Advanced Auditing, Assurance and Professional Ethics · Internal Audit

Internal Audit under Section 378ZF for Producer Companies

Updated 5 October 2026

A producer company is a body corporate under Part XXIA of the Companies Act, 2013. Internal audit is tested through Section 138 and Rule 13 of the Companies (Accounts) Rules, 2014, which cover prescribed classes of companies. To solve a question, check the class and limits, then the person proposed, then the Section 144 bar. Check the current text before the exam.

Understand Internal Audit under Section 378ZF for Producer Companies

A producer company is a body corporate formed under Part XXIA of the Companies Act, 2013. Its members are primary producers, such as farmers, and it carries on activities like production, harvesting, procurement, grading, pooling, marketing and sale of their produce. Many are small, but some handle large volumes of money. Internal audit adds a control layer once the business is big enough.

The general internal audit rule is Section 138. It says a prescribed class of company must appoint an internal auditor. Rule 13 of the Companies (Accounts) Rules, 2014 prescribes the classes: every listed company; an unlisted public company that crosses stated limits of paid-up capital, turnover, borrowings or deposits; and a private company that crosses stated limits of turnover or borrowings. The limits are tested on the preceding financial year.

Whether and how these classes apply to a producer company depends on the provisions of Part XXIA on the application of the Act. Check the current text of Part XXIA, Section 138 and Rule 13 before you answer. Do not assert a separate turnover trigger for producer companies unless you have confirmed it from the text.

The internal auditor under Section 138 may be a chartered accountant or cost accountant (whether in practice or not), or such other professional as the Board decides. The internal auditor may or may not be an employee of the company.

On who appoints: Section 138(1) says the company shall appoint an internal auditor, and the Board makes the appointment under its general powers. The members in general meeting appoint the statutory auditor, which is a different process.

Under Rule 13, the Audit Committee or the Board, in consultation with the internal auditor, formulates the scope, functioning, periodicity and methodology of the internal audit.

Remember that internal audit differs from statutory audit. The internal auditor reports to management or the Board, and the work is about controls, risk and efficiency. Section 144 separately bars a statutory auditor from providing internal audit services to the company it audits. So the statutory auditor of a company cannot also be its internal auditor. Check the current text of the sections and the rule before the exam for any change in the limits.

Key rules to remember

When an internal auditor is required: Listed company, or unlisted public company or private company above the Rule 13 limits in the preceding financial year ⇒ internal auditor required; Unlisted public company: paid-up capital ₹50 crore or more, turnover ₹200 crore or more, borrowings from banks or public financial institutions exceeding ₹100 crore, or deposits ₹25 crore or more. Private company: turnover ₹200 crore or more, or such borrowings exceeding ₹100 crore. Check the exact wording in the current rule and how it applies to a producer company.
Who does the internal audit: Internal auditor appointed under Section 138; Do not assert that a producer company provision excludes other professionals whom the Board may decide. Check the section text.
Who may be appointed under Section 138: Chartered accountant OR cost accountant OR other professional decided by the Board, whether or not an employee; This is the general Section 138 position for companies.
Who appoints: Company must appoint an internal auditor (Section 138(1)); the Board makes the appointment under its general powers; Not the general meeting.
Scope and method: Scope, functioning, periodicity and methodology: formulated by the Audit Committee or the Board in consultation with the internal auditor (Rule 13, Companies (Accounts) Rules, 2014); Use this for questions on how the audit is carried out.
Bar on statutory auditor: Statutory auditor ≠ internal auditor of the same company; Section 144 bars a statutory auditor from providing internal audit services to the company it audits.

How to solve Internal Audit under Section 378ZF for Producer Companies questions

Use this order for any question on internal audit of a producer company. It keeps your answer in provision-facts-conclusion form.

1Confirm the entity is a producer company under Part XXIA of the Companies Act, 2013. Check from the current text how the Act and Rule 13 apply to it.
2Identify the class of company (listed, unlisted public or private). Collect the figures for the preceding financial year: paid-up capital, turnover, borrowings and deposits.
3Compare the figures with the Rule 13 limits for that class. If no limit is crossed, state that internal audit is not mandatory under Section 138, though a voluntary appointment is allowed.
4If a limit is crossed, state that an internal auditor is required. Section 138(1) requires the company to appoint one, and the Board makes the appointment under its general powers.
5Test the person proposed under Section 138: a chartered accountant, a cost accountant or another professional the Board decides, whether or not an employee. Reject the company's statutory auditor under Section 144.
6Link to Rule 13 of the Companies (Accounts) Rules, 2014 for scope, functioning, periodicity and methodology, formulated by the Audit Committee or the Board in consultation with the internal auditor.
7Conclude clearly: required or not, eligible or not, and what the company must do now.

Quickest way: Three-check shortcut

When to use it: Use this for case-scenario MCQs where you have about a minute per question.

Check 1: Is it a producer company, and does Section 138 with Rule 13 apply to it on the current text? If yes, go on.
Check 2: Did the company cross a Rule 13 limit for its class in the preceding financial year? If no, no mandatory internal audit.
Check 3: Is the proposed auditor the statutory auditor? If yes, the appointment is wrong. Otherwise test eligibility under Section 138 (chartered accountant, cost accountant or other professional decided by the Board) and the Board appoints.

