Internal Audit Applicability for Companies in India

Internal Audit Applicability can be considered as a crucial framework for companies in India. According to Section 138 of the Companies Act, 2013, this applies to all listed companies. It is also for unlisted public or private companies. These companies has the exceeding specific thresholds. The thresholds can include Rs. 200 crore turnover or Rs. 100 crore in loans. In this blog, you will get guidance on Internal Audit Applicability.

What is an Internal Audit?

An Internal audit refers to an independent, objective assurance and consulting activity. This helps to add value and improve an organisation's operations. It allows companies to reach their goals. This can be done by measuring and improving the efficiency of risk management, control, and governance methods. Internal audits focus on improving operational efficiency, following rules, and preventing fraud. As per the Companies Act, 2013, it is mandatory for specific companies. This depends on their size, structure, and financial exposure.

Legal Framework for Internal Audit Applicability in India

In India, internal audits are mainly regulated by Section 138 of the Companies Act, 2013. IT is also regulated by Rule 13 of the Companies (Accounts) Rules, 2014. This is compulsory for listed companies and certain unlisted public companies with specific revenue or loan amounts. It is also compulsory for private companies that meet certain standards. The purpose of these audits is to improve internal controls, manage risks, and maintain compliance.

Internal Audit Applicability Criteria (Who Must Appoint an Internal Auditor)

According to Section 138 of the Companies Act, 2013 and the Companies (Accounts) Rules, 2014, certain companies are eligible for an internal audit applicability.

Listed below are the companies that need to appoint an internal auditor:

1) Listed Companies

Every listed companies have to appoint an internal auditor. This is regardless of size, revenue, or capital. The company is listed on a stock exchange in India.

2) Unlisted Public Companies

An unlisted public company needs to appoint an internal auditor. They can appoint it if it meets the required criteria. This must happen during the following financial year. Here are the following criteria:

a) Turnover

The turnover is Rs. 200 crore or more

b) Paid-up Share Capital

The paid-up share capital is Rs. 50 crore or more.

c) Outstanding Loans/Borrowings

This is over Rs. 100 crore from banks or public financial institutions at any time.

d) Outstanding Deposits

The outstanding deposits are more than Rs. 25 crore at any point.

3) Private Companies

A private company should appoint an internal auditor. It needs to meet specific and specified criteria in the previous financial year.

Below are the following criteria:

a) Turnover

The turnover limit is Rs. 200 crore or more

b) Outstanding loans or borrowings

The outstanding loans or borrowings are exceeding Rs. 100 crore from banks or financial institutions at any point.

Who Can Conduct the Internal Audit?

According to the Section 138 of the Companies Act, 2013, the following entities can conduct the internal audits:

a) A qualified Chartered Accountants (CA)

b) Cost Accountant

c) Any other professionals who is decided by the Board.

However, the auditor can be an employee or an external consultant. They cannot be the statutory auditor of the company.

Role and Responsibilities of an Internal Auditor

Here are the key roles and responsibilities of an Internal Auditor:

a) Independent Assessments

The internal auditors conduct a thorough analysis of a company. They check the financial and operational processes. They also check risk management practices and adherence to regulations. This gives an independent assessment of the company. It means they analyses potential weaknesses or areas for improvement.

b) Reporting and Recommendations:

They will prepare an audit report and presented to the Board of Directors or the Audit Committee. This gives good insights and recommendations for the company. It will help with corrective actions regarding issues.

c) Fraud Detection and Prevention

An internal auditor will protect the company from fraud. They can protect it by identifying and reducing fraudulent activities. An internal auditor will also investigate and assess internal controls. They will suggest measures to eliminate fraud.

d) Financial Accuracy and Compliance

They will carefully analyses all financial transactions and records. An internal auditor checks for accuracy, completeness, and adherence to accounting standards. They also check for regulatory requirements. This confirms that they are in compliance with the financial regulations.

e) Modern Focus

The internal auditor also focuses on ESG (Environmental, Social, and Governance) auditing. They also utilise advanced data analytics for auditing processes.

Key qualifications for an Internal Auditor

The key qualifications for an Internal Auditor:

a) Chartered Accountant (CA)

It focuses on important skills for internal auditing. This can include accounting and finance knowledge.

b) Cost Accountant (CMA)

Cost accountants have knowledge about cost management. This can help with internal audits.

c) Certified Internal Auditor (CIA)

The Instituter of Internal Auditors (IIA) provides the Certified Internal Auditor (CIA). The CIA certification shows the specialised knowledge and skills in internal auditing practices.

d) Internal Employees

According to Rule 13, Companies (Accounts) Rules, 2014, Companies have the right to appoint a qualified employee. The employee has the relevant experience to act as the internal auditor.

e) Statutory Auditor

Companies Act, 2013 – Section 144(b) prohibits statutory auditor from rendering internal audit services to the same company.

Consequences of Non-Compliance for Internal Audit Applicability

a) Financial Penalties (Section 450):

A penalty of up to Rs. 10,000 applies to the company and its officers. There is also a fine of Rs. 1,000 per day if the contravention continues.

b) Substantial Total Fines

Total penalties can accumulate to significant amounts. The amount is more than Rs. 2, 00,000 or even more.

c) Director Liability

The Officers may suffer from personal fines. They may also face legal consequences if negligence is established. The officers can include directors.

d) Operational and Risk Management Issues

Companies without an internal audit do not benefit from an independent review of risks. It also includes internal control processes, and corporate governance. This may result in fraud and financial losses.

e) Regulatory Scrutiny

If a listed or unlisted company fails to comply with Section 138 of the Companies Act 2013, it can lead to increased scrutiny. A regulatory agency will do increased scrutiny. This may also result in further litigation and reputational risk.

Conclusion

Internal Audit Applicability is essential for corporate governance and strategic risk management.  It can be required by Section 138 of the Companies Act. These audits helps to protect assets, detect fraud, and maintain strict regulatory compliance. This will also help to identify gaps for business purposes. Businesses will improve transparency and build stakeholders' trust. 

FAQ

Q1. Is Internal Audit Applicability Mandatory for All Companies?

No, Internal Audit Applicability is not mandatory for all companies. It is only applicable to listed companies, unlisted public or private companies. The required company must meet the prescribed thresholds of turnover, loans, or paid-up capital. This can be met during the following financial year.

Q2. What is the Internal Audit Applicability Criteria for Private Limited Companies?

The criteria of the Internal Audit Applicability for Private Limited Companies are:

1. The company must have the turnover of Rs. 200 crore or more.
2. The outstanding loans or borrowings is more than Rs. 100 Crore from banks or public financial institutions at any point.

Thus, if it meets these criteria, they can appoint an internal auditor.

Q3. Who can be appointed as an Internal Auditor?

The following entities can be appointed as an internal Auditor by the Board:

1. A Chartered Accountant (CA)
2. A Cost Accountant (CMA)
3. Any other Professional as decided by the board
4. An Employee of the company
5. An external Firm, etc.

Q4. Can an employee be an internal auditor?

Yes, a qualified employees can be an internal auditor.

Q5. Is Internal Audit Applicability is beneficial for start-ups?

Yes, it the Internal Audit Applicability is beneficial for start-ups. However, internal audit is not officially mandatory. It is recommended for start-ups. This helps to maintain, and boost investor confidence. It also helps with operational efficiency, and risk management during rapid scaling.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Online Legal India is a digital platform. If you require legal assistance, we strongly recommend consulting a qualified lawyer or law firm.