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Internal Audit (Section 138)
There was no provision under the Companies Act, 1956 for Internal Audit. Section 138 of the Companies Act, 2013 came into force from 1st April, 2014 which provides for it. According to Section 138 of the Companies Act, 2013 and the Companies (Accounts) Rules, 2014:
(a) Companies required to appoint Internal Auditor
(1) The following class of companies shall be required to appoint an internal auditor which may be either an individual or a partnership firm or a body corporate [As amended vide notification no. G.S.R. 742(E ) dated 27th July, 2016], namely:
(a) every listed company.
(b) every unlisted public company having:
- Paid up share capital of Rs 50 crore or more during the preceding financial year, or
- Turnover of ` 200 crore or more during the preceding financial year, or
- Outstanding loans or borrowings from banks or public financial institutions exceeding Rs 100 crores or more at any point of time during the preceding financial year, or
- Outstanding deposits of Rs 25 crore or more at any point of time during the preceding financial year, and
(c) every private company having:
- Turnover of Rs 200 crore or more during the preceding financial year, or
- Outstanding loans or borrowings from banks or public financial institutions exceeding Rs 100 crore or more at any point of time during the preceding financial year.
(2) 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.
(b) Transitional period
An existing company covered under any of the above criteria shall comply with the requirements of Section 138 and this rule within 6 months of commencement of such Section.
(c) Who is Internal Auditor
- Internal Auditor 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. Here, the term Chartered Accountant shall mean a Chartered Accountant whether engaged in practice or not.
- The internal auditor may or may not be an employee of the company.
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FAQs on Internal Audit(Section 138) - Dividends & Audit, Company Law - Company Law - B Com
| 1. What is the role of internal audit in relation to dividends and audit? |  |
Ans. The role of internal audit in relation to dividends and audit is to review and evaluate the company's internal controls and processes related to the declaration and payment of dividends. This includes assessing the accuracy and completeness of dividend calculations, ensuring compliance with legal and regulatory requirements, and identifying any potential risks or errors in the dividend distribution process.
| 2. What are the key responsibilities of an internal auditor regarding dividends and audit? | |
Ans. The key responsibilities of an internal auditor regarding dividends and audit include verifying the accuracy of dividend calculations, reviewing dividend policies and procedures, assessing compliance with company law and regulatory requirements, evaluating the effectiveness of internal controls over the dividend distribution process, and identifying any potential risks or fraud related to dividends.
| 3. How does company law impact the auditing of dividends? | |
Ans. Company law sets out the legal requirements and guidelines for the declaration and payment of dividends. As part of the audit process, the internal auditor needs to ensure compliance with these legal requirements. This includes verifying that dividends are declared and paid in accordance with the company's articles of association, ensuring proper authorization for dividend payments, and confirming that the company has sufficient retained earnings or profits available for distribution as dividends.
| 4. What are the potential risks and challenges in auditing dividends? | |
Ans. Some potential risks and challenges in auditing dividends include the risk of inaccurate dividend calculations, failure to comply with legal and regulatory requirements, lack of proper documentation and authorization for dividend payments, misclassification of dividend payments, and potential fraud or misuse of funds in the dividend distribution process. Internal auditors need to be vigilant in identifying and addressing these risks to ensure accurate and lawful dividend payments.
| 5. How can internal auditors contribute to improving the dividend distribution process? | |
Ans. Internal auditors can contribute to improving the dividend distribution process by conducting regular audits to identify and address any weaknesses or deficiencies in the processes and controls related to dividends. They can also provide recommendations for enhancing internal controls, streamlining procedures, and ensuring compliance with company law and regulatory requirements. By identifying and addressing these areas of improvement, internal auditors help enhance the accuracy, efficiency, and integrity of the dividend distribution process.
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