Navigate the Companies Act Section 138 maze with ease. Uncover practical tips for stress-free Internal Auditor appointments. Compliance made simple.

Appointment of Internal Auditor: Overview 

Section 138 of the Companies Act mandates that specific companies must designate an internal auditor to conduct an internal audit, assessing the company’s functions and activities. The Board can appoint the internal auditor, who may be a chartered accountant, a cost accountant, or another professional as determined by the Board. This article provides a detailed examination of the requirements and procedures for appointing an internal auditor.

What is an internal auditor?

An internal auditor is an independent professional who is employed by an organization to evaluate its internal controls, governance, and risk management processes. They provide objective assurance and insight to the organization’s board of directors or senior management.

Why appoint an internal auditor?

There are many reasons why an organization might appoint an internal auditor, but some of the most common reasons include:

• To improve the organization’s internal controls and risk management processes
• To identify and prevent fraud and errors
• To ensure compliance with laws and regulations
• To provide independent oversight of the organization’s activities
• To improve the organization’s overall efficiency and effectiveness

Who can be appointed as an internal auditor?

The specific qualifications for an internal auditor will vary depending on the organization’s size, industry, and complexity. However, most internal auditors will have at least a bachelor’s degree in accounting or a related field, and many will also be certified in internal auditing.

How is an internal auditor appointed?

The process for appointing an internal auditor will also vary depending on the organization. However, some common steps include:

• The board of directors or senior management should develop a job description for the internal auditor position.
• The organization should advertise the position and interview candidates.
• The board of directors or senior management should select the most qualified candidate and make a formal offer of employment.
• The internal auditor should be inducted into the organization and trained on its policies and procedures.

What are the responsibilities of an internal auditor?

The specific responsibilities of an internal auditor will vary depending on the organization. However, some common responsibilities include:

• Reviewing the organization’s internal controls
• Assessing the organization’s risk management processes
• Performing audits of the organization’s financial statements and operations
• Reporting findings and recommendations to the board of directors or senior management
• Following up on audit findings to ensure that corrective actions are taken

What are the benefits of having an internal auditor?

There are many benefits to having an internal auditor, including:

• Improved internal controls and risk management processes
• Reduced fraud and errors
• Increased compliance with laws and regulations
• Improved corporate governance
• Increased efficiency and effectiveness

Eligibility Criteria for Appointment of Internal Auditor

The eligibility requirements for internal auditors can vary depending on several factors, including:

Process for appointment: Briefly mention the steps involved in appointing an internal auditor, such as board resolution, obtaining consent, filing MGT-14 form, etc.

Term of appointment: Specify the usual duration of an internal auditor’s term and the possibility of reappointment.

Duties and responsibilities: Briefly outline the core duties an internal auditor performs, such as reviewing internal controls, assessing risks, conducting audits, and reporting findings.

Importance of internal auditors: Explain the value of having an internal auditor for improving organizational governance, risk management, and overall performance.

Process for the appointment of Internal Auditor

1. Board Resolution: The Board of Directors appoints an Internal Auditor through a formal resolution.
2. Terms and Consent: Board members must approve the appointment terms, and the potential auditor provides written consent to accept the role.
3. Registration Requirements: Within 30 days of the Board resolution:
   • Auditor Details: Register the appointed auditor’s details in the company register.
   • ROC Filing: File Form MGT-14 with the Registrar of Companies, including the consent letter.

Roles and Responsibilities

1. Risk Management and Governance

• Assess the effectiveness of the company’s risk management and corporate governance systems in achieving organizational goals.
• Identify and report deficiencies in risk management and control.
• Recommend improvements to enhance performance and mitigate risks.

2. Security and Compliance

• Evaluate the organization’s exposure to information security threats and vulnerabilities.
• Assess the effectiveness of programs related to regulatory compliance.

3. Business Continuity and Resilience

• Analyze the organization’s preparedness for potential disruptions to its operations.
• Recommend strategies to strengthen business continuity and resilience.

4. Education and Development

• Conduct workshops and seminars to educate and develop staff on risk management, internal controls, and ethical conduct.

5. Anti-Fraud Programs

• Play a key role in maintaining and improving the organization’s anti-fraud programs.

Benefits of Having an Internal Auditor

1. Enhanced Risk Management and Governance

• Early risk detection: Proactive identification of potential risks and internal control weaknesses allows for preventive measures before issues escalate.
• Stronger corporate governance: Ensures adherence to policies and procedures, promotes ethical conduct, and protects shareholder interests.
• Improved decision-making: Provides accurate and timely information to management for sound strategic choices.

2. Boosted Compliance

• Reduced legal and regulatory risks: Verifies compliance with laws and regulations, minimizing fines, penalties, and reputational damage.
• Identification of compliance gaps: Pinpoints areas where compliance efforts need improvement for proactive mitigation.

