Internal Audit Under Section 138 Of Companies Act 2013
Updated: Jun 21
What is an Internal Audit?
Internal audit refers to an independent service to evaluate an organisation's internal controls, its corporate practices, processes, and methods. An internal audit helps in securing compliance with the various laws applicable to an organisation.
Section 138 of the companies act deals with the same, i.e., Internal Auditing. And states about the various classes of companies where Auditing is mandatory.
Section 138 of the Companies Act 2013
Internal Audit under Section 138 of Companies Act, 2013: The internal audit assesses a company’s interior control, inclusive of its corporate governance and accounting methods. These audits pledge compliance with laws and regulations and help to maintain precise and timely financial reporting and data collection.
According to Section 138 of the Indian Companies Act, 2013, Along with Rule 13 Of Companies (Accounts) Rules 2014
A particular specific class requires the appointment of Internal Auditors of companies. An excerpt of Rule 13 of Companies (Accounts) Rules, 2014 is mentioned below-
“13. Companies required to appoint internal auditor”: The companies which are required to appoint or hire an intern
(a) Every listed company - Always applicable
(b) Every unlisted public company
During the prior fiscal year, Paid-up share capital is fifty crore rupees or more.
During the prior fiscal year, turnover income is two hundred crore rupees or more.
Borrowings from public financial institutions or banks during the prior fiscal year exceed the amount of one hundred crore rupees or higher at any point in time.
Outstanding deposits during the prior fiscal year are twenty-five crore rupees or more at any point in time.
(c) All unlisted private company
turnover is of two hundred crore rupees or higher during the prior fiscal year
Borrowings from banks or any public financial institutions exceed the margin of one hundred crore rupees or higher at any point time through the previous fiscal year.
Given that any existing company coming under any of the conditions mentioned above will comply with the necessities of section 138 and the said rule within six months of the foundation of such section.
Clarification: (For the persistence of this rule)
There is no compulsion regarding the internal auditor being an employee of the company.
The company's Audit Committee should consult with the Internal Auditor and formulate the scope, methodology, functioning, and periodicity for conducting the internal audit.
The Internal auditor might be a Chartered Accountant (CA), Cost and Works Accountancy (CWA), or any other professional. The duties and responsibilities are specified neither in the rules nor in the Act. So therefore, even if the regulations and Act state that the appointment of Internal Auditor is mandatory, the same rules and Act also provide the option for the companies to appoint any person as internal auditors”.
I-LCD: I stands for Income, L for Loan, C for Capital, and D for Deposit. This section provides indirect ways and opportunities to all internal auditors, and hence it is known as the auditor’s gift.
Note: In the case of listed companies, I-LCD is always applicable. In the case of unlisted companies (public and private), I-LCD is not always suitable.
Significant Points of Internal Audit
The prior fiscal year is to be considered to check the above limits. For example, for checking the applicability of Section 138 of the Indian Companies Act 2013
(Internal Auditor) for the fiscal year 2020-21, the fiscal year 2019-20 is to be taken into attention.
To easily remember the limits mentioned above, the limit decreasing method in the same proportion should be considered, i.e., the loan is half of the income, capital is half of the loan, and henceforth.
The listed companies have to obey Section 138 of the companies act 2013 regardless of the above limit.
For private unlisted companies, there are two limits to check out the section’s applicability, namely, Income and Loan.
An internal auditor should be a chartered accountant, cost accountant, or other professional selected by the board to conduct the company’s Internal Audit of functions and activities.
For easy accessibility, the excerpt of Section 138 of the Companies Act, 2013 is reproduced:
The mentioned class or classes of companies will be required to appoint an internal auditor, who will be a chartered accountant or a cost accountant, or any other professional decided by the board to conduct an indoor audit of the functions and activities of the corporation.
The Central Government, following specific rules, may prescribe the manner and the intervals in which the internal audit will be conducted and reported to the board.