Internal Audit Applicability Under Companies Act, 2013 – Complete Guide for Businesses

The Internal Audit plays an important role in helping the organization achieve its goals through the application of a systematic and disciplined approach in evaluating and improving the efficiency of risk management, control, and governance process. The Internal Audit will be able to find the problem areas and raise them before the management in an unbiased manner and provide required information.

 

Section 138 of the Companies Act, 2013 makes provisions for appointing an Internal Auditor in case any one of the conditions laid down under clause 1 below is applicable to such class of companies.

 

An exhaustive guide on internal audit applicability, provisions, rules, procedures, and compliance in India by Tax Esquire.

 

What is Internal Audit?

 

Internal audit refers to a situation where a competent professional analyses your company's internal systems, finances, management, compliance, and risks and suggests areas where changes can be made to improve performance.

 

It is not the statutory audit that happens towards the end of the year.

 

This process is ongoing throughout the year and customized according to your needs.

 

It can be compared to preventive maintenance on your body because it is independent and very helpful.

 

The importance of internal audits is that they help you to:

 

●  Enhance internal controls

●  Detect any errors or frauds

●  Improve efficiency

●  Comply with the law

●  Build stakeholders' trust

 

Regulations Governing the Internal Audit

 

The regulations for the internal audit include:

 

★  138 of the Companies Act, 2013

★  Rule 13 of the Companies (Accounts) Rules, 2014

 

Some of the details that these regulations outline include:

 

●  Companies required to carry out the internal audit

●  Persons eligible for internal audit

●  Structure of the audit process

 

Internal Audit Types

 

Organizations must be able to evaluate their risk exposure, enhance their processes, and ensure they meet regulatory requirements. Depending on the purpose of the audit, there are different internal audit types that may be conducted.

 

Financial/Control Audits

 

One type of internal audit is financial or control audits. This audit type examines an organization's internal control over financial reporting. These include evaluating the accuracy of accounting entries and verifying that there are proper controls in place to avoid any misstatements.

 

Compliance Audits

 

Another type of internal audit is compliance audits. Organizations need to be aware of and adhere to all legal and regulatory requirements in which they operate. The areas of compliance could range from environmental laws to data protection laws, employee benefits policies, or occupational health and safety regulations.

 

Operational Audits:

 

Operational audits review the effectiveness and efficiency of the operations performed by the company. The internal auditor reviews the operational process of the organization and checks if it performs effectively and efficiently or not. The aim of performing operational audits is to enhance the operation process and make it more efficient.

 

IT Audits:

 

Due to the growing dependency on information technology, organizations conduct IT audits to test the system of their organization and check whether it works effectively and efficiently or not. This audit also includes reviewing the security system of data storage and access control and disaster recovery procedures in case of any mishap.

 

 

Applicability of Internal Auditing - Who Should Appoint Internal Auditors?

 

According to Section 138 of the Companies Act, 2013, along with Rule 13 of the Companies (Accounts) Rules, 2014, some particular organizations/companies will have their internal audit applicability as per the Companies Act 2013. Below mentioned are those companies who are required to appoint an internal auditor,

 

Listed Companies: All such companies which are listed on any stock exchange in India should have their internal audit in place.

 

Unlisted Public Companies: Those unlisted public companies who meet either one of the below-stated conditions in the last financial year should have their internal audit in place:

 

●  ₹200 Crore turnover or more.

●  ₹50 Crore paid-up share capital or more.

●  Loans/Borrowings of more than ₹100 Crore outstanding at any time from Banks/FIs.

●  ₹25 Crore Outstanding Deposits at any point.

 

Applicability of Internal Audit for Private Companies: Private companies having the below conditions in their preceding financial year may conduct their internal audits,

 

●  ₹200 Crore turnover or more.

●  Loans/Borrowings of more than ₹100 Crore outstanding at any time from Banks/FIs.

 

Scope of Internal Auditing

 

The Companies Act does not provide a specific scope of internal auditing. Rather:

 

Audit Committee or Board of Directors is responsible for determining:

 

1. Scope

2. Frequency

3. Approach

4. Reporting lines

 

Commonly, internal auditing includes:

 

●  Systems for financial accounting

●  Compliance with laws

●  Efficiency in operations

●  System for risk management

●  Internal control systems

 

What are the Roles and Responsibilities of the Internal Auditor?

 

Following are the roles and responsibilities of the internal auditor appointed for carrying out his duties in the organization,

 

Independent Evaluations: Internal auditors perform an assessment of the organization's accounting procedures, internal controls, and risk management processes. This provides a fresh point of view that helps recognize any weakness.

 

Documentation and Recommendations: Internal auditors provide documentation of their work through audit reports, which are then submitted to the Board of Directors or Audit Committee. The report provides insights and recommendations about improving matters.

 

Prevention of Frauds: They are very important in helping to protect the interests of the business by identifying and preventing frauds. They investigate any suspicious activity and review internal controls to prevent frauds.

 

Accurate Financial Records and Compliance: The internal auditors carefully check the financial transactions made by the company. They help to maintain accurate and complete financial records.

 

Qualifications for Internal Auditor Are?

 

The Companies Act 2013 doesn't specify any particular qualifications or requirements for internal auditors in India. It needs to be noted that internal audit plays an important role according to Section 138 for certain types of companies.

 

Chartered Accountant (CA): Chartered accountant degree is highly respected and provides valuable skills for internal audit purposes such as accounting and finance.

 

Cost Accountant (CMA): The cost accountant degree provides knowledge and expertise regarding cost management, which can be useful for internal audit purposes.

 

Certified Internal Auditor (CIA): It is a credential provided by the Institute of Internal Auditors (IIA) and signifies special expertise in the field of internal auditing.

 

Internal Employee: Rule 13 under Companies (Accounts) Rules, 2014, allows the appointment of internal auditor by a company from its employees having proper qualifications and experience.

 

Statutory Auditor: A statutory auditor cannot act as an internal auditor according to Section 144(b) of the Corporations Act 2013.

 

Penalty for Non-Compliance of Internal Audit Provisions

 

➔  There is no provision of penalty in the case of non-compliance with internal audit provided for under Section 138 in the Companies Act 2013. However, in such instances, the provisions of Section 450 shall apply.

➔  Both the company as well as the officer held responsible for non-compliance may be penalized.

➔  The first time penalty that can be imposed is up to ₹10,000.

➔  If non-compliance persists, an extra penalty of ₹1,000 for each day after the first shall be levied.

➔  The offenses committed under Section 450 are compoundable offenses.

 

 

Caro Reporting and Internal Audit

 

●  The requirement under CARO is that statutory auditors should:

 

●  Examine internal control systems Make comments regarding adequacy of internal audit system

 

●  Thus making internal audit more important than ever.

 

Why Should You Choose Tax Esquire for Internal Audit?

 

With Tax Esquire, you get:

 

●  Experienced internal audit services from CAs

●  Tailored internal audit frameworks

●  Audit based on risk assessment

●  Compliance with the Companies Act and CARO

●  Dedicated reporting with practical recommendations

 

We assist organizations to maintain compliance, minimize risks, and enhance their performance.

 

Internal auditing as mandated by the Companies Act, 2013, is crucial for many Indian businesses. It brings about transparency and efficiency in organizational operations.

 

Regardless of whether the process is mandatory or voluntary, adopting an internal audit mechanism can be extremely beneficial to the financial standing of your organization.