Mandatory Appointment of Internal Auditor: Section 138 Companies Act 2013

An Internal Auditor is a person recommended by the Audit Committee (if any) and approved by the Board of Directors to conduct an internal audit of the functions and activities of the company.

Internal Auditor in consultation with the Audit Committee and Board shall formulate the scope, methodology, and periodicity for conducting the audit.

The following class of companies is required to appoint internal auditor:

• every listed company;
• every unlisted public company having-
• paid up share capital of fifty crore rupees or more during the preceding financial year; or
• turnover of two hundred crore rupees or more during the preceding financial year; or
• 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
• outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year;
• every private company having-
• turnover of two hundred crore rupees or more during the preceding financial year; or
• 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.

Internal Audit shall be conducted by

• Chartered Accountants or
• Cost Accountants or
• Such professionals as decided by the Board to conduct such audit.

Explanation.- For the purposes of this rule –

• the internal auditor may or may not be an employee of the company;
• 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’.

Procedure to be followed:

• written consent from the auditor being eligible for appointment
• convene board meeting for such appointment
• Filing E-form MGT-14 for appointment of the auditor within 30 days of passing such resolution.

Since no specific penalty has been mentioned under the section or rules, therefore Section 450 of the Companies Act 2013 shall be applicable, that is if a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made there-under, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of ten thousand rupees, and in case of continuing contravention, with a further penalty of one thousand rupees for each day after the first during which the contravention continues, subject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person.

Conclusion: Compliance with Section 138 of the Companies Act 2013 is crucial for designated companies to ensure effective internal audit mechanisms. Understanding the criteria, roles, and procedures outlined in the Act facilitates seamless adherence to regulatory requirements, promoting transparency and accountability within corporate governance.