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Appointment of Internal Auditor


Appointment of Internal Auditor

As per Section 138 of the Companies Act, a certain class of companies are required to appoint an internal auditor for conducting internal audit which evaluates the function and activities of the company. The internal auditor can be the chartered accountant or a cost accountant, or such other professional as decided by the Board can be appointed as the Internal Auditor. In this article, we look at the requirement and procedure for the appointment of Internal Auditor in detail.

What is the Role of an Internal Auditor?

An internal auditor is a professional within a company who acts as an independent reviewer of its internal controls, processes, and governance. They provide objective assessments, ensuring the company adheres to regulations and maintains accurate financial reporting. Internal audits go beyond just finances, evaluating operational efficiency and identifying areas for improvement in risk management and overall company health. Their role is to add value by helping the organization achieve its objectives.

Importance of appointing an Internal Auditor

An internal auditor is a crucial safeguard for any organization. They assess the business’s performance independently and objectively, evaluating its operations and controls. Here’s why appointing one is important:

  • Stronger Risk Management: Internal auditors identify and assess risks that could obstruct your goals. They recommend mitigating these risks and protecting your business from financial losses, reputational damage, and legal issues.
  • Improved Compliance: They ensure the organization adheres to laws, regulations, and internal policies, minimizing the risk of fines, legal trouble, and operational disruptions.
  • Enhanced Efficiency and Effectiveness: Internal auditors evaluate your processes, pinpointing areas for improvement and cost savings. They can help streamline operations and ensure they align with your overall objectives.
  • Reduced Fraud: Regular internal audits help detect and deter fraud by identifying weaknesses in controls and procedures. This safeguards your assets and promotes a culture of accountability.
  • Continuous Improvement: By finding best practices and recommending enhancements, internal auditors contribute to your organization’s long-term success and sustainability.

Duties and Responsibilities

An Internal auditor has the following duties and responsibilities in a company as listed below:

  • Evaluate risk management, corporate governance system, which is functioning as intended to meet the organisation goals.
  • Issue report of risk management and control deficiencies identified by the auditor. Also, the internal auditor provides recommendations in pursuit of improving the performance towards the organisation.
  • Evaluate risk exposures and security threat of the organisation information.
  • Evaluate programs relevant to regulatory compliance.
  • Evaluate the readiness of the organization in case of any interruption towards the business of the organization.
  • Provide workshops and seminars towards education and staff development
  • Plays a major role in maintaining the organization’s anti-fraud programs.

Note: The internal auditor should report to the audit committee. The audit committee or the board should, along with the internal auditor formulate the function, scope, periodicity and methodology of conducting the internal audit. Further, both the audit committee and the board are required to consider the efficiency of internal control systems and financial controls in the company.

Who needs to appoint an Internal Editor?

Internal Auditors are professionals who are appointed by the concerned organisation for internal auditing of the company. According to the Section 138 of the companies Act, the internal auditor can be chartered accountant or a cost accountant, company secretary or such other professional decided by the Board of Directors of the company for the purpose of internal auditing.

The following are the companies are mandatorily required to appoint an internal auditor:

  • Any listed companies
  • Any unlisted public company having-
    • Paid-up share capital of Rs.50 crore or above during the preceding financial year.
    • Annual turnover of income of Rs.200 crores or above during the preceding financial year.
    • Outstanding loans or borrowings from either banks or public financial institutions that are exceeding Rs.100 crores or above during the preceding financial year.
    • Outstanding deposits of Rs.25 crores or above during the preceding financial year.
  • In case of any private companies having-
    • Annual turnover of income of Rs.200 crores or above during the preceding financial year.
    • Outstanding loans or borrowings from either banks or public financial institutions that are exceeding Rs.100 crores or above during the preceding financial year.

Who is Qualified as Internal Auditors?

The Companies Act 2013 in India doesn’t dictate internal auditors’ educational background. However, Section 138 highlights the significance of internal audits for specific company categories. Here’s a list of who can qualify as an internal auditor in India:

  • Chartered Accountant (CA): This widely recognized qualification emphasizes skills crucial for internal auditing, including accounting and financial expertise.
  • Cost Accountant (CMA): Cost accountants bring specialized knowledge in cost management, which can be advantageous for internal audits.
  • Certified Internal Auditor (CIA): Offered by the Institute of Internal Auditors (IIA), the CIA certification demonstrates in-depth knowledge and honed skills in internal auditing practices.
  • Internal Employees: Companies can appoint qualified employees with relevant experience for the internal auditor role, as per Rule 13 of the Companies (Accounts) Rules, 2014.

Important Note: Section 144(b) of the Companies Act 2013 prohibits appointing a statutory auditor as an internal auditor.

How to appoint an Internal Auditor for a Company?

Having a qualified internal auditor is essential for companies complying with the Companies Act 2013. Here’s a step-by-step guide for appointing one:

  1. Selecting a Qualified Candidate:
  • Verify the candidate meets the eligibility criteria as defined in the Companies Act (refer to your qualification section for details).
  • Obtain written consent from the chosen individual confirming their acceptance of the internal auditor position.
  1. Board Meeting:
  • Schedule a board of directors meeting to discuss and formally approve the internal auditor’s appointment.
  1. Documentation and Filing:
  • Within 30 days of the board meeting (not 15):
    • Prepare a draft of the board meeting minutes reflecting the discussions and approval of the appointment.
    • Once finalized, create a certified copy of the board resolution formally appointing the chosen individual.
  1. Form MGT-14 Filing:
  • File Form MGT-14 with the Registrar of Companies (ROC) within 30 days of the board meeting. This form (mandated by Section 117) notifies the ROC of the appointment. Include the prescribed filing fee.
  1. Appointment Letter:
  • Issue a formal appointment letter to the new internal auditor outlining their responsibilities, terms of engagement, and any other relevant details.

Format of the Board Resolution

“RESOLVED THAT pursuant to provisions of section 138 of Companies act 2013 read with rule 13 of the Companies (Accounts) Rules, 2014 and section 179 of the said Act read with rule 8 of the Companies (Meetings of board and its Powers) Rules, 2014 and other applicable provisions, if any, M/s ____________ (a firm of practising cost accountants/ charatered accountants/ company secretaries represented by Mr. ______________, having membership number ___________)/ Mr. ____________, Cost Accountant/ Chartered Accountant/ Company Secreatary/ ____________ (any other professional) having membershipnumber ___________ be and is hereby appointed as Internal Auditors of the company on the terms contained in the draft appointment letter containing scope, functioning, periodicity, and methodology of the audit placed before the Board.

RESOLVED FURTHER THAT Mr. _____________ Director (DIN: ___________) and Mr. __________ (DIN:__________) hereby severally authorized to take such steps and to do all such acts, deeds and things as may be necessary in this regard and to negotiate and fix the terms and conditions including the remuneration, to convey the acceptance of the terms, to sign the appointment letter and digitally signing and filing the necessary forms and returns, and generally to do all such acts, deeds, matters and things as may be necessary, proper, expedient or incidental for giving effect to this resolution.”

Penalty for Non-Compliance

If a company or any other officer of the company, contravenes the provisions of this section, then the company or any officer of the company who is in default is liable for punishment with a penalty of up to Rs.10,000. In case of continuation of default in complying with the above section further fine of Rs.1,000 per day will be imposed.