INTERNAL AUDITOR – SECTION 138 OF COMPANIES ACT, 2013
Legal framework of Internal Auditor Section 138 of Companies Act 2013 and legal provisions applicable
1. Introduction to Internal Auditor Section 138 of Companies Act 2013
Internal audit is an independent function that involves continuous and critical appraisal of an organization’s operations. It helps in ensuring compliance with laws, improving governance, and enhancing risk management. The Companies Act, 2013 mandates internal audits for certain classes of companies to strengthen corporate governance.
2. Legal Framework for Internal Audit
The provisions related to internal audit are primarily covered under Section 138 of the Companies Act, 2013, along with Rule 13 of the Companies (Accounts) Rules, 2014.
Applicability of Internal Audit
As per Section 138, the following classes of companies are required to appoint an internal auditor:
- Listed companies
- Unlisted public companies meeting any of the following criteria:
- Paid-up share capital of ₹50 crore or more
- Turnover of ₹200 crore or more
- Outstanding loans or borrowings exceeding ₹100 crore
- Outstanding deposits of ₹25 crore or more
- Private companies meeting any of the following criteria:
- Turnover of ₹200 crore or more
- Outstanding loans or borrowings exceeding ₹100 crore
Who Can Be Appointed as an Internal Auditor Section 138 of Companies Act 2013 ?
The Companies Act allows the appointment of:
- Chartered Accountants (CA)
- Cost Accountants
- Other professionals as decided by the Board of Directors.
Procedure for Appointment of Internal Auditor
- The Board of Directors appoints the internal auditor through a resolution.
- The appointment must be filed with the Registrar of Companies (ROC) within 30 days.
- The Audit Committee (if applicable) formulates the scope and methodology of the audit.
Scope of Internal Audit
Internal auditors assess:
- Compliance with laws and regulations
- Effectiveness of internal controls
- Risk management processes
- Operational efficiency
- Financial reporting accuracy.
3. FAQs on Internal Audit
Q1: Is internal audit mandatory for all companies?
No, internal audit is mandatory only for companies that meet the prescribed thresholds under Section 138 of the Companies Act, 2013.
Q2: Can an employee of the company be appointed as an internal auditor?
No, the internal auditor must be an independent professional such as a CA, Cost Accountant, or other qualified expert.
Q3: What happens if a company fails to appoint an internal auditor?
Failure to comply with Section 138 may result in penalties, including fines and regulatory action.
Q4: How frequently should internal audits be conducted?
The frequency depends on the company’s size and complexity. Generally, audits are conducted quarterly or annually.
Q5: What is the difference between internal audit and statutory audit?
- Internal Audit: Focuses on operational efficiency, risk management, and compliance.
- Statutory Audit: Ensures financial statements are accurate and comply with legal requirements.
Q6: Can a company outsource its internal audit function?
Yes, companies can outsource internal audits to professional firms specializing in audit services.
Q7: What are the reporting requirements for internal auditors?
Internal auditors must submit a detailed report to the Audit Committee or Board of Directors, highlighting compliance status, risks, and recommendations.
Q8: How does internal audit improve corporate governance?
Internal audit enhances governance by:
- Identifying risks
- Ensuring compliance
- Improving operational efficiency
- Providing independent assurance to stakeholders.
Internal audit helps in ensuring corporate transparency, risk management, and regulatory compliance. The Companies Act, 2013 has strengthened internal audit provisions to enhance governance and accountability. Companies must ensure timely compliance with Section 138 to avoid penalties and improve operational efficiency.
Internal auditing is a cornerstone of corporate governance, playing a crucial role in ensuring transparency, accountability, and effective risk management. Here’s how it strengthens governance:
1. Enhancing Compliance and Integrity
Internal auditors assess whether a company complies with laws, regulations, and internal policies. By identifying gaps and recommending corrective actions, they mitigate regulatory risks and prevent unethical practices.
2. Strengthening Risk Management
Companies face various risks—financial, operational, reputational, and strategic. Internal auditors evaluate risk exposure and recommend measures to reduce vulnerabilities, safeguarding the company’s interests.
3. Improving Decision-Making
Audit reports provide valuable insights to management and the board, helping them make data-driven decisions. By ensuring access to accurate financial and operational information, internal auditing prevents mismanagement and financial errors.
4. Detecting and Preventing Fraud
Fraudulent activities can severely impact a company’s reputation and financial health. Internal auditors implement checks and balances to identify fraud risks and suggest preventive controls, making it harder for unethical practices to flourish.
5. Enhancing Transparency and Accountability
Internal audit fosters an environment of accountability, ensuring employees and executives adhere to ethical standards. Regular audits signal to investors and stakeholders that the company is well-managed and trustworthy.
6. Strengthening Internal Controls
Internal auditors review control mechanisms to ensure they are effective and efficient. Weak controls can lead to operational failures, financial losses, or compliance issues, so strong controls help ensure smooth business operations.
7. Supporting the Board and Audit Committee
Internal audit acts as a bridge between the board of directors, audit committee, and management, providing them with objective assessments on governance, operations, and financial matters.
Conclusion
Internal auditing is not just a compliance function—it is a strategic tool that enhances governance, builds trust, and improves operational efficiency. Companies that prioritize internal audit see stronger governance structures, better risk management, and increased investor confidence.