Appointment of Internal Auditor under Companies Act, 2013

Appointment of Internal Auditor under Companies Act, 2013

Who is an Internal Auditor?

The Internal Audit Function is a way of systematic evaluation and scrutiny activity conducted in an organization. It is an assessment process of the risk management and the internal control methods of the company or organization. It checks the efficiency and effectivity of all the processes operative inside the company. The person or team of people who conducts the process of internal audit in the company is called internal auditor(s). Every company that has to appoint an internal auditor or group of internal auditors to keep a check on the operations of the company and to assure that the goals and objectives of the entity are fulfilled appropriately. Also, it is really important for the company to ensure and check the overall core competencies of today’s Internal Auditor so that the audit is conducted in a competent and compliant manner.

What are the provisions related to appointment of Internal Auditor?

The appointment of Internal Auditor in a company is dealt and governed by the following stated provisions of the Companies Act and Rules. These provisions are-

  1. Section 138(1) of the Companies Act, 2013: This section states that

“Such class or classes of companies as may be prescribed shall be 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 internal audit of the functions and activities of the company.”

  1. Rule 13 of the Companies (Accounts) Rules, 2014: This rule states that

“(1) The following class of companies shall be required to appoint an internal auditor [which    

        may be either an individual or a partnership firm or a body corporate], namely:

  • Every listed company;
  • Every unlisted public company having-
  • Paid up share capital of fifty crore rupees or more during the preceding financial year; or
  • Turnover of two hundred crore rupees or more during the preceding financial year; or
  • Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or
  • Outstanding deposits of twenty-five crore rupees or more at any point of time during the preceding financial year; and
  • Every private company having-
  • turnover of two hundred crore rupees or more during the preceding financial year; or
  • outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more 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” or “Cost Accountant” shall mean a “Chartered

          Accountant” or a “Cost Accountant”, as the case may be, 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.”

What is the Process of Appointment of Internal Auditor?

Internal Auditor is the key person who conducts the function of Internal Audit in the company. For appointing an Internal Auditor, a company must follow the below mentioned step by step procedure prescribed by the Companies Act, 2013-

  1. The company has to obtain a letter of consent from the newly propose auditor to seek their eligibility to be appointed as an Internal Auditor in an organization.
  2. A notice for holding a board meeting has be given to all the directors and the members. Once the notice has been served to everyone, a Board Meeting has to be called a Board for the Internal Auditor’s appointment.
  3. An e-Form MGT-14 has to be filed by the company for appointing the Internal Auditor of the company.
  4. An intimation letter stating the appointment of the auditor in the company, has to be send by the organization to the newly appointed Internal Auditor.

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.