1. Internal Audit — Section 138

Internal Audit is a continuous, independent appraisal activity within the company aimed at evaluating and improving the effectiveness of risk management, internal controls, and governance processes. It differs from statutory audit — it is preventive (ongoing) rather than year-end, and the internal auditor reports to the Audit Committee or Board, not to shareholders.

Mandatory applicability — Section 138: Internal Audit is compulsory for:

• Every listed company.
• Every unlisted public company with: paid-up share capital ≥ ₹50 crore (in the preceding financial year), OR turnover ≥ ₹200 crore, OR outstanding loans/borrowings ≥ ₹100 crore, OR outstanding deposits ≥ ₹25 crore.
• Every private company with turnover ≥ ₹200 crore or outstanding loans/borrowings ≥ ₹100 crore.

Who can be Internal Auditor?

• A Chartered Accountant (whether in practice or not), or a Cost Accountant, or any other professional as decided by the Board.
• Appointed by the Board on the recommendation of the Audit Committee; can be an employee or an external firm.

Scope of Internal Audit:

• Review of accounting records, internal financial controls, and risk management systems.
• Evaluation of operational efficiency and compliance with laws, policies, and procedures.
• Detection and prevention of fraud and misappropriation.
• Reporting to the Audit Committee and the Board on findings and recommendations.

2. Disqualifications of a Statutory Auditor — Section 141(3)

A person shall not be appointed as auditor of a company if:

• They are a body corporate (not a LLP or individual Chartered Accountant).
• They are an officer or employee of the company — to maintain independence, the auditor must be external and at arm's length.
• They are a partner or employee of an officer or employee of the company.
• They, or their relative, holds securities of the company of a face value exceeding ₹1 lakh — financial interest creates a conflict of interest.
• They are indebted to the company in excess of ₹5 lakh, or have given guarantees to the company exceeding that amount.
• They, or their firm, directly or indirectly, renders services such as accounting, internal audit, actuarial, investment advisory, or management services to the company — multi-tasking compromises independence.
• They have a business relationship with the company, its subsidiary, or its associate, except for professional services rendered as auditor.
• Their relative is a director or is in the employment of the company in a financial capacity.
• A person convicted by a court of an offence involving fraud within the preceding 10 years.

If, after appointment, an auditor incurs any of the above disqualifications, they must vacate office and the resultant vacancy is treated as a casual vacancy to be filled by the Board.

3. Procedure for Removal of Statutory Auditors — Section 140

The removal of a statutory auditor before the expiry of their term is a safeguarded process to prevent directors from removing auditors who discover inconvenient information:

1. Application to Central Government: the company must make an application in Form ADT-2 to the Central Government (processed by the Regional Director) for prior approval, along with reasons for removal.
2. Central Government's approval: the Central Government may grant or refuse approval. The company must obtain this approval before calling any general meeting for removal.
3. Special Resolution: after obtaining the Central Government's approval, the company must pass a Special Resolution at a general meeting to remove the auditor. An ordinary resolution is not sufficient — this extra threshold protects auditor independence.
4. Right of the Auditor to be Heard: before the Board proposes the resolution and before the general meeting, the auditor being removed has the right to make a written representation to the company, which must be circulated to all members along with the notice of the meeting; if the representation is too late, it must be read out at the meeting. The auditor also has the right to speak at the meeting.
5. Report to ICAI: the company must report the removal to the Institute of Chartered Accountants of India (ICAI) within 30 days.

Casual vacancy: after removal, the resulting vacancy is a casual vacancy to be filled by the Board of Directors within 30 days (for government companies, by the CAG); the newly appointed auditor holds office only until the conclusion of the next AGM.