Section 138: internal audit

Introduction

Section 138 leaves the companies that need an internal auditor, and the manner and intervals of internal audit, to rules made by the Central Government. Check the current rules for your company’s class before deciding whether an internal auditor is required.

Key takeaways

Who must appoint an internal auditor

Sub-section (1) applies to the class or classes of companies prescribed by rules. A company should compare its status and financial parameters with the current prescribed criteria each year.

• India Code — consolidated Companies Act, 2013, section 138

Qualification and scope

The internal auditor may be a chartered accountant, a cost accountant, or another professional decided by the Board. The internal audit covers the functions and activities of the company. The statutory auditor cannot provide internal audit services to the company, its holding company or its subsidiary company, because section 144(b) prohibits it.

Conduct and reporting

Sub-section (2) allows the Central Government to prescribe by rules the manner and intervals of internal audit and how it is reported to the Board. Record the Board’s decisions on scope, frequency and methodology, along with the internal audit reports.

Practical preparation

Check applicability against the current rules. Pass a Board resolution appointing the internal auditor. Confirm the appointee is not the statutory auditor. Agree scope and frequency. Table the internal audit reports at the Board.

Practical checklist

Glossary

Internal auditor

The person appointed under section 138 to conduct internal audit of the company’s functions and activities.

Prescribed

Specified by rules made under the Act.

Frequently asked questions