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Who Can be appointed as an Internal Auditor of a Company?

CS Annu Sharma 
on 06 September 2020

LinkedIn


In this write-up, we supposed to cover every major aspect of Internal Audit as per Companies Act, 2013, though it is covered under Section 138 of the Companies Act, 2013 but this section is not applicable on every company unlike the requirement of Statutory Auditor also a statutory auditor is barred to perform the functions of Internal Auditor.

A very interesting fact about this Section is that A Company Secretary, Chartered Accountant or Cost Accountant in Employment can also become an Internal Auditor of a Company. Let's cover this Section step by step for better understanding and clarity of compliance.

Legal Aspects and Applicability

Sl No

Provisions applicable

Coverage

1

Sec 138

Internal audit

2

Rule 13 of Companies (Accounts) Rule, 2014

Applicability of Internal Audit

3

Rule 8 of the Companies (Meetings of Board and its Powers) Rules, 2014

Power of Board

Who Can be appointed as an Internal Auditor of a Company

Every Listed company is Covered under this section as per Rule 13 (1)

Every Unlisted Public Company Fulfill Following Conditions

Paid Up Share Capital is more than or equal to Rs. 50 Crore.

Turnover during Previous Financial Year is more than or equal to Rs. 200 Crore.

Outstanding loans/Borrowings anytime Previous Financial Year is more than Rs. 100 Crore.

Outstanding Deposit during Previous Financial Year is more than or equal to Rs. 25 Crore.

Every Private Company Fulfill Following Conditions

Turnover during Previous Financial Year is more than or equal to Rs. 200 Crore.

Outstanding loans/Borrowings anytime Previous Financial Year is more than Rs. 100 Crore.

NOTE: Appointment of an internal auditor is mandatory for every producer company irrespective of any criterion.

Scope of Internal Audit

  1. The internal audit is done by checking whether the company has complied with all the applicable laws and thereafter a report is prepared by the Internal Auditor stating the compliances and material deviations if any.
  2. Companies have the privilege to conduct the Audit as per their size and requirements since no particular guidelines are prescribed as per Companies Act, 2013.
  3. The Audit Committee of the Company or the Board shall, in connection with the Internal Auditor, formulate the scope, functioning, periodicity, and methodology for conducting the internal audit.
  4. Internal Audit should not be looked upon as a Compliance burden but as a basic necessity for the healthy growth of the Company.

Objectives of Internal Audit

To Maintain better policies and procedures

To ensure better compliance of the law

To avoid unwarranted legal action

Fraud detection & Integrity and Accountability

To protect the interest of Shareholders

To evaluate and improve risk management system, internal control and governance processes

Eligibility Criteria for Internal Auditor

SEC 144: The statutory auditor shall not provide the internal audit services to the company, its holding co. Subsidiary co. (directly or indirectly).

Following may become Internal Auditor of the Company:

  • Chartered Accountant, or
  • Cost Accountant, or
  • Such other Professional as may decide by the Board.

Internal Auditor may or may not be an employee of the Company therefore as the Section only specify the word Professionals and term Professional has a wide view hence Internal Auditor may be Company Secretary/Lawyer/CA/CMA/MBA (finance)/CFA.

The word 'professional' is defined in Black's Law Dictionary [9th Edition, Page 1329] as "A person who belongs to a learned profession or whose occupation requires a high level of training and proficiency". Further, 'profession' is defined [9th Edition, Page 1329] as "A vocation requiring advanced education and training".

Company Secretary may perform the function of internal audit. He interfaces with stakeholders across an organization. Appointment of Company Secretary as an internal auditor may facilitate proper interaction between the board, its committees, senior management and departmental heads, vendors and suppliers, shareholders and another stakeholder. It will promote effective governance.

Steps to Appoint an Internal Auditor.

  1. Obtain a consent letter from the proposed New Auditor for being eligible for appointment as an Internal Auditor.
  2. Draft Notice cum Agenda for Calling Board Meeting to Appoint internal auditor.
  3. Convene Board Meeting to pass Board Resolution for the appointment of Internal Auditor.
  4. Prepare Minutes of the Meeting.
  5. Send Intimation letter to the New Appointed Internal Auditor pertaining to his appointment in a Company.
  6. File e-form MGT -14 within 30 days of Board Meeting.

(NOTE: MGT-14 is not required to be filed by Private Limited Company as per notification dated 05.06.2015)

Basic Fundamentals of Internal Audit.

Testing, Analysis & Reporting

Analyze the process/ systems followed by the Co.

The authenticity of reports generated from the systems

Review of documented policies & procedures for various key operations and adherence thereto

Scrutiny of delegated authority

In-depth checking principle

Content of Internal Audit Report

  1. Title
  2. Addressee
  3. Period of coverage of the Report
  4. Opening or introductory paragraph
  5. Objective paragraph
  6. Scope paragraph
  7. Documents / Records checked during the IA
  8. Executive summary, highlighting the key material issues, observations, control, weaknesses and exceptions
  9. Significant observations, findings and recommendations
  10. Management comments on respective observations, findings and recommendations
  11. Action Taken Report
  12. Date of Report
  13. Place of signature
  14. Internal Auditor's signature with Membership No.

Penal Provisions in case of Non-Compliance:

There are no specific penal provisions provided in this section 138. Therefore, the penal provisions under section 450 would apply in case of any non-compliance of this section. Accordingly, for contravention, the company and every officer of the company who is in default shall be punishable with a fine upto Rs.10,000, in case the contravention is a continuing one then the further fine shall be Rs.1,000 every day. The offences under this section are compoundable under section 441 of the Act.

DRAFT FORMAT OF BOARD RESOLUTION TO APPOINT INTERNAL AUDITOR

CERTIFIED COPY OF THE RESOLUTIONS PASSED AT THE BOARD MEETING OF PRIVATE LIMITED HELD ON XXXX AT THE REGISTERED OFFICE OF THE COMPANY AT————————————————————————–AT 11.00 A.M AND CONCLUDED AT 11:30 A.M

APPOINTMENT OF INTERNAL AUDITOR OF THE COMPANY

"RESOLVED THAT pursuant to section 138 of the Companies Act, 2013 read with rule 13 of the Companies (Accounts) Rules, 2014, and other applicable provisions of the Act, M/s …………(Name of the Firm/Person) Chartered accountants, be and is hereby appointed as internal auditors of the company for the financial year ………..

RESOLVED FURTHER THAT Mr. ……………………. Director/Managing Director of the company be and is hereby authorized to decide and final the remuneration to be paid to internal auditor and to intimate the same to the concerned Registrar of the Companies.

FURTHER RESOLVED THAT Board of Directors of the Company be and is hereby authorised severally to do all such acts, deeds, matters and things as may be considered necessary or desirable to give effect to this resolution and matters incidental thereto."

 

CRUX of the Article:

At the conclusion of the internal audit, the auditor will issue a formal report presenting significant findings and also assist the organization in improving the internal procedures for the overall betterment of the organization. So, it's a basic tool of improving efficiency and growth of the organization through the mechanism of Internal Audit.

Internal audit is conducted by businesses across the world to assess the correctness of the records and the effectiveness of the operations. It is done periodically and offers control by measuring and evaluating the effectiveness of other controls of the organizations. Every company registered under the Companies Act, 2013 must appoint an Internal Auditor for a company.

Mrs Annu Sharma is a Company Secretary by profession as well as a Certified CSR Professional along with Graduation in Law. She has Vast Experience of 3 years in Corporate and other Allied Laws. Being a Writer by Passion she has penned many articles on corporate laws till now which are published on prominent websites.

 

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