company having

(i)    paid up share capital of fifty crore rupees or more during the preceding financial year; or

(ii) turnover(income) of two hundred crore rupees or more during the preceding financial year; or

(iii)    outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or

(iv)    outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year; and

(c) every private company having

(i) turnover of two hundred crore rupees or more during the preceding financial year; or

(ii)   outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year:

Provided that an existing company covered under any of the above criteria shall comply with the requirements of section 138 and this rule within six months of commencement of such section.

Explanation.- For the purposes of this rule – The internal auditor may or may not be an employee of the company; The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit. However, the rule specifies that an internal auditor may or may not be an employee of the company. The Internal auditor may be a CA/CWA or any other professional. And also neither the rules nor the Act, has specified the duties and responsibilities. So even if the rules and act made the appointment of Internal Auditor mandatory, the same rules and Act provides option to companies to appoint any person as internal auditors. And also any one who has the knowledge can became an Internal Auditor, because the rules did not define the word “any other professional”

SHORTCUTS TO REMEMBER ABOVE LIMITS

I-LCD –Internal Auditors(I)- LCD(Gift)
Since this section provides indirect avenues & opportunities to internal auditors, Therefore it is termed as Internal auditor’s gift

InternalKey Points:

1. For the purpose of checking the aforesaid limits , it may be noted that Preceding Financial year to be considered. For Eg.  For Checking the applicability of section 138 of Indian Companies Act 2013( Internal Auditor) for FY 2014-15 , FY 2013-14 to be taken into consideration.

2. For easy remember of the aforesaid limits , one should consider the above limit  decreasing in same    proportion  respectively i.e “L” is half of “I”, “C” is half of “L” and so on.

3. Listed companies has to comply with section 138 of companies act 2014 irrespective of above limit.

4. For Private unlisted companies, There are two limits to check out the applicability of aforesaid section     i.e Income & Loan

5. Internal auditor should either be a chartered accountant or a cost accountant, or such other professional as may be decided by the board to conduct Internal Audit of functions and activities of the company.

We are also reproducing extract of Section 138 of the Companies Act, 2013 for your ready reference-

138. Internal audit

(1) Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.

(2) The Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.

CA Deepak Rathore- For any Clarification Please Contact @ deepakrathore.8888@gmail.com. Suggestions are always welcome.

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31 Comments

  1. Aaron says:

    Does the internal auditor must be a citizen of India and locate in the India? For international company with a subsidiary in India, whether the audit team in headquarter out of India could qualify as internal auditor?

  2. cvs says:

    A company is an unlisted company. For the FY 2016-17 its turnover is 220 crore and hence it has appointed an internal auditor for the FY 2017-18. Now for the FY 2017-18, its turnover falls to Rs.180 crore. The Paid up capital of the company is Rs.10 crores. Outstanding loans or borrowings as well as are also well within the limit. NOW THE QUESTION IS,, WILL IT BE MANDATORY FOR THE COMPANY TO APPOINT INTERNAL AUDITOR FOR THE YEAR 2018-19.

  3. Vaibhav Raijada says:

    Thank you so much.
    I visited this site to check internal audit applicability before my exam.
    I just got 6 marks because of you.
    Thank you thank you thank you.

  4. Akshaya says:

    suppose a pvt company is having a turnover of 250 cr in Year 1 and in Y 2 it has turnover of only 150crs and outstanding loans and borrowing in both the years are 90 crs. Then, 138 is applicable for year 1..what about year 2?

  5. Shipra says:

    Hi,

    My query is whether internal auditor needs to be appointed every year or we may just appoint him once and he’ll continue to be the auditor till his termination by the Board??

  6. Ankit Mittal says:

    what exactly means appointing an internal auditor? If there is an employee who is CA will it suffice the criteria for section 138 ? Is internal audit report compulsory for above mentioned companies?

  7. Ezhilarasan says:

    My Query is regarding Intimation of Internal Auditor Appointment to ROC. Is it mandatory. Is there any penal provision for not intimating or delay in intimation. My Company comes under Unlisted companies with exceeding 25crores deposits.

  8. venkatesh says:

    No need to appoint any internal auditor if the company maintains internal audit department. Every listed company must have maintained internal audit department as per clause 41 of Listing Agreement.

  9. Arpit salgiya says:

    Why in outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more used what it means exceeding 100 crore or >= 100 crore.i.e whether at exact 100 crore of borrowing internal audit will be required or not.

  10. Santosh says:

    Thank you for making us remember in shortcut threshold limits in regard applicability of internal auditor.

    I have one queries in regard to appointment of internal auditor which is as under:

    Is the appointment of internal auditor should be in every financial year or one time appointment, if it reachs the threshold limit?

    Regards,
    Santosh

  11. ramjiyahoo says:

    But why to break head. A company could easily designate an accountant or accounts assistant as internal auditor, and since he knows the inside of the company his review might be a better one.

  12. Kamal Jain says:

    S. 138(2) The Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.

    Kindly confirm whether Central Government has made any rule so far on manner and internal for conducting Internal Audit and reporting to the Board?

    Thanks in advance

  13. vswami says:

    OFFHAND (Sharing own thoughts) The subject new requirements, as understood, have brought about a wide paradigm shift of importance and significance from external audit/ its attendant responsibilities/answer ability to in-house machinery of internal control and audit. That has, in effect, placed an added dimension to and weight-age for ‘good governance’ within the corporate. The contents/ substance of the lately revised format of statutory audit report go to reflect the mentioned shift of control/oversight from external to internal. On the flip side, however,, In the current scenario, as is common knowledge, there has been so much left to be desired in the realm of ‘good governance’ in corporate sector , – in general, and with the recently introduced host of novel ideas/concepts, apart from innovations of LLP and one man company thereby enlarging the concept of ‘corporate’ itself (as a legal entity), In particular. To say the least, these are, perhaps, areas, obviously riddled with a conflict of interests, in a comprehensive sense, which do warrant a relook at both by both the government and the law experts, and in-depth deliberation, to the end of plugging in the necessary correctives from the viewpoint of larger public interests.

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