Internal audit applicability plays an essential role in the function as well as operations of a company.
The Companies Act of 2013 states the rules and regulations of internal audit applicability.
Many companies are required to have provisions and follow them properly according to internal audit applicability.
The internal control of a company is highly determined by internal audit applicability.
It also ensures that every worker and person working in a company follows all the rules and regulations.
The structure and functions of the risk evaluation system are also determined by internal audit applicability.
It also ensures accountability as well as being integrated into the company. The interests of stakeholders are also protected. We have a complete guide on internal audit applicability and how it works.
Applicability of Internal audit
Section 138 of the Companies Act 2013; as well as rule 13 of companies, rule 2014, declared the companies that are liable to follow internal audit applicability.
Some of the specified companies that have to follow the applicability of internal audits are given below:
- All types of listed companies that are registered should follow the applicability of internal audit.
- Every unlisted public company that has an annual turnover of 200 crore rupees or more than 200 crore rupees should follow the applicability of an internal audit.
- Every unlisted public company that has paid a share amount of 50 crore rupees or more than 50 crore rupees should follow the applicability of an internal audit.
- Every unlisted public company that has an outstanding deposit of 25 crore rupees or more than 25 crore rupees at any time should follow the applicability of an internal audit.
- Every unlisted public company that has received alone of hundred crore rupees or more than 100 crore rupees from many banks or public financial institutions at any point in time should follow the applicability of an internal audit.
- Every private company that has an annual turnover of 200 crore rupees or more than 200 crore rupees should follow the applicability of an internal audit.
- Every private company that has received alone of hundred crore rupees or more than 100 crore rupees from many banks or public financial institutions at any point in time should follow the applicability of internal audit.
Scopes
The scope of Internal audit applicability should be mentioned in the Companies Act 2013.
However,; the scopes of internal applicability of a company are to be determined by the members of the board as well as members of the audit in addition to the internal auditor as mentioned in rule 13(2) of the Companies (Accounts) Rules, 2014.
They are required to deliver and specify methodology and strategies for internal audit applicability to work properly.
These scopes are to be formulated and conducted during internal audits in a company.
Qualifications Required to a internal Auditor
It is important for companies to hire someone as an internal auditor to carry out the process of Internal auditing in the company, as mentioned in section 138(1) of the Companies Act, 2013.
The qualification of an internal auditor in a company can be a chartered accountant, whether they have experience practising or not.
A cost accountant can also be hired as an internal auditor, with or without any experience. In addition, other professionals that might be suggested or explained by the board can also be appointed as internal auditors.
The statutory auditor cannot be appointed as the internal auditor of a company.
This provision is mentioned in 144(b) of the Companies Act, 2013. In other words, the internal auditor and a statutory auditor cannot be the same person.
A qualified employee of the company can also be appointed or hired as an internal auditor for the company.
This provision is mentioned in Rule 13 of the Companies (Accounts) Rules, 2014.
Procedure of appointment
Here is the procedure for appointing an internal auditor.
- The eligibility of a person to be appointed as an internal auditor should be mentioned with the returned consent as well as a certificate by the proposed internal auditor. These provisions are mentioned in the Companies Act of 2013.
- A meeting with the board is to be issued for the appointment of the internal auditor of a company.
- A meeting with the board of directors is mandatory to be held.
- The secretary of a company or any other authorized member of a company can sign the form to send it to the registrar of the company or ROC.
- The comments draft should be prepared within 15 days of a meeting with the board of directors to appoint an internal auditor.
- A certified copy of the order issued by the board of directors should be made after appointing the final internal auditor for the company. This form should be issued as Form MGT 14, as mentioned in section 117 of the Companies Act, 2013, with the Registrar of the company. It also includes the prescribed fee.
- An appointment letter should be issued to the internal auditor.
Internal Audit Types
Here are some main types of internal audits for a company:
- Investigation audit: the investigation in a specific department of a specific area in a company comes under the function of investigation audit. It is responsible for detecting any error as well as fraud in a company.
- Management audit: the working and structure of a company are determined by management audit. These structures are efficiently analysed and verified.
- Performance audit: the performance of a specific department, team, or employee is determined under performance audit in a company.
- Operational audit: the operation, effectiveness, and efficiency of a particular department are verified by operational audits. There are various operations that are included in an operational audit, such as the accuracy of data, security, management, and others.
- Technology audit: the evaluation, as well as verification of the technology infrastructure of a company, comes under technology audits.
- Compliance audit: these audits are responsible for adequate and timely compliance with required rules and regulations in a company.
- Environmental audit: environmental auditors include functions as well as operations that deal with the effect of companies' functions or work on the environment. The laws, as well as environmental regulations, are also verified concerning the company.
- Financial audit: financial audit deals with the financial stages of a company. It also includes its verification.
Penalty
A few penalties are mentioned in the Companies Act 2013 for non-compliance of internal auditors.
There are no specific penalties or punishments mentioned in this act. It only has some general provisions for penalties when it comes to non-compliance.
Some general penalties in the Companies Act 2013 are given below:
- The company, employee, or any other member of the company who is responsible for disobeying as well as non-compliance with the internal audit is charged with a penalty of 10,000 rupees.
- In case of continuation of non-compliance and an additional penalty of Rs 1000 is charged per day, which can be increased up to 2 lakh rupees. The penalty of 2 lakh rupees applies to the company, whereas the penalty of 50,000 rupees applies to the officer responsible for non-compliance.
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Conclusion
The process in which internal matters such as accounts, finance departments, and other operations of a company are analysed as well verified is known as an internal audit.
The effectiveness, as well as efficiency, of various operations and functions of a company are determined by internal audits.
Qualified employees or a person appointed by the board of directors can act as internal auditors to conduct internal audits in a company.
The Internal audit applicability of a company has specified criteria. The provisions and rules are different for listed as well as unlisted companies.
Some specified public and private companies are also required to have internal audits.
FAQs related to internal audit applicability
1. What are some advantages of internal audits?
The internal audit in a company is responsible for the evaluation as well as verification of all the processes that take place in a company. All internal functions and operations of a company, such as accounts, finances, security, and others, are covered in internal audits. One of the main advantages of a statuary audit is that it is carried out only once in a financial year. Still, internal audits can be conducted whenever you want, such as monthly, weekly or any other interval of time. It can also specify or find any flaws or errors in different operations or functions in the company.
2. What is the applicability of internal audit?
The applicability of internal audit is only available for public as well as private companies with an annual turnover of 200 crore rupees or more than 200 crore rupees. In addition, it is also available for companies with a loan of 100 crore rupees or more than 100 crore rupees from a bank or public financial institution.
3. Do all companies need internal audits?
All companies are not required to have internal audits. The criteria of internal audit have been mentioned above in the article. However, it is recommended for all types of Companies to have internal audits once in a while to smooth operations.
4. Do small companies need internal audits?
Whether it is a small company or a big company each of them requires an internal audit in today's world of fierce competition. Internal auditors and internal audits play an important role in determining the functions and operations of a company in addition to their quality. It also helps the company to take better decisions and judgments in the future
5. What will happen if there is no internal audit applicability?
A good organization or a company will always have internal audits. A company's lack of internal audit applicability can cause a lack of judgments and wellness decisions. They would be unable to determine their success and provisions for better outcomes. The examination of internal processes and operations will only be possible with internal audits. This can also lead to a lack of objective as well as risk management in a company.
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