How to appoint an Internal Auditor your company?

Last Updated at: November 14, 2019
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How to appoint Internal Auditor for your company?

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. 

As per Section 138 of the Companies Act 2013: 

1) Such class or classes of companies shall be required to appoint an Internal Auditor, which shall either be a Chartered Accountant or a Cost Accountant, or such other professional as may be decided by the Board to conduct an internal audit of the functions of the company.

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

Classifications of the organizations eligible for audit 

The appointment of an Internal Auditor can be done by the following class of companies, as mentioned in the Companies Act:

  • Every listed company and
  • Every unlisted public organization
  1. All the organizations which have a paid-up share capital of fifty crore rupees or more during the preceding accounting year.
  2. The companies which have annual sales of two hundred crore rupees or more during the preceding financial year.
  3. The organizations which have an outstanding loan exceeding one hundred crore rupees or more from banks or other financial institutions at any time during the preceding financial year.
  4. The companies which have outstanding deposits of twenty-five crore rupees or more at any point of time during the preceding financial year.
  5. Every private company having-
  • Annual sales of two hundred crore rupees or more 
  • Outstanding loans from banks exceeding one hundred crore rupees or more.

Role of an Internal Auditor

It is mandatory to appoint an Internal Auditor who can take care of the following tasks:

    • Review the control systems of the financial as well as the operational segments in the organizations independently.
    • Determining whether the policies, procedures and regulations are complying with the legislation.
    • Incorporate healthy risk management practices and measuring and managing any dispersion of risk.
    • Save the organization’s assets by checking the inefficiency and duplication of effort.
    • Install internal check systems to minimize the possibility of theft or fraud.
    • Incorporating programs and activities to monitor and prevent the company and its liabilities.

Get Legal Guidance

Eligibility for appointment as Internal Auditor

Rule 13(1) of the Companies Act, 2014 lays the following eligibility criteria for a person to be appointed as an Internal Auditor:

  • He or she shall be either a Chartered Accountant, whether engaged in the practice or not, or a Cost Accountant, or such professional as may be decided by the Board of Directors of the company. 
  • He may not be an employee of the company.

Procedure for appointment of Internal Auditor

  • The organizations must ensure the eligibility conditions are fulfilled.
  • Obtain a written consent and a certificate from the proposed person to the effect of his eligibility under the Act.
  • Issue a notice or drafting an agenda on a shorter notice, in writing, to every director of the company and calling for a Board meeting to appoint the Internal Auditor of the company and to fix his income with all the benefits.
  • Authorize the Company Secretary or any Director to sign and file the relevant form with the Registrar of the Companies.
  • Prepare and circulate the draft minutes within 15 days of the Board meeting to all the Directors for their comments.
  • In case of a public company, filing a certified copy of the Board resolution approving the appointment of an Internal Auditor with the Registrar in Form No. MGT.14 under Section 117 of the Act along with the prescribed fee. 
  • Issue the appointment letter to the concerned Internal Auditor.
  • Section 138(2) gives the guidelines to the Central Government to make the rules and manners to carry out the proceedings.
  • Rule 13 states that the Audit Committee along with the Internal Auditor shall formulate the scope, functioning, periodicity and methodology for doing the internal audit.

In case of a government firm, the Comptroller and the Auditor General of India shall appoint the auditor under the sub-section (5) or sub-section (7) of Section 139 and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and the Auditor General of India. 

If any auditor or the Cost Accountant or the Company Secretary, in practice, does not comply with the provisions of the sub-section (12), he or she shall be punishable with fine which shall not be less than one lakh rupees but which may be extended to twenty-five lakh rupees. 

Internal Audit is a basic necessity for the healthy growth of the company. The Auditors, Chartered Accountants, Company Secretariats, etc. should explore the opportunities in this area as they have a good knowledge of the companies act and other laws which are necessary for conducting a proper and effective Internal Audit system. 

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How to appoint an Internal Auditor your company?

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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. 

As per Section 138 of the Companies Act 2013: 

1) Such class or classes of companies shall be required to appoint an Internal Auditor, which shall either be a Chartered Accountant or a Cost Accountant, or such other professional as may be decided by the Board to conduct an internal audit of the functions of the company.

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

Classifications of the organizations eligible for audit 

The appointment of an Internal Auditor can be done by the following class of companies, as mentioned in the Companies Act:

  • Every listed company and
  • Every unlisted public organization
  1. All the organizations which have a paid-up share capital of fifty crore rupees or more during the preceding accounting year.
  2. The companies which have annual sales of two hundred crore rupees or more during the preceding financial year.
  3. The organizations which have an outstanding loan exceeding one hundred crore rupees or more from banks or other financial institutions at any time during the preceding financial year.
  4. The companies which have outstanding deposits of twenty-five crore rupees or more at any point of time during the preceding financial year.
  5. Every private company having-
  • Annual sales of two hundred crore rupees or more 
  • Outstanding loans from banks exceeding one hundred crore rupees or more.

Role of an Internal Auditor

It is mandatory to appoint an Internal Auditor who can take care of the following tasks:

    • Review the control systems of the financial as well as the operational segments in the organizations independently.
    • Determining whether the policies, procedures and regulations are complying with the legislation.
    • Incorporate healthy risk management practices and measuring and managing any dispersion of risk.
    • Save the organization’s assets by checking the inefficiency and duplication of effort.
    • Install internal check systems to minimize the possibility of theft or fraud.
    • Incorporating programs and activities to monitor and prevent the company and its liabilities.

Get Legal Guidance

Eligibility for appointment as Internal Auditor

Rule 13(1) of the Companies Act, 2014 lays the following eligibility criteria for a person to be appointed as an Internal Auditor:

  • He or she shall be either a Chartered Accountant, whether engaged in the practice or not, or a Cost Accountant, or such professional as may be decided by the Board of Directors of the company. 
  • He may not be an employee of the company.

Procedure for appointment of Internal Auditor

  • The organizations must ensure the eligibility conditions are fulfilled.
  • Obtain a written consent and a certificate from the proposed person to the effect of his eligibility under the Act.
  • Issue a notice or drafting an agenda on a shorter notice, in writing, to every director of the company and calling for a Board meeting to appoint the Internal Auditor of the company and to fix his income with all the benefits.
  • Authorize the Company Secretary or any Director to sign and file the relevant form with the Registrar of the Companies.
  • Prepare and circulate the draft minutes within 15 days of the Board meeting to all the Directors for their comments.
  • In case of a public company, filing a certified copy of the Board resolution approving the appointment of an Internal Auditor with the Registrar in Form No. MGT.14 under Section 117 of the Act along with the prescribed fee. 
  • Issue the appointment letter to the concerned Internal Auditor.
  • Section 138(2) gives the guidelines to the Central Government to make the rules and manners to carry out the proceedings.
  • Rule 13 states that the Audit Committee along with the Internal Auditor shall formulate the scope, functioning, periodicity and methodology for doing the internal audit.

In case of a government firm, the Comptroller and the Auditor General of India shall appoint the auditor under the sub-section (5) or sub-section (7) of Section 139 and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and the Auditor General of India. 

If any auditor or the Cost Accountant or the Company Secretary, in practice, does not comply with the provisions of the sub-section (12), he or she shall be punishable with fine which shall not be less than one lakh rupees but which may be extended to twenty-five lakh rupees. 

Internal Audit is a basic necessity for the healthy growth of the company. The Auditors, Chartered Accountants, Company Secretariats, etc. should explore the opportunities in this area as they have a good knowledge of the companies act and other laws which are necessary for conducting a proper and effective Internal Audit system. 

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