With the implementation of Companies Act, 2013 the Ministry of Corporate Affairs has notified the provisions related to Internal Audit of Companies w.e.f 01st April, 2014.
Internal Audit: The Companies Act, 2013 has given statutory recognition to Internal Audit. This area has opened a scope of professional opportunity among the Chartered Accountants and other professionals.
Changing nearly six decades old regulations for corporate reporting, the new Companies Act makes it mandatory for certain class of companies which are required to conduct Internal Audit.
Section 138 of the Act provides that such class or classes of companies as may be prescribed shall be required to appoint an internal auditor. Such internal auditor shall be appointed by board and may be either chartered accountant or cost accountant or such other professional as may be decided by Board.
Companies covered under Internal Audit
According to Rule 13 of The Companies (Accounts) Rules, 2014 following class or classes of companies shall be required to appoint an internal auditor or firm of internal auditors, namely:
(a) every listed company;
(b) every unlisted public company having-
(i) paid up share capital of 50 crore rupees or more during the preceding financial year; or
(ii) turnover of 200 crore rupees or more during the preceding financial year; or
(iii) outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year; or
(iv) outstanding deposits of 25 crore rupees or more at any point of time during the preceding financial year; and
(c) every private company having-
(i) turnover of 200 crore rupees or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year:
The rules also provide that every existing company covered under above criteria in Financial Year 2013-14 shall comply with requirements of Section 138 and Rule 13 of Companies (Accounts) Rules, 2014 before 30th September, 2014 (within 6 months of the commencement of Section 138, i.e. 01st April, 2014).
Eligibility for appointment of Internal Auditors
According to the Section 138 of Act, the internal auditor shall be either Chartered Accountant or Cost Accountant or such other professional as may be decided by the board. Thus, the board of company has been given freedom to appoint any professional and competent person to be its internal auditor.
Such internal auditor may or may not be an employee of the company (Explanation to Rule 13 of Companies (Accounts) Rules, 2014) Thus, an employee of company may also be appointed by Board as internal auditor. The members of The Institute of Chartered Accountants of India who are in service can take this opportunity to be appointed as Internal Auditor of their own employer company. The rules also specifically provide that the term ‘Chartered Accountant’ shall mean a Chartered Accountant, whether engaged in practice or not (Explanation to Rule 13 of Companies (Accounts) Rules, 2014). Therefore, every registered member of the Institute of Chartered Accountants of India is eligible for appointment as Internal Auditor of company. Besides, those persons who are member of The Institute of Cost Accountants of India or The Institute of Company Secretaries of India and other professionals which are employees of the company are also eligible to appoint. The firm of Chartered Accountants or Cost Accountants or Company Secretaries are also hitherto eligible for appointment as Internal Auditors of Company.
It should be noted that the statutory auditor appointed under section 139 of Act is not eligible to provide the service of Internal Audit whether rendered directly or indirectly to the company or its holding company or subsidiary company – provided in Section 144 of the Companies Act, 2013. For this purpose, the term ‘’directly or indirectly” shall include rendering of services by the auditor, -
(i) in case of auditor being an individual, either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual;
(ii) in case of auditor being a firm, either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners.
Scope and functions of Internal Auditors
The scope and functions of Internal Auditors has not been defined in Companies Act, 2013 nor in the Rules prescribed. 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 – Sub-rule 2 of Rule 13 of Companies (Accounts) Rules, 2014.
The report of Board of every listed company and every other public company having a paid up share capital of twenty five crore rupees or more calculated at the end of the preceding financial years shall contain the details in respect of adequacy of internal financial controls with reference to the Financial Statement (Sub-rules 4 & 5 of Rule 8 of Companies (Accounts) Rules, 2014). The periodicity, scope, functioning and methodology of internal audit being conducted will come under this clause of Board report.
The threshold limit for appointment of Internal Audit is kept at a very high level bringing only selective and limited number of companies within its ambit.
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