Applicability of Internal Audit Under the Companies Act, 2013

Introduction

Internal audit applicability is an important requirement for companies in India, influencing several key aspects of corporate governance and operations. The Companies Act, 2013 specifies the criteria that determine which companies must establish an internal audit function. This requirement helps strengthen internal controls, ensures regulatory compliance, and safeguards stakeholder interests.

Appointing an internal auditor involves selecting a qualified professional—typically a Chartered Accountant (CA) or a Certified Internal Auditor (CIA)—who meets the eligibility criteria and the company’s specific needs in accordance with the provisions of the Act.

This article explains the applicability of internal audits, along with the qualifications, roles, and procedures for appointing an internal auditor.

What Is an Internal Audit?

Under the Companies Act, 2013, certain companies in India are required (or recommended) to conduct internal audits. An internal audit is an independent evaluation performed by qualified professionals to examine a company’s internal controls, risk management systems, and overall governance processes. It involves reviewing financial and operational activities, identifying gaps, and recommending corrective measures.

Internal audits help ensure regulatory compliance, prevent fraud, promote transparency, strengthen financial discipline, and build stakeholder trust—while also protecting the company from penalties arising from non-compliance.

Scope of an Internal Audit

Section 138(2) of the Companies Act empowers the Central Government to prescribe the frequency and reporting framework for internal audits. However, Rule 13 does not define a fixed scope. Instead, it requires the Audit Committee (or the Board where no committee exists) to collaborate with the internal auditor to determine:

Scope and coverage
Reporting and functioning
Frequency of audits
Methodology to be followed

This flexible approach ensures that the internal audit focuses on the most critical and high-risk areas of the organization, aligned with the company’s needs and the internal auditor’s expertise.

Internal Audit Applicability — Who Must Appoint an Internal Auditor?

According to Section 138 of the Companies Act, 2013, read with Rule 13 of the Companies (Accounts) Rules, 2014, the following companies are required to appoint an internal auditor:

1. Listed Companies

All companies listed on any stock exchange in India.

2. Unlisted Public Companies

Applicable if any of the following conditions were met in the preceding financial year:

Turnover of ₹200 crore or more
Paid-up share capital of ₹50 crore or more
Outstanding loans/borrowings from banks or financial institutions exceeding ₹100 crore at any point
Outstanding deposits exceeding ₹25 crore at any point

3. Private Companies

Applicable if any of the following conditions were met in the preceding financial year:

Turnover of ₹200 crore or more
Outstanding loans/borrowings from banks or financial institutions exceeding ₹100 crore at any point

Note: Even if internal audit is not mandatory, many companies voluntarily adopt it for stronger risk management, better compliance, and improved governance.

Internal Audit Applicability Summary

Company Type	Criteria
Listed Companies	All listed companies
Unlisted Public Companies	Turnover ≥ ₹200 Cr; or Paid-up capital ≥ ₹50 Cr; or Loans ≥ ₹100 Cr; or Deposits ≥ ₹25 Cr
Private Companies	Turnover ≥ ₹200 Cr; or Loans ≥ ₹100 Cr

Role of an Internal Auditor

Internal auditors are responsible for the following key functions:
1. Independent Assessments
They evaluate financial and operational systems, risk management practices, and regulatory compliance, providing unbiased insights.
2. Reporting and Recommendations
Audit findings are presented to the Board or Audit Committee along with actionable recommendations for improvement.
3. Fraud Detection and Prevention
Internal auditors help safeguard assets by detecting irregularities, investigating suspicious activities, and strengthening anti-fraud controls.
4. Financial Accuracy and Compliance
They verify the accuracy and completeness of financial records, ensuring compliance with accounting standards and regulatory frameworks.

Qualifications Required for an Internal Auditor

The Companies Act, 2013 does not specify strict educational requirements. However, internal auditors are typically:
- Chartered Accountants (CA)
- Cost Accountants (CMA)
- Certified Internal Auditors (CIA) – credential by the Institute of Internal Auditors (IIA)
- Qualified employees with relevant experience as permitted under Rule 13
Important:
A statutory auditor cannot act as an internal auditor under Section 144(b) of the Companies Act, 2013.

How to Appoint an Internal Auditor

Here’s a simplified step-by-step process:

1. Select a Qualified Candidate

Ensure the person meets the required qualifications.
Obtain their written consent for appointment.

2. Hold a Board Meeting

Present the proposal.
Approve the appointment through a board resolution.

3. Documentation

Draft and finalize meeting minutes.
Prepare a certified copy of the board resolution approving the appointment.

4. File Form MGT-14

Submit Form MGT-14 with the Registrar of Companies (ROC) within 30 days of the board meeting.
Pay the prescribed filing fees.

5. Issue Appointment Letter

Provide a formal appointment letter outlining scope, duties, and terms of engagement.

Penalties for Non-Compliance With Internal Audit Requirements

There is no specific penalty section under Section 138. Instead, Section 450 of the Companies Act applies:

Company and responsible officers may face a penalty up to ₹10,000.
If the default continues, an additional ₹1,000 per day may be levied.
These offences are compoundable, allowing settlement without court proceedings.

About the Author

Ravi

Ravi is an experienced legal writer who simplifies complex laws into clear, practical guidance. He empowers entrepreneurs to understand and meet their legal obligations, helping them build compliant and sustainable businesses with confidence.