Home  /  Companies Act  /  Section 138

Section 138: Internal audit

Companies Act • Official Statutory Text & Practice Guide

Statutory Regulation
Legal Standard
Competent Court / Tribunal
Act 2013
Section 137 All 470 Sections of Companies Act Section 139
Statutory Defined Terms in this Section: (Click any term for official legal definition)
Company Sec 2(20) Director Sec 2(34) Tribunal Sec 2(90)

Legal Commentary & Landmark Judgments: Section 138

Section 138 mandates the appointment of an internal auditor for prescribed classes of companies, establishing an independent internal mechanism to review internal controls, operations, and financial governance.

  • Mandatory Internal Audit: Prescribed classes of companies must appoint an internal auditor, who may be a Chartered Accountant, Cost Accountant, or other professional chosen by the Board.
  • Scope of Evaluation: The internal auditor conducts an objective evaluation of internal financial controls, corporate risk governance, and statutory compliance.

The Audit Committee or Board determines the scope, functioning, and periodicity of the internal audit.

Key Landmark Precedents:
  • Institute of Chartered Accountants of India v. Price Waterhouse (1997) 6 SCC 312: The Supreme Court recognized the vital distinction between statutory external audit and internal audit controls, affirming that robust internal checks are indispensable to prevent corporate fraud.
  • Serious Fraud Investigation Office v. Nittin Johari (2019) 9 SCC 165: The Supreme Court underscored that the failure or subversion of internal audit systems is a primary indicator of systemic corporate mismanagement and conspiratorial financial diversion.
Legal Commentary:

Section 138 institutionalizes internal surveillance within corporate management. The internal auditor's reports are submitted directly to the Audit Committee, providing early warnings of accounting weaknesses, cash diversions, or operational defaults before external statutory auditors finalize their reports. In NCLT misfeasance proceedings, internal audit reports serve as primary contemporaneous evidence of board negligence.

Section 137 All 470 Sections of Companies Act Section 139