Internal Audit and Internal Auditor Appointment under companies act 2013

Introduction

Definition of Internal audit is not given in Companies Act 2013, Generally, you can understand, Internal audit is a department in a company which provides an unbiased, impartial, independent review of organisation and process. The role of Internal Audit is to provide senior leaders and governing bodies of an organization an objective source of information regarding the organization's risks, control environment, operational effectiveness, and compliance with applicable laws and regulations. 

Internalauditing activity is primarily directed at evaluating internal control. Internal control is broadly defined as a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of the following core objectives for which all businesses strive: 

• Effectiveness and efficiency of operations.
• Reliability of financial and management reporting.
• Compliance with laws and regulations.
• Safeguarding of Assets.

Internal Audit is governed by Section 138 of the companies Act, 2013 read with Rule 13(1) of the Companies  Rules, 2014 and Rule 8 of the Companies Rules, 2014. Companies which shall be required to appoint an internal auditor, namely -

1. Every listed company
2. Every unlisted public company having

• Paid up share capital of fifty crore rupees or more during the preceding financial year, or
• Turnover of two hundred crore rupees or more during the preceding financial year, or
• Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore or more exceeding one hundred crore rupees or more at any point of time during the preceding financial year, or
• Outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year; and 

    3. Every private company having - 

•  Turnover of two hundred crore rupees or more during the preceding financial year; or
• Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year;

Who conduct the Internal Audit of Companies

An Auditor is appointed by company who can be any of the following person: 

• A chartered accountant or 
• A cost accountant, or
• Such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.
• Note that a person who is appointed by the company may or may not be the employee of the company. The audit committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit.

Procedure to appoint Internal Auditor for the company

The companies which appoints an Internal Auditor has to follow the given procedure :-

• Prepare notice of board meeting along with draft resolution(s) to be passed in the board meeting for candidate consideration for appointment as Internal Auditor and sending engagement letter or consent letter from the proposed internal Auditor. 
• Obtaining engagement letter or consent letter 
• Sending of Notice along with agenda of Board meeting to all the Directors of company.
• Convene board meeting and pass the following Board Resolution.
• Sending of Outcome of Board Meeting to Stock exchange wherever company's securities are listed within 30 minutes from the conclusion of meeting.
• Sending of Appointment letter to Appointed Internal Auditor.
• File e-Form return along with attachments with the Registrar of Companies regarding appointment of Internal Auditor within thirty (30) days from date of Board Meeting.
• Making entry in register, minute books, etc of company.

Forms required for appointment of Internal Auditor

An E-form is required to be filed by the company i.e MGT-14 within thirty days from date of Board Meeting as per The Companies Act, 2013

If a Company fails to appoint an Internal Auditor

Every company and every officer of the company who is in default or such other person shall be punishable with fine which may extent to Rs-10000 - and where the contravention is continuing one with a further fine which may extend to Rs-1000 - for every day after the first during which the contravention continues.