3. Optimized Operational Efficiency

• Cost savings and resource optimization: Identifies inefficiencies, waste, and potential cost savings, leading to improved resource allocation and streamlined processes.
• Enhanced productivity and performance: Identifies areas for improvement in operations and processes, leading to increased productivity and overall performance.

4. Safeguarding Assets and Integrity

• Reduced fraud and misuse: Detects and deters fraudulent activities, protecting the organization’s assets and financial integrity.
• Stronger internal controls: Evaluates and strengthens internal controls to prevent unauthorized access and misuse of resources.

5. Fostering a Positive Work Environment

• Promotes accountability and transparency: Encourages ethical conduct and accountability within the organization, fostering a positive work environment.
• Boosts employee morale and confidence: Demonstrates commitment to good governance and risk management, leading to increased employee morale and confidence.

Format of the Board Resolution

Title: Resolution for Appointment of Internal Auditor WHEREAS: The Companies Act, 2013, requires certain companies to appoint an Internal Auditor. The Board of Directors recognizes the importance of having an effective internal audit function to assess the adequacy and effectiveness of the Company’s internal control systems and risk management processes. NOW, THEREFORE, BE IT RESOLVED THAT: The Board of Directors hereby appoints [Name of Internal Auditor] as the Internal Auditor of the Company for a term of [Term of Appointment] commencing from [Date of Appointment]. The Internal Auditor shall be responsible for performing the following duties and responsibilities: [List of Duties and Responsibilities, e.g., evaluating risk management and corporate governance, reporting deficiencies and recommendations, assessing security threats and compliance programs, etc.] The Internal Auditor shall report directly to the [Audit Committee/Board of Directors]. The Internal Auditor shall be authorized to have access to all records, documents, and personnel of the Company as necessary to perform his/her duties. The Company Secretary is authorized to file Form MGT-14 with the Registrar of Companies (ROC) within 30 days of the passing of this resolution. [Signatures of Board Members]

Penalty for Non-Compliance

Under the Companies Act, 2013

• If a company fails to appoint an internal auditor, it is liable for a penalty of up to Rs. 10,000.
• If the non-compliance continues, an additional penalty of Rs. 1,000 per day may be imposed, up to a maximum of Rs. 2,00,000 for the company and Rs. 50,000 for any officer in default.

Internal Auditor FAQs:

How are internal auditors appointed?

Internal auditors are appointed by the Board of Directors through a resolution passed at a board meeting. The chosen candidate must provide written consent and the Company Secretary files Form MGT-14 with the Registrar of Companies within 30 days.

Who are the rule 138 appointments of internal auditors?

Rule 138 of the Companies Act, 2013 mandates certain types of companies to appoint an internal auditor. These include: Listed companies Unlisted public companies with: Paid-up share capital of Rs.50 crore or more Annual turnover of Rs.200 crore or more Outstanding loans or borrowings exceeding Rs.100 crore Outstanding deposits of Rs.25 crore or more Private companies with annual turnover of Rs.200 crore or more or outstanding loans exceeding Rs.100 crore

What is Section 138 of the Companies Act 2013 applicability?

Section 138 of the Companies Act, 2013 specifies the requirement for certain companies to appoint an internal auditor and outlines their qualifications and duties.

What is the mode of appointment of an auditor?

Internal auditors are appointed through a Board Resolution, not voting by members. They are not considered statutory auditors subject to Section 139 of the Companies Act.

Who can appoint an internal auditor of a company?

Only the Board of Directors has the authority to appoint an internal auditor.

What is the appointment of auditors section 139?

Section 139 deals with the appointment of statutory auditors, who are elected by shareholders and responsible for auditing the company's financial statements. Internal auditors are separate and appointed by the Board under Section 138.

Who cannot be appointed as an internal auditor?

Individuals directly involved with the company's finances (e.g., CFO, Treasurer) or those lacking relevant qualifications should not be appointed as internal auditors.

Who appoints and removes the internal auditor?

The Board of Directors appoints and can also remove the internal auditor by passing a resolution.

How many years is an internal auditor appointed for?

Internal auditors are typically appointed for a term of one year with the possibility of renewal.

What are the 5 C's of audit?

The 5 C's of audit are not generally defined within internal auditing. However, some principles guiding internal audits might include:
Competence: Auditors must have relevant skills and knowledge to perform their duties effectively.
Confidentiality: Maintaining strict confidentiality regarding sensitive information accessed during audits.
Communication: Clear and concise communication of findings and recommendations to relevant stakeholders.
Continuity: Conducting audits regularly and consistently to provide ongoing insights.
Cost-effectiveness: Balancing the thoroughness of the audit with its cost to the company.

Also, Read:

• Audit and Appointment of Auditors
• How to Appoint a Compliance Auditor
• Guide on Internal Audit A Better Career Option