Dear Professionals,

In this write-up we supposed to cover every major aspects of Internal Audit as per Companies Act, 2013, though it is covered under Section 138 of Companies Act, 2013 but this section is not applicable on every company unlike the requirement of Statutory Auditor also a statutory auditor is barred to perform the functions of Internal Auditor.

Very interesting fact about this Section that A Company Secretary, Chartered Accountant or Cost Accountant in Employment can also become an Internal Auditor of a Company. Let’s cover this Section step by step for better understanding and clarity of compliance.

Legal Aspects and Applicability

Sl No Provisions applicable Coverage 
Sec 138 Internal audit 
Rule 13 of Companies (Accounts) Rule, 2014 Applicability of Internal Audit 
Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014 Power of Board 
Every Listed company is Covered under this section as per Rule 13 (1)

Every Unlisted Public Company Fulfill Following Conditions

Paid Up Share Capital is more than or equal to Rs. 50 Crore.Turnover during Previous Financial Year is more than or equal to Rs. 200 Crore.Outstanding loans/Borrowings anytime Previous Financial Year is more than Rs. 100 Crore.Outstanding Deposit during Previous Financial Year is more than or equal to Rs. 25 Crore.

Every Private Company Fulfill Following Conditions

Turnover during Previous Financial Year is more than or equal to Rs. 200 Crore.Outstanding loans/Borrowings anytime Previous Financial Year is more than Rs. 100 Crore.

NOTE: Appointment of internal auditor is mandatory for every producer company irrespective of any criterion.

Scope of Internal Audit

  1. The internal audit is done by checking whether the company has complied with all the applicable laws and thereafter a report is prepared by the Internal Auditor stating the compliances and material deviations if any.
  2. Companies have the privilege to conduct the Audit as per their size and requirements since no particular guidelines are prescribed as per Companies Act, 2013.
  3. The Audit Committee of the Company or the Board shall, in connection with the Internal Auditor, formulate the scope, functioning, periodicity, and methodology for conducting the internal audit.
  4. Internal Audit should not be looked upon as a Compliance burden but as a basic necessity for the healthy growth of the Company.

Objectives of Internal Audit

To Maintain better policies and proceduresTo ensure better compliance of lawTo avoid unwarranted legal actionFraud detection & Integrity and AccountabilityTo protect the interest of ShareholdersTo evaluate and improve risk management system, internal control and governance processes

Eligibility Criteria for Internal Auditor

SEC – 144 – The statutory auditor shall not provide the internal audit services to the company, it’s holding co. Subsidiary co. (directly or indirectly).

Following may become Internal Auditor of the Company:

  • Chartered Accountant, or
  • Cost Accountant, or
  • Such other Professional as may decide by the Board.

Internal Auditor may or may not be an employee of the Company therefore as the Section only specifies the word Professionals and term Professional has a wide view hence Internal Auditor may be Company Secretary/Lawyer/CA/CMA/MBA (finance)/CFA.

The word ‘professional’ is defined in Black’s Law Dictionary [9th Edition, Page 1329] as “A person who belongs to a learned profession or whose occupation requires a high level of training and proficiency”. Further, ‘profession’ is defined [9th Edition, Page 1329] as “A vocation requiring advanced education and training”.

Company Secretary may perform the function of internal audit. He interfaces with stakeholders across organization. Appointment of Company Secretary as internal auditor may facilitate proper interaction between board, its committees, senior management and departmental heads, vendors and suppliers, shareholders and another stakeholder. It will promote effective governance.

Steps to Appoint an Internal Auditor

  1. Obtain consent letter from the proposed New Auditor for being eligible for appointment as an Internal Auditor.
  2. Draft Notice cum Agenda for Calling Board Meeting to Appoint internal auditor.
  3. Convene Board Meeting to pass Board Resolution for appointment of Internal Auditor.
  4. Prepare Minutes of the Meeting.
  5. Send Intimation letter to the New Appointed Internal Auditor pertaining to his appointment in a Company.
  6. File e-form MGT -14 within 30 days of Board Meeting.

(NOTE: MGT-14 is not required to be filed by Private Limited Company as per notification dated 05.06.2015)

Basic Fundamentals of Internal Audit

Testing, Analysis & ReportingAnalyze the process/ systems followed by the Co.The authenticity of reports generated from the systemsReview of documented policies & procedures for various key operations and adherence theretoScrutiny of delegated authorityIn-depth checking principle

Content of Internal Audit Report

  1. Title
  2. Addressee
  3. Period of coverage of the Report
  4. Opening or introductory paragraph
  5. Objective paragraph
  6. Scope paragraph
  7. Documents / Records checked during the IA
  8. Executive summary, highlighting the key material issues, observations, control, weaknesses and exceptions
  9. Significant observations, findings and recommendations
  10. Management comments on respective observations, findings and recommendations
  11. Action Taken Report
  12. Date of Report
  13. Place of signature
  14. Internal Auditor’s signature with Membership No.