Common mistakes in Internal Audit under Section 378ZF for Producer Companies

Treating farmer ownership as an exemption from internal audit.
Students assume a company owned by primary producers is outside the internal audit rules.
Fix: Ownership by farmers gives no exemption by itself. Test the company against Section 138 and the Rule 13 limits, after checking how the Act applies to producer companies.
Mixing up 'or more' and 'exceeding' in the Rule 13 limits.
Students memorise the figures but not the wording of each limit.
Fix: Read the wording of each limit in the current rule. For example, the turnover limit is ₹200 crore or more, so turnover of exactly ₹200 crore meets it.
Letting the general meeting appoint the internal auditor.
Students mix it up with statutory auditor appointment.
Fix: Write that Section 138(1) requires the company to appoint an internal auditor and the Board makes the appointment under its general powers.
Appointing the statutory auditor as internal auditor to save cost.
It looks efficient and both roles seem to be audits.
Fix: State that Section 144 bars the statutory auditor from internal audit services for the same company, and the roles must stay separate.
Asserting that a producer company provision limits the internal auditor to a chartered accountant or cost accountant and excludes any other professional the Board decides.
Students blend Section 138 with the producer company provisions and overstate the rule.
Fix: Say the internal auditor is appointed under Section 138, which covers a chartered accountant, a cost accountant or another professional the Board decides. Check the section text instead of asserting an exclusion.
Applying Section 138 limits to a producer company from memory without checking applicability.
Students memorise the Rule 13 figures and apply them everywhere, or drop them without a reason.
Fix: Check the current provisions for producer companies and Rule 13 of the Companies (Accounts) Rules, 2014 for applicability, then state the test you applied.
Writing a bare conclusion without the provision.
Students rush the written answers.
Fix: Always give the provision, the facts from the case, then the conclusion.

Worked examples

Example 1

Kisan Agro Producer Company Limited, an unlisted company, had turnover of ₹2,50,00,00,000 in the preceding financial year. The Board has not appointed an internal auditor, saying the company is owned by farmers and is exempt. Assume Section 138 and Rule 13 apply to the company. Advise the company.

Show the solution

Provision: Section 138 requires a prescribed class of company to appoint an internal auditor. Under Rule 13, an unlisted public company or a private company with turnover of ₹200 crore or more in the preceding financial year is in the prescribed class.
Facts: The company is unlisted. Turnover is ₹2,50,00,00,000, which is ₹250 crore and is more than ₹200 crore. So the turnover limit is met whether the company is public or private.
Application: The farmer ownership gives no exemption. The test is the class and the limits.
Further advice: The Board should appoint an eligible internal auditor under Section 138 (a chartered accountant, a cost accountant or another professional the Board decides) and fix the scope, periodicity and methodology in consultation with that person.

Answer: The company's view is wrong. An internal auditor is required because turnover of ₹250 crore meets the ₹200 crore limit. The Board must appoint an eligible internal auditor under Section 138 and set the terms.

Example 2

Green Valley Producer Company Limited, an unlisted company, had turnover of ₹40,00,00,000, paid-up capital of ₹3,00,00,000, borrowings from banks of ₹12,00,00,000 and no deposits in the preceding financial year. Its Board wants to appoint M/s Rao & Co., the company's statutory auditors, as internal auditor for the coming year. Assume Section 138 and Rule 13 apply to the company. Examine.

Show the solution

Provision: Under Section 138 and Rule 13, internal audit is mandatory only for the prescribed classes that cross the stated limits.
Facts: Turnover of ₹40 crore is below ₹200 crore, paid-up capital of ₹3 crore is below ₹50 crore, borrowings of ₹12 crore are below ₹100 crore, and there are no deposits. No limit is crossed, so internal audit is not mandatory.
Voluntary appointment: The company may still appoint an internal auditor, but the person must be eligible.
Eligibility: M/s Rao & Co. is the statutory auditor. Section 144 bars a statutory auditor from providing internal audit services to the company it audits, as it would impair independence.
Conclusion: The proposal cannot go ahead, even as a voluntary appointment.

Answer: Internal audit is not mandatory for Green Valley, but if it chooses to have one, it must appoint someone other than its statutory auditor. M/s Rao & Co. cannot be appointed.

Exam tips

In MCQs, the trap is usually the wording of the limit ('or more' versus 'exceeding') or the identity of the proposed auditor. Read both slowly.
For written answers, use three lines: provision, facts, conclusion. Name Section 138 and Rule 13 in the provision line.
Keep the sources apart: Section 138 and Rule 13 for the classes, limits, who may be appointed, the appointment requirement and the scope, and Section 144 for the bar on the statutory auditor.
Always state the class of company (listed, unlisted public or private) before you compare the figures with the limits.
Before the exam, confirm the current Rule 13 limits, the permitted professionals in Section 138, and how the Act applies to producer companies under Part XXIA.

Practice questions from Internal Audit

Internal Audit under Section 378ZF for Producer Companies: frequently asked questions

Is internal audit compulsory for every producer company?

No. Section 138 and Rule 13 make it compulsory only for prescribed classes of companies that cross the stated limits. Check how these apply to producer companies under Part XXIA in the current text. Smaller companies may appoint an internal auditor voluntarily.

Who can be the internal auditor of a producer company?

The internal auditor is appointed under Section 138. That section allows a chartered accountant, a cost accountant or such other professional as the Board decides, whether or not an employee. Section 144 bars the company's statutory auditor from this role.

How are the producer company provisions linked to Section 138?

Section 138 is the general internal audit provision for companies, including who may be appointed. Check Part XXIA for how the Act applies to producer companies. For scope, functioning, periodicity and methodology, the Audit Committee or the Board, in consultation with the internal auditor, follows Rule 13 of the Companies (Accounts) Rules, 2014.

Does the Board or the general meeting appoint the internal auditor?

Section 138(1) says the company shall appoint an internal auditor, and the Board makes the appointment under its general powers. The general meeting appoints the statutory auditor, which is a different process.