Applicability of Internal Audit - Companies Act, 2013

Internal Audit Applicability

Updated on July 08, 2024 10:40:56 AM

Internal audit applicability plays a crucial role in monitoring an organization’s time to time policies, functionings and operations.

The act aims to promote business efficiency, accountability, and sustainable growth while ensuring compliance with legal and ethical standards to maintain the integrity of the corporate sector in India.

Accountability

The following companies are required to appoint as an internal auditor:

Listed Companies: All companies listed on stock exchanges in India must have an internal auditor.

Unlisted Public Companies: Unlisted public companies meeting prescribed criteria related to turnover or paid-up share capitals are required to appoint an internal auditor.

Private Companies: Private companies meeting prescribed criteria related to turnover or paid-up share capital or outstanding loans/deposits above a specified threshold must appoint an internal auditor

S.No Company’s Type Applicability or Criteria
01 Listed Companies All companies listed on stock exchanges in India must have an internal auditor.
02 Unlisted Public Companies
  • Turnover - 200 crores or more.
  • Paid Up Share Capital - 50 crores or more.
  • Outstanding loans/ Borrowing from banks or financial institutes - Exceeding limit of 100 crores or more.
  • Outstanding Deposits - 25 crores or more.
  • 03 Private Companies
  • Turnover - 200 crores or more.
  • Outstanding loans/ Borrowing from banks or financial institutes - Exceeding limit of 100 crores or more.
  • Role of Internal Auditor

    • The Internal Auditor is responsible for conducting independent and objective assessments of the company’s financial and operational processes, risk management practices, compliance with laws and regulations, and effectiveness of internal controls.
    • The Internal auditor evaluates and reports to the Board of Directors or the Audit Committee, which further ensures appropriate actions to be taken based on the audit observations and recommendations.
    • Internal auditors play a crucial role in detecting and preventing fraud within the organization. They investigate suspicious activities and recommend measures to strengthen the company’s anti-fraud mechanisms.
    • Internal auditors examine financial transactions and records to verify their accuracy, completeness, and compliance with accounting standards and regulatory requirements.

    Qualifications for Internal Auditor

    • As per Companies Act 2013 in India, the qualifications of an internal auditor isn’t specifically outlined in the legislation. The Act doesn’t prescribe specific educational qualifications or certifications, instead it focuses on the requirements for conducting internal audits for certain classes of companies. (as mentioned in Section 138)
    • Obtaining a recognized professional certificate enhances the credibility and expertise of internal auditors. Some common certifications such as
    1. Certified Internal Auditor (CIA): Offered by the Institute of Internal Auditors (IIA), the CIA certification is a globally recognized qualification for internal auditors.
    2. Chartered Accountant (CA): Recognized in many countries, this qualification emphasizes auditing, accounting, and financial expertise.
    3. Cost Accountant: In many countries, a cost accountant can also be appointed as an internal auditor.
    • Section 144(b) of the Corporations Act, 2013 prohibits the appointment of a statutory auditor as an internal auditor. It is not possible for the statutory auditor and internal auditor to be the same person.
    • In accordance with Rule 13 of the Companies (Accounts) Rule, 2014, an internal auditor’s position can also be filled by an employee of the company.

    Scopes of Internal Audit

    • The Companies Act of 2013 does not mandate the scope of internal audit.
    • The Internal Auditors along with the Audit Committee of an organization or company or board shall formulate the scope, frequency, operations and methodology for conducting the internal audit under the rule of 13 (2) of the Companies (accounts) Rules, 2014.
    • There isn’t a specified time slot for conducting an internal audit mentioned in the Act, however one should conduct an audit quarterly to ensure smooth functioning, identification of fraud, etc.
    • During internal audits in a company, these scopes must be formulated and conducted.

    Penalties given in case of non-compliance

    Under the Companies Act 2013 in India, non-compliance with the requirements of internal audits can lead to penalties or other legal consequences for the company and its officers. However, no particular penalty is prescribed under section 138 for criminal provision but, section 450 could be applicable if in any case section 138 gets violated.

    Below mentioned are some potential penalties that can be imposed:

    • Non-compliant companies or officers are charged with a fees of 10,000/- and if the violation continues then 1000/- per day, for as long the violation lasts.
    • In serious cases of non-compliance, the Registrar of Companies or other regulatory authorities may initiate legal actions against the company and its officers, which can lead to prosecution in court.
    • Directors and officers of the company who are responsible for ensuring the compliance with the internal audit requirements may also be held personally liable for any non-compliance resulting in penalties, fines, or disqualification from being a director in other companies.
    • It's important to note that the penalties and consequences for non compliance may vary depending upon the specific violation and discretion of the regulatory authorities. Therefore, it is crucial for the companies to ensure they comply with the internal audit requirements as stipulated in the Companies Act 2013 and other relevant regulations to avoid potential penalties and legal repercussions.
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    Conclusion

    In conclusion, The Company Act 2013, mandates internal audits for certain types of the companies based on their size, turnover, and nature of business. Companies falling under these criteria are required to conduct internal audits as per provisions specified.

    Even if a company does not fall under the mandatory requirements, it may still choose to conduct internal audits voluntarily.

    Companies falling under such exemptions should carefully review the relevant provisions to determine their applicability.

    Compliance with the Act’s provisions and adherence to internal audit standards are essential to ensure effective governance, risk management, and overall improvement of the company’s operations.

    FAQs

    Do private companies need internal audits?

    Yes, private companies can benefit from internal audits. Internal audits help private companies assess and enhance their internal controls, risk management processes, and overall operational efficiency.

    What is the limit for applicability of internal audit?

    The criteria for applicability is:

    Turnover of 200 crores or more and outstanding loans/ Borrowing from banks or financial institutes exceeding limit of 100 crores or more.

    For which company audit is compulsory?

    A statutory audit is compulsory for every company, whether it has a turnover or not and internal audit is compulsory for those companies with annual turnover of 1 crore.

    For which company audit is not compulsory?

    Generally, smaller private companies are often exempt from mandatory audits. In many countries, small and medium-sized enterprises (SMEs) or companies that fall below a certain revenue or asset threshold may not be required by law to conduct audits.

    Can an employee be an internal auditor?

    Yes, an employee can be an internal auditor. In fact, it is quite common for companies to have internal auditors who are employees of the organization. Internal auditors are individuals who work within the company and are responsible for evaluating and assessing the company's internal controls, risk management processes, financial reporting, and operational efficiency.

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