Internal Audit Section 138 of Companies Act 2013 – Internal Audit Applicability

Internal Audit Section 138 of Companies Act 2013 – Internal Audit Applicability

Advance Company Law important topic Internal Audit is a compliance test which has been mandated by Section 138 of the Companies Act 2013.

Applicability of Section 138

Section 138 shall apply only to such classes of companies as may be prescribed. As per Rule 13 of the Companies (Accounts) Rules, 2014, following classes of companies shall be covered under Section 138:

(a) Every listed company (Always applicable)

(b) Every unlisted public company having–

(i) Paid up share capital of fifty crore rupees or more during the preceding financial year; or

(ii) Turnover (income) of two hundred crore rupees or more during the preceding financial year; or

(iii) 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

(iv) Outstanding deposits of twenty-five crore rupees or more at any point of time during the preceding financial year; and

(c) Every private company having–

(i) Turnover of two hundred crore rupees or more during the preceding financial year; or

(ii)   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:

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Legal requirements for existing companies

If 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.

Legal requirements under Section 138

1. Every company, to which Section 138 is applicable, shall appoint an internal auditor.
2. The internal auditor shall conduct the internal audit of the functions and activities of the company.
3. The internal auditor shall be-

(i)  A chartered accountant (whether engaged in the practice or not); or

(ii) A cost accountant; or

(iii) Such other professional body as may be decided by the Board.

1. d) The internal auditor may or may not be an employee of the company.
2. e) A ‘Chartered Accountant’ may be appointed as an internal auditor, whether or not engaged in practice.

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Manner and interval of internal audit

1. Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.
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.

Therefore the Act has given the power to the Board/the Audit committee to define the scope of work of the Internal Auditor. The Act does not prescribe any specific time frame for conducting an internal audit but it is considered a good practice to conduct the Audit on a quarterly basis so that the compliance are monitored properly and there are no frauds or deviations in the Company.

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