# Internal Audit [Section 138]

Section 138 mandates that certain prescribed classes of companies must appoint an internal auditor to conduct internal audit of the functions and activities of the company.

## (A) Companies Required to Appoint Internal Auditor

### 1. Listed Companies

Every listed company must appoint an internal auditor (no threshold).

### 2. Unlisted Public Company — if any one of the following is satisfied:

Criterion	Threshold	Period
Paid-up share capital	≥ ₹ 50 crores	During preceding FY
Turnover	≥ ₹ 200 crores	During preceding FY
Outstanding loan/borrowing from bank/PFI	> ₹ 100 crores	At any time during preceding FY
Outstanding deposits	≥ ₹ 25 crores	At any time during preceding FY

### 3. Private Company — if any one of the following is satisfied:

Criterion	Threshold	Period
Turnover	≥ ₹ 200 crores	During preceding FY
Outstanding loan/borrowing from bank/PFI	> ₹ 100 crores	At any time during preceding FY

> Memory tip: Private companies have only 2 triggers; unlisted public has 4 triggers.

## (B) Qualifications of Internal Auditor

The internal auditor shall be either:

A Chartered Accountant (CA),
A Cost & Management Accountant (CMA), or
Such other professional as decided by the BOD.

Additional flexibility:

The internal auditor may or may not be an employee of the company.
The CA/CMA need not be in practice.

## (C) Form of Internal Auditor

The internal auditor may be:

An individual, or
A partnership firm, or
A body corporate.

## (D) Scope and Methodology

The Audit Committee of the company (or the BOD in consultation with the internal auditor) shall formulate:

Scope of internal audit,
Functioning,
Periodicity, and
Methodology of conducting internal audit.

Worked example

### Example 1

Example: Loan repaid before year-end

P Pvt. Ltd. availed a loan of ₹ 110 crores during the last FY but had an outstanding balance of only ₹ 75 crores as at the end of that FY.

Analysis: The criterion for private companies is outstanding loan/borrowing exceeding ₹ 100 crores at any time during the preceding FY — not at year-end.

Since the outstanding amount crossed ₹ 100 crores at some point during the FY, the threshold is satisfied.

Conclusion: P Pvt. Ltd. is required to appoint an internal auditor.

⚠️ Common exam mistakes

Applying the paid-up capital criterion to private companies — it applies only to unlisted public companies.
Checking outstanding loan/borrowing only at year-end — the test is 'at any time during the preceding FY'.
Assuming only a practicing CA can be internal auditor — a CMA, or any other professional decided by BOD, can also be appointed.
Confusing the internal auditor's qualifications with statutory auditor qualifications (which are stricter under Section 141).
Forgetting that listed companies have no threshold — they must always appoint an internal auditor.

Bare-Act text Section 138 · Companies Act, 2013 · click to expand

Section 138 — 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.

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Internal Audit – Section 138

Worked example

⚠️ Common exam mistakes