Internal Audit is one most important tool for better Corporate Governance in any company. This is not a post – mortem like statutory audit, but may provide real time analysis and processing of transactions through watchful eyes.
According to Section 138 of the Companies Act, 2013 discussed earlier here, “Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. 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.”
Accordingly, Rule 13 of the Companies (Accounts) Rules 2014 prescribes appointment of Internal Auditor.
Companies for Internal Audit:
The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors, namely:-
(a) every listed company;
(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 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.
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 i.e. 1st April 2014.
Eligibility to be Internal Auditor:
Chartered Accountant (CA) and Cost Accountant (CMA) are primarily eligible to be appointed as Internal Auditor. The term “Chartered Accountant” shall mean a Chartered Accountant whether engaged in practice or not.
Other professional like Company Secretary may be appointed as an Internal Auditor of a Company if decided by the Board of directors of the company for such appointment.
This seems from the close reading that audit committee of the company is authorised to appoint a chartered accountant or cost accountant as internal auditor. In case of other professional like company secretary, only board of Directors may appoint them as internal auditors.
The internal auditor may or may not be an employee of the company.
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.
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