Internal Audit

An Internal Audit– Companies Act 2013 along with requirement of LODR 2015

An Internal Audit– Companies Act 2013 along with requirement of LODR 2015

The Companies Act, 2013 under Section 138, states that a class or classes of companies as prescribed would be required to appoint an internal auditor who will be a Chartered Accountant/Cost Accountant (CA) or such other professional as decided by board to conduct an internal audit of the role and functions of the company.  

Meaning of Internal Audit

Internal auditing is an independent as well as consulting activity which adds value to a business and improves the operations of an organization. It assists an organization to meet its objectives by bringing a systematic, disciplined approach to evaluate & improve the effectiveness of risk management and control. It helps in getting the assurance that risks to the organization are managed well.

Every organization, regardless of the size, should have internal control system. The internal audit can provide its services better if it is resourced with a professional staff and can bring out critical issues and suggest improvements to bring greater efficiency.

Class of companies covered under an Internal Audit

As per Rules 13 of the Companies (Accounts) Rules, 2014, the following companies shall appoint an internal auditor:

  • Every listed company;
  • Every unlisted public company having-
  • Paid-up share capital of Rupees 50 crore or more during preceding financial year; or
  • Turnover of 200 crore rupees or more during preceding financial year; or
  • Outstanding loans/borrowings from banks or the public financial institutions exceeding 100 crore or more at any time during the preceding financial year;
  • Outstanding deposits of 25 crore rupees; and
  • Every private company having-
  • Turnover of 200 crore rupees or more during preceding financial year;
  • Outstanding loans/borrowings from banks or public financial institutions exceeding 100 crore or more at any time during the preceding financial year.
READ  Roles and Responsibilities of Internal Auditor

Who can be appointed as internal auditor for an internal audit?

According to section 138 of the Companies Act 2013, the internal auditor would be a Chartered Accountant or a Cost Accountant or such professional as decided by the board. This means that board of directors of a company has been given the liberty to appoint any professional. Further, the appointment of the internal auditor can be an employee of a company appointed by the board of directors of company as internal auditor.

Alternatively, ICAI practicing members can also take this opportunity to be appointed as Internal Auditor as the rules specifically provide that Chartered Accountant shall mean Chartered Accountant, whether engaged in practice or not. Thus, every registered member of the ICAI is eligible for the appointment as Internal Auditor of the company.

Those who are a member of the ICAI or the ICSI[1] and other professionals who are the employees of the company are also eligible to be appointed as internal auditor.

Ineligible member for Internal Audit Appointment

The statutory auditor appointed under the Section 139 of Companies Act is not eligible to provide the services of internal audit whether provided directly/indirectly to the company/its holding company/subsidiary company. For this purpose, directly and indirectly, shall include rendering of services by the auditor:

  • If the auditor being an individual either himself or through his relative or any other person connected with such individual or through any other entity, in which such individual has a significant influence or control or whose name or trademark or brand is used by such individual;
  • If the auditor being a firm, either itself or through any of its partners/parent/subsidiary/associate entity or through any other entity wherein the firm or any partner of firm has significant influence or control or whose name/trademark/brand is used by the firm or any of its partners.
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Provisions under LODR Regulations

According to the LODR Regulations monitored through stock exchanges by SEBI has entrusted great responsibility on the audit committee, which is responsible to the board for oversight of management reporting on internal controls, and the auditor plays a significant role in assessing and risk management reporting based on the following pillars of corporate governance:

  • Accountability;
  • Transparency;
  • Responsibility;
  • Fairness.

The audit committee & the internal auditor are connected to each other, and their efficiency mandates that there must be a deep understanding of the internal audit best practices.

Significance of an Internal Audit

If we keep aside the mandatory regulatory requirement still there are certain common factors that show the significance of this audit. These are:

  • Expansion through mergers, acquisition and also internal growth;
  • Entering into capital market;
  • Challenging business environment;
  • Strict regulatory requirements and disclosure norms;
  • Risk in the business;
  • To ensure data integrity, protection of data and other security needs.

Role of internal auditor with external auditor

The internal auditor & the external auditor should work cohesively and co-ordinate with each other as both play a critical role in assuring that operational compliance is ensured and also proper financial disclosures. Both auditors should compliment each other. The plans can be discussed with each other so as to concentrate on areas with greater risk in the opinion of the internal and external auditors.


An Internal audit is an excellent avenue for professionals like CS and CA. One can grow within the organization for an employed professional or take up an assignment by practicing professionals. In some organizations, the function of internal auditor could be a sole function, whereas, in others, they may outsource this function.

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Read our article:Forensic Accounting and Investigation Standards (FAIS) under DAAB

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