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Provision requiring Internal Audit to be conducted

Varsha singh 
on 24 January 2018

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Clause 49 of the listing agreement: This section states that The Audit Committee is required to review certain points in regards to adequacy and efficiency of internal audit. The management, especially the functional management as well as the Audit Committee needs extensive support from the internal audit function to give it the primary assurance about controls and compliances before giving the required reports/ certificates or to appropriately review the necessary aspects and make informed decisions.

Section 292A of Companies Act, 1956: In addition, Section 292A of the Companies Act, 1956, requires public companies having paid up capital not less than Rs. 5 crores to constitute a committee of the Board, i.e., the Audit Committee. In terms of sub section 5 of the said Section, the internal auditor is required to attend and participate at the meetings of such Audit Committees.

Companies (Auditor's Reports) Order, 2003: The Central Government, in terms of the power vested under Section 227(4A) of the Companies Act, 1956 had notified the Companies (Auditor's Report) Order, 2003. Clause (vii) of the said 2003 order requires the auditor to report as follows:

"Whether in case of listed companies and/ or other companies having paid-up capital and reserves exceeding Rs. 50 lakhs as at the commencement of the financial year concerned, or having an average annual turnover exceeding five crore rupees for a period of three consecutive financial years immediately preceding the financial year concerned, whether the company has an internal audit system commensurate with its size and nature of its business."

Though the clause does not by itself mandate internal audit in the subjected companies, yet a company to which the same is applicable, would incur a negative remark from the auditor if it does not have an internal audit system.

Section 581ZF of the Companies Act, 1956 requires that every Producer Company shall have internal audit of its accounts carried out by a chartered accountant, at such interval and in such manner as may be specified in articles.

The Securities and Exchange Board of India has mandated complete internal audit on a half-yearly basis for stock brokers/trading members/ clearing members.

IRDA (Investment) (Fourth Amendment) Regulations, 2008 has introduced requirements of quarterly internal audit for insurers.

Companies going in for tapping the international capital market, especially, those seeking listing in US stock exchanges, NASDAQ, NYSE, etc., also need a strong internal audit function to meet the stringent corporate governance and internal control requirements of those stock exchanges. In this context, the US companies, having US public as investor also needs to comply with the requirements of Sections 302 and 404 of the Sarbanes Oxley Act of 2002.


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