Penal Provisions in case of Non-Compliance:

There are no specific penal provisions provided in this section 138. Therefore, the penal provisions under section 450 would apply in case of any non-compliance of this section. Accordingly, for contravention, the company and every officer of the company who is in default shall be punishable with a fine upto Rs.10,000, in case the contravention is a continuing one then the further fine shall be Rs.1,000 every day. The offences under this section are compoundable under section 441 of the Act.

DRAFT FORMAT OF BOARD RESOLUTION TO APPOINT INTERNAL AUDITOR

CERTIFIED COPY OF THE RESOLUTIONS PASSED AT THE BOARD MEETING OF PRIVATE LIMITED HELD ON XXXX AT THE REGISTERED OFFICE OF THE COMPANY AT————————————————————————–AT 11.00 A.M AND CONCLUDED AT 11:30 A.M

APPOINTMENT OF INTERNAL AUDITOR OF THE COMPANY

“RESOLVED THAT pursuant to section 138 of the Companies Act, 2013 read with rule 13 of the Companies (Accounts) Rules, 2014, and other applicable provisions of the Act, M/s …………(Name of the Firm/Person) Chartered accountants, be and is hereby appointed as internal auditors of the company for the financial year ………..

RESOLVED FURTHER THAT Mr. ……………………. Director/Managing Director of the company be and is hereby authorized to decide and final the remuneration to be paid to internal auditor and to intimate the same to the concerned Registrar of the Companies.

FURTHER RESOLVED THAT, Board of Directors of the Company be and is hereby authorised severally to do all such acts, deeds, matters and things as may be considered necessary or desirable to give effect to this resolution and matters incidental thereto.”

CRUX of the Article:

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. 

Internal audit is conducted by businesses across the world to assess the correctness of the records and the effectiveness of the operations. It is done periodically and offers control by measuring and evaluating the effectiveness of other controls of the organizations. Every company registered under the Companies Act, 2013 must appoint an Internal Auditor for a company.

By csannusharma

CS Annu Sharma is a highly qualified and experienced professional in the field of Company Secretarial and Legal activities. With an impressive academic background and relevant certifications, she has demonstrated exceptional expertise and dedication in her career. Education: Qualified Company Secretary (CS) from the Institute of Company Secretaries of India (ICSI). Graduate in Law from Indraparasth Law College, enabling a strong legal foundation in her professional journey. Graduate in Commerce from Delhi University, providing her with a comprehensive understanding of financial and business concepts. Certifications: Certified CSR Professional from the Institute of Company Secretaries of India (ICSI), showcasing her commitment to corporate social responsibility and ethical business practices. Work Experience: She possesses an extensive and diversified work experience of more than 6 years, focusing on Secretarial and Legal activities. Throughout her career, she has consistently showcased her ability to handle complex corporate governance matters and legal compliance with utmost efficiency and precision. Current Position: Currently, Mrs. Annu holds a prominent position in an NSE Listed Entity, namely Globe International Carriers Limited, based in Jaipur. As a key member of the organization, she plays a vital role in ensuring compliance with regulatory requirements, advising the management on corporate governance best practices, and safeguarding the company's interests. Professional Attributes: Thorough knowledge of corporate laws, regulations, and guidelines in India, enabling her to provide strategic insights and support in decision-making processes. Expertise in handling secretarial matters, including board meetings, annual general meetings, and other statutory compliances. Proficiency in drafting legal documents, contracts, and agreements, ensuring accuracy and adherence to legal requirements. Strong understanding of corporate social responsibility and its impact on sustainable business practices. Excellent communication and interpersonal skills, enabling effective collaboration with various stakeholders, both internal and external. Personal Traits: Mrs. Annu Khandelwal is known for her dedication, integrity, and commitment to maintaining the highest ethical standards in her professional conduct. Her meticulous approach to work and attention to detail make her an invaluable asset to any organization she is associated with. Conclusion: Cs Annu 's profile exemplifies a highly qualified and accomplished Company Secretary, well-versed in legal matters and corporate governance. With her wealth of experience and commitment to excellence, she continues to contribute significantly to the success and growth of the organizations she serves.