Section 138 Internal audit – Companies Act 2013

Amended and updated notes on section 138 of Companies Act 2013. Detail discussion on provisions and rules related to Internal audit.

Amended and updated notes on section 138 of Companies Act 2013. Detail discussion on provisions and rules related to Internal audit.

Chapter IX (Sections 128138) of the Companies Act, 2013 (CA 2013) deals with the provisions related to accounts of companies. Section 138 of CA 2013 provides for Internal audit.

Recently, we have discussed in detail section 136 (Copy of financial statement to be filed with Registrar) of CA 2013. Today, we learn the provisions of section 138 of Companies Act 2013 read with the Companies (Accounts) Rules, 2014.

Section 138 of the Companies Act, 2013 has been notified by the Ministry of Corporate Affairs (MCA) vide Notification No. S.O. 902(E) issued dated 27.03.2014. This notification shall come into force from 1st April, 2014 i.e. the commencement date of section 138 is 01-04-2014.

There was no provision for Internal Audit under the Companies Act, 1956 i.e. appointment of Internal Auditor was not mandatory according to the Companies Act 1956. However, a new section 138 of the Companies Act, 2013 came into force from 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27-03-2014.

Name of ActThe Companies Act 2013
Enacted byParliament of India
Administered byMinistry of Corporate Affairs (MCA)
Number of Chapters29
Number of Sections484 (470-43+57)
Number of Schedules7
You are reading:
Chapter No.IX
Chapter NameAccounts of Companies
Section No.138
Section NameInternal audit
Monthly Updated EditionCompany Law PDF

Class of Companies required to appoint Internal Auditor [Section 138(1)]

As per section 138(1) of the Companies Act, 2013, such class or classes of companies as may be prescribed shall be required to appoint an internal auditor to conduct internal audit of the functions and activities of the company.

Accordingly, such class or classes of companies has now been prescribed in the Companies (Accounts) Rules, 2014 issued by the Ministry of Corporate Affairs (MCA) vide G.S.R. 239(E), dated 31-03-2014 and subsequently amended from time to time.

According to sub-rule (1) of Rule 13 of the Companies (Accounts) Rules, 2014, the following class of companies shall be required to appoint an internal auditor or a firm of internal auditors, namely:

  • (a) every Listed Company;
  • (b) every Unlisted Public Company having-
    • (i) paid up share capital of ₹50 crore or more during the preceding financial year; or
  • (ii) turnover of ₹200 crore or more during the preceding financial year; or
  • (iii) outstanding loans or borrowings from banks or public financial institutions exceeding ₹100 crore or more at any point of time during the preceding financial year; or
  • (iv) outstanding deposits of ₹25 crore or more at any point of time during the preceding financial year; and
  • (c) every Private Company having-

(i) turnover of ₹200 crore or more during the preceding financial year; or

(ii) outstanding loans or borrowings from banks or public financial institutions exceeding ₹100 crore or more at any point of time during the preceding financial year:

Check Limit during the preceding Financial Year (for the purpose of Appointment of Internal Auditor in a Company)Unlisted Public Company (In Crores)Unlisted Private Company (In Crores)
Turnover200200
Loans100100
Capital50NA
Deposits25NA
Note: All listed companies are compulsorily required to appoint an internal auditor.

Who are eligible for appointment as an Internal Auditor of Company

As per sub-section (1) of section 138 of CA 2013 read with the explanation of Rule 13(1) of the Companies (Accounts) Rules, 2014:

1) The internal auditor may or may not be an employee of the company. Therefore, an employee of company may be appointed by the BOD (Board of Directors) as an internal auditor of the company.

2) Internal Auditor shall either be a Chartered Accountant (CA) or a Cost Accountant (CMA), or such other professional as may be decided by the Board of Directors of the company.

3) The term “Chartered Accountant” shall mean a Chartered Accountant whether engaged in practice or not. Thus, every registered member of the Institute of Chartered Accountants of India (ICAI) shall be eligible to be appointed as an internal auditor of company. In other words, a CA need not be a practicing Chartered Accountant for the purpose of internal auditing.

4) As per section 2(28) of CA 2013, the term “Cost Accountant” means a cost accountant as defined in clause (b) of subsection (1) of section 2 of the Cost and Works Accountants Act, 1959. Accordingly, Cost Accountant means a person who is a member of the Institute of Cost Accountants of India. In other words, a CMA in employment may also be appointed as an internal auditor for the purpose of internal audit of company.

5) The firms of Chartered Accountants or Cost Accountants or Company Secretaries are also eligible for appointment as an Internal Auditor of the company.

Scope, function and periodicity of Internal Auditor of company

In accordance with the provision of section 138(2) of CA 2013, the Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.

Sub-rule (2) of the Companies (Accounts) Rules, 2014 states that 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.

Therefore, the scope, functions and periodicity of Internal Auditors of company has neither been defined in Companies Act, 2013 nor specifically prescribed in the Rules.

Section 138 of Companies Act 2013: Internal audit

Section 138 shall come into force on 1st day of April, 2014 vide Notification No. S.O. 902(E) dated 27th March, 2014.

(1) Such class or classes of companies as may be prescribed shall be required to appoint an internal auditor, who shall either be 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.

(2) The Central Government may, by rules, prescribe the manner and the intervals in which the internal audit shall be conducted and reported to the Board.

Exception/ Modification/ Adaptation:

1) In case of a Specified IFSC public company, section 138 shall apply if the articles of the company provides for the same. –Notification No. G.S.R. 08(E) dated 4th January, 2017.

2) In case of a Specified IFSC private company, section 138 shall apply if the articles of the company provides for the same. –Notification No. G.S.R. 09(E) dated 4th January, 2017.


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