Internal Auditor Under The Companies Act, 2013

Through this article, we are going to discuss first about the Internal Audit and how internal auditor going to be appointed in a Company under the Companies Act, 2013.

1. Concept of Internal Audit:

Audit is the systematic scrutiny of books of accounts of an organization in order to calculate, ascertain or check their accuracy and efficiency.

In the same line, Internal Audit is the check to assess the risk management and to ensure that risk management processes are efficient, effective, secure and compliant. It is the basic check of internal control of the organization. An internal audit is an organizational move to check, ensure, monitor and analyze its own business operations in order to determine how well it conforms to a set of specific criteria.

2. Appointment of Internal Auditor:

In this, we discuss the procedure of appointment of internal auditor as per the applicable provisions of the Companies Act, 2013 along with Rules pertaining to the same.

3. Applicable Provisions for Appointment of Internal Auditor:

As per the provisions of Section 138(1) of the Companies Act 2013 read with Rule 13 of the Companies (Accounts) Rules, 2014 which are reproduce here for your ready reference:

4. According to Section 138(1) of the Companies Act, 2013,:

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.  

5. Rule 13 of the Companies (Accounts) Rules, 2014:

(1) The following class of companies shall be required to appoint an internal auditor [which may be either an individual or a partnership firm or a body corporate], namely:-

(a) every listed company;

(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 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 –

(i) the internal auditor may or may not be an employee of the company;

(ii) the term “Chartered Accountant” or “Cost Accountant” shall mean a “Chartered Accountant” or a “Cost Accountant”, as the case may be, whether engaged in practice or not’.

(2) 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.

6. Procedure : The Company should do the following steps:

 Seek consent from new internal auditor for being eligible for appointment of Internal Auditor as per Companies Act 2013.

1. Obtain consent letter from the proposed New Auditor for being eligible for appointment as an Internal Auditor.

 2.After giving notice of the Board meeting, Call a Board Meeting for appointment of Internal Auditor.(follow revised SS-1 on meetings of the Board of Directors)

3.File an e-form MGT-14 for appointment of Internal Auditor of the Company. (NOTE: MGT-14 is not required to be filed by Private Limited Company as per notification dated 05.06.2015)

4. Send Intimation letter to the New Appointed Internal Auditor pertaining to his appointment in a Company.

7. CONCLUDING REMARKS:

Regular internal audits assess a company’s controls and assist in finding the uncovered proof of fraud, waste or abuse. At the conclusion of the internal audit, the auditor will issue a formal report presenting significant findings and also assist the organization in improving the internal procedures for the overall betterment of the organization. So it’s a basic tool of improving efficiency and growth of the organization through the mechanism of Internal Audit. 

Disclaimer: The above views are the personal views of the author and the Readers are requested to exercise their due diligence before taking action.