Appointment of Internal Auditor

The concept of internal audit was present in the Companies Act, 1956 in the form of Section 581ZF which stipulated that ‘Every Producer Company shall have internal audit of its accounts carried out, at such interval and in such manner as may be specified in articles, by a chartered accountant’.
The Institute of Internal Auditors defines Internal Audit as an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
An internal auditor (IA) is a trained professional employed by Companies to provide independent and objective evaluations of financial and operational business activities, including corporate governance. They are tasked to assess the risk management and ensure that Companies comply with laws and regulations, follow proper procedures, and function as efficiently as possible.

In accordance with the Section 138 of the Companies Act, 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, the following Companies shall be required to appoint an internal auditorto conduct internal audit of the functions and activities of the Company: –

* during the preceding financial year
** at any point of time during the preceding financial year

The internal auditor may or may not be an employee of the Company but he/she shall either be a chartered accountant or a cost accountant or such other professional as may be decided by the Board whether engaged in practice or not.

The Audit Committee of the Company or the Board of Directors shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit.

The Process to appoint Internal Auditor is as follows: –

Step 1: Obtain Written Consent

Take the consent of Internal Auditor in writing before appointment and a certificate that they are eligible for appointment and not disqualified for appointment.

Step 2: Hold the Board Meeting

In the Board Meeting, propose the appointment of Internal Auditor and take the approval of Directors by passing a Board Resolution and authorise a Director to file the intimation with the Registrar in Form MGT-14.

Step 3: Filing with the Registrar

After passing the Resolution, the Company shall file the intimation with the concerned Registrar in Form MGT-14 along with prescribed fee within 30 days of Board Meeting.

Attachments with Form MGT-14

• Certified copy of the Board Resolution
• Copy of Written consent from Auditor
• Copy of Certificate from Auditor

There are no specific penal provisions provided in this section 138. Therefore, the penal provisions under section 450 would apply in case of any non-compliance of this section. Accordingly, for contravention, the company and every officer of the company who is in default shall be punishable with a fine upto Rs.10,000, in case the contravention is a continuing one then the further fine shall be Rs.1,000 every daysubject to a maximum of two lakh rupees in case of a company and fifty thousand rupees in case of an officer who is in default or any other person. The offences under this section are compoundable under section 441 of the Act.

Important Note: As provided in section 144, an auditor of the company cannot provide the internal audit service to the company or its holding company or its subsidiary.