Audits are essential for large corporations, but what about private limited companies? Are internal audits required for all of them?
This article explores the criteria that determine whether private companies must conduct internal audits, along with statutory requirements and key considerations.
Internal Audit Requirements for Private Companies in India
In India, internal audits for private companies are governed by the Companies Act, 2013, along with regulations issued by the Institute of Chartered Accountants of India (ICAI) and other regulatory bodies.
Applicability Under Section 138 of the Companies Act, 2013
Internal audits are mandatory for private companies that meet any of the following criteria:
- Annual Turnover: INR 200 crore or more in the preceding financial year
- Outstanding Loans/Borrowings: Exceeding INR 100 crore from banks or public financial institutions at any time during the preceding financial year
Additionally, internal audits may be required if:
- Sector-specific regulators (e.g., banking, insurance, NBFCs) impose additional audit requirements
- A private company is a subsidiary of a listed company, where the parent company’s audit committee mandates internal audits
Key Implementation Requirements
For companies meeting the criteria, internal audits must follow these guidelines:
- Audit Committee or Board Oversight: Defines the audit scope and methodology
- Appointment of an Internal Auditor: The board appoints a Chartered Accountant (CA), Cost Accountant, or other qualified professional
- Independence from Statutory Auditors: The statutory auditor cannot serve as the internal auditor to avoid conflicts of interest
- Auditor Selection: Companies can hire an internal professional or an external audit firm
- Reporting Structure: The auditor reports to the audit committee or board of directors
- Audit Frequency: Based on company size and risk exposure:
- Quarterly: High-risk businesses
- Annually or Bi-annually: Stable businesses with lower risks
Role of an Internal Auditor in Private Companies
The internal auditor plays a crucial role in ensuring compliance and efficiency. Their responsibilities include:
- Independent Assessments: Reviewing financial and operational processes
- Evaluating Internal Controls: Ensuring regulatory and policy compliance
- Risk Management: Identifying and mitigating financial, operational, and compliance risks
- Financial Review: Checking records for accuracy and transparency
- Regulatory Compliance: Ensuring adherence to the Companies Act, taxation laws, and industry-specific regulations
- Fraud Prevention: Detecting and investigating fraudulent activities
- Operational Efficiency: Recommending cost-saving measures and performance improvements
- Audit Reports: Presenting findings and corrective measures to management
Penalties for Non-Compliance
Failure to comply with internal audit requirements under Section 138 of the Companies Act, 2013 can result in:
- Monetary Penalties:
- A fine of up to INR 10,000, with an additional fine of ₹1,000 per day for continued violations
- Regulatory Scrutiny:
- The Ministry of Corporate Affairs (MCA) may investigate financial records
- Disqualification of Directors:
- Persistent non-compliance may lead to director disqualification under Section 164 of the Companies Act
- Tax Penalties:
- Non-compliance affecting financial reporting may result in tax penalties under the Income Tax Act, 1961
- Impact on Borrowings:
- If a company with loans exceeding INR 100 crore fails to conduct internal audits, lenders may restrict credit facilities