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Feb 26, 2024

Internal Audit Applicability as per Companies Act 2013: A Brief Overview

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Vijay Sardhara

Suvit

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Internal audit is an independent and objective function that helps an organization assess and improve its risk management, control, and governance processes. Internal audit also provides assurance and advisory services to the management and the board of directors on various aspects of the organization’s operations and performance.

The Companies Act 2013, which came into force on 1st April 2014, has introduced several provisions related to internal audits for certain classes of companies. These provisions aim to ensure that the companies have an effective internal audit applicability in place, which can enhance their transparency, accountability, and compliance.

In this blog post, we will discuss the following topics related to internal audit applicability as per the Companies Act 2013:

  • Which companies are required to appoint an internal auditor as per the Companies Act 2013?
  • What are the qualifications and criteria for the internal auditor?
  • What are the roles and responsibilities of the internal auditor?
  • What are the reporting and compliance requirements for the internal auditor and the company?
  • What are the recent amendments and updates about internal audit?

Which Companies are Required to Appoint an Internal Auditor as per the Companies Act 2013?

According to Section 138 of the Companies Act of 2013, the following categories of businesses must appoint an internal auditor:

  • Every listed company.
  • Every unlisted public company having paid-up share capital of fifty crore rupees or more, or turnover of two hundred crore rupees or more, or outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more, or outstanding deposits of twenty-five crore rupees or more.
  • Every private company has a turnover of two hundred crore rupees or more, or outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more.

The internal auditor may be appointed by the board of directors or any other person authorized by the board.

What are the Qualifications and Criteria for the Internal Auditor?

The internal auditor shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the board of directors.

The internal auditor may or may not be an employee of the company.

The internal auditor cannot be the statutory auditor or a partner or employee of the statutory auditor of the company.

The internal auditor should have the necessary skills, knowledge, and experience to perform the internal audit function efficiently.

The internal auditor should also adhere to the ethical standards and professional guidelines issued by the relevant regulatory bodies and associations.

What are the Roles and Responsibilities of the Internal Auditor?

The internal auditor's roles and responsibilities are set by the company's audit committee or board of directors, in consultation with them.

They conduct audits independently and objectively, following predetermined scope, functioning, periodicity, and methodology.

Evaluating the adequacy and effectiveness of internal control, risk management, and governance systems, they identify and report weaknesses, deficiencies, or non-compliance.

Providing assurance and advisory services to management and the board, they offer recommendations for process and system improvement based on best practices.

Maintaining thorough documentation, they communicate audit results and recommendations clearly and promptly to stakeholders.

What are the Reporting and Compliance Requirements According to Internal Audit Applicability?

The reporting and compliance requirements for the internal auditor and the company are as follows:

  • The internal auditor should submit the internal audit report to the audit committee or the board of directors, as per the periodicity decided by them. The internal audit report should contain the scope, objectives, methodology, findings, conclusions, and recommendations of the internal audit. The internal audit report should also highlight any significant issues, risks, or frauds that may affect the company’s operations or performance.

  • The audit committee or the board of directors should review the internal audit report and take appropriate actions on the findings and recommendations of the internal auditor. The audit committee or the board of directors should also monitor the implementation and follow-up of the internal audit recommendations by the management.

  • The internal auditor should also report to the statutory auditor on the areas and matters covered by the internal audit and the results and observations of the internal audit. The internal auditor should also provide any information or assistance required by the statutory auditor for the statutory audit.

  • The company should comply with the provisions of section 138 and the rules made thereunder regarding the appointment, qualification, role, responsibility, and reporting of the internal auditor. The company should also comply with any other applicable laws, regulations, standards, and policies related to internal audit.

Recent Amendments and Updates to Internal Audit

The Ministry of Corporate Affairs (MCA) has issued some amendments and updates to internal audits in recent years. These are:

  • The Companies (Amendment) Act 2017 has amended section 138 to provide that the internal auditor may be appointed by the board of directors or any other person authorized by the board, instead of only by the board of directors.
  • The Companies (Accounts) Amendment Rules 2018 have clarified that the internal auditor may be a chartered accountant or a cost accountant, or such other professional as may be decided by the board of directors, instead of only a chartered accountant or a cost accountant.
  • The Companies (Audit and Auditors) Amendment Rules 2018 have provided that the statutory auditor shall report on the adequacy of the internal financial controls system and its operating effectiveness in the audit report, instead of only on the adequacy of the internal financial controls system.
You will find this interesting as well: Cost Audit Applicability.

FAQs

Q: How can you appoint an internal auditor for your company?

A: You need to obtain the approval of the board of directors or any other person authorized by the board and select a qualified and competent internal auditor, who can be an individual or a firm or a body corporate.

Q: What are the benefits of internal audit for your company?

A: Internal audit can help you to improve your processes and systems, mitigate your risks, and ensure your compliance with the applicable laws, regulations, standards, and policies.

Q: How can you report and comply with the internal audit provisions of the Companies Act 2013?

A: You need to submit the internal audit report to the audit committee or the board of directors, report to the statutory auditor on the internal audit matters, and comply with the provisions of section 138 and the rules made thereunder.

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