Section 138 of the Companies Act, 2013 deal with the appointment of Internal Auditor in a company. Companies registered in India are 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 an internal audit of the functions and activities of the company. 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.
In layman terms, “internal auditing” can be defined as an independent consulting activity which is made for the purpose of adding value by objective assurance and also by improving the operations of the organization in concern. In other words, it is a process to achieve the organization’s goals by rendering a systematic format to evaluate and further improve the corporate governance and risk management, for providing an effective mechanism, and thereby helping in gaining insight and providing recommendations by virtue of the evaluation analysis and also the business management and assessment of data.
In simple words, internal auditing is a mechanism which provides value to the concerned corporate entity as rendering crucial independent advice.
Eligibility for Appointment of Internal Auditor
Internal auditors are professionals who are hired by the concerned organization for internal auditing, and according to Section 138 of the Companies Act, 2013, the internal auditors shall either be a chartered accountant, cost accountant, company secretary, or any such other professional hired by the organizations for the purpose of internal auditing.
The following companies are required to appoint an internal auditor:
Under Rule 13 of the Companies (Accounts) Rules, 2014, the following companies are required to appoint internal auditor:-
- Listed companies
- All unlisted companies having-
- The paid-up share capital must be 50 crore or above, that is to say in the preceding financial year.
- There must be a turnover of income of 200 crores or more that is to say in the preceding financial year.
- The organization should have outstanding loans from either banks or financial institutions that are exceeding 100 crores or more in the preceding financial year at any time, or;
- In the case of private companies where–
- There must be a turnover of income of 200 two hundred crores or more, in the preceding financial year; or
- The organization should have outstanding loans from either banks or public financial institutions that is exceeding 100 crores or more in the preceding financial year at any time.
- In order to check the aforementioned limits, it is to be noted that the preceding financial year is to be considered. For example, the applicability of Section 138 of the Companies Act, 2013 for the assessment year 2014-15, FY 2013-14 to be taken into consideration.
- Another way to remember the aforesaid limits is to consider the above limit decreasing in the same proportion, such as “L” is the half of “I” and “C” is half of “L”.
- All the listed companies have to comply with Section 138 of the Companies Act, 2013 irrespective of the aforementioned limit.
- In order to check out the applicability of Section 138 in the case of ‘private unlisted companies’, we must look into their income and loans to consider such applicability.
Roles and Responsibilities
An Internal Auditor has the following duties and liabilities in a company:
- Evaluation for rendering assurance of risk management, corporate governance systems, that is to say, the systems are functioning as intended to meet the organization’s goals.
- Issues relevant to risk management and control deficiencies identified are reported by the auditor. The internal auditor also provides recommendations in pursuit of improving the structure in the efficiency and proactive performance towards the organization.
- Evaluating risk exposures and security threat of the organization’s information.
- Evaluating programs relevant to regulatory compliance.
- Evaluating the readiness of the organization in case of any interruption towards the business of the organization.
- Providing workshops and seminars towards education and staff development
- Plays a key role in maintaining the organization’s anti-fraud programs.
The internal auditor must assess the organization’s internal controls with regards to the financial report, wherein they must carry out fraud risk assessment controls. It would provide a scope of review in the framework of risk management, and thereby helping the directors of the organization in their decision-making process.
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