Appointment Of Internal Auditor Under Companies Act, 2013

An internal auditor is a person appointed by the board to conduct an internal audit of the functions and activities of the company. Internal audit is a continuous and systematic way of risk management, and proper governance in order to bring out more transparency and accountability in companies' activities.

Importance of appointing internal auditor

• Risk Mitigation: They help identify and assess risks that could impact the organization's objectives and provide recommendations for mitigating those risks.
• Compliance Monitoring: Internal auditors ensure compliance with laws, regulations, and internal policies, minimizing legal and regulatory risks.
• Efficiency and Effectiveness: They evaluate the efficiency and effectiveness of internal processes, identifying areas for improvement and cost savings.
• Fraud Detection: Internal auditors help detect and prevent fraud by conducting regular audits and implementing controls to safeguard assets.
• Continuous Improvement: Internal auditors play a crucial role in fostering a culture of continuous improvement by identifying best practices and recommending enhancements.
• Business Sustainability: By ensuring proper risk management, compliance, and efficiency, internal auditors contribute to the long-term sustainability and success of the organization.

SCOPE, FUNCTION AND PERIODICITY OF INTERNAL AUDIT

The internal auditor shall be reporting to audit committee, and audit committee or board shall in consultation with the internal auditor will formulate the scope, functioning, periodicity and methodology for conducting the internal audit.

Further 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.

APPOINTMENT OF INTERNAL AUDITOR

Section 138 of the Companies Act, 2013 read with Companies (Accounts) Rules, 2014 following class of companies shall required to appoint internal auditor:

1. Every listed company

2. Every unlisted public company having:

• Paid-up share capital of Rs. 50 crores or more during the preceding financial year or
• Turnover of Rs. 200 crores of more during the preceding financial year or
• Outstanding loans or borrowings exceeding Rs. 100 crores or more at any time during the preceding financial year or
• Outstanding deposits of Rs. 25 crores or more at any time during the preceding financial year.

3. Every private company having:

• Turnover of Rs. 200 crores of more during the preceding financial year or
• Outstanding loans or borrowings exceeding Rs. 100 crores or more at any time during the preceding financial year or

INTERNAL AUDIT TO BE CONDUCTED BY

• A Chartered Accountant or
• A Cost Accountant or
• Such professional as may be decided by the board to conduct internal audit.

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

FOLLOWING SHALL NOT BE APPOINTED AS INTERNAL AUDITOR

• A Statutory Auditor of a Company.
• A Cost Auditor of a Company shall not be the internal auditor of a Company for the period for which he is conducting the Cost Audit.

PROCEDURE FOR APPOINTMENT OF INTERNAL AUDITOR

1. Obtain a written consent of the auditor for being eligible for appointment as an Internal Auditor under Companies Act, 2013
2. Issuing 7 days' notice for calling a board meeting for appointment of internal auditor.
3. Hold board meeting and appoint internal auditor.
4. Inform the auditor about his appointment as an internal auditor of the company.
5. Filing form MGT-14 for appointment of internal auditor within 30 days of passing board resolution.

PENALTY FOR NON-COMPLIANCE

Since no specific penalty provided under section or rule, therefore section 450 shall be applicable

If a company or any officer of a company or any other person contravenes any of the provisions of this Act then the company and every officer of the company who is in default or such other person shall be liable to a penalty of Rs. 10,000/- and in case of continuing contravention, with a further penalty of Rs. 1,000/- for each day after the first during which the contravention continues, subject to a maximum of Rs. 2,00,000/- in case of a company and Rs. 50,000/- in case of an officer who is in default or any other person.

The author can also be reached at csneharedekar@gmail.com

Disclaimer: Please note that the above article is based on the interpretation of related laws, which may differ from person to person and is not legal advice.