Internal Audit

In Companies Act, 1956 no provisions were there for appointment of internal auditor. Even the provision contained in CARO was also recommendatory in nature. Companies Act, 2013 has made it a statutory requirement to appoint internal auditor for certain specified companies. The provisions are contained in section 138.

A quick analysis of the provision with the rules is given below in the image:

Companies required to appoint internal auditor –

1)         The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors, namely:-

a)         every listed company;

b)        every unlisted public company having-

                             i.            paid up share capital ≥  Rs. 50 crore during the preceding financial year; or

                          ii.            turnover ≥ Rs. 200 crore during the preceding financial year; or

                        iii.            loans or borrowings from banks or public financial institutions ≥ Rs. 100 crore  (Outstanding at any point of time during the preceding financial year); or

                        iv.            deposits ≥ 25 crore (outstanding at any point of time during the preceding financial year); and

c)            every private company having-

                             i.            turnover ≥ 200 crore during the preceding financial year; or

                          ii.            loans or borrowings from banks or public financial institutions ≥ 100 crore (outstanding 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” shall mean a Chartered Accountant 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.