Information about Guide On Appointment of Auditor

The company is governed by two bodies: the shareholders and the directors. The shareholders are the true owner of the company who provides funds to the director of the company and in return, the directors of the company perform business operations from the funds that are accepted from the shareholders. Therefore, the Board is under an obligation to present the books of accounts of the company to the shareholders in the General Meeting; so that the shareholders can have a close look at where their funds are being utilized by the company, for the purpose the same the board of directors needs to appoint an independent person who is practicing Chartered accountant to conduct Statutory Audit.

An auditor is a trained individual who reviews, checks, and verifies the correctness or genuineness of financial records maintained by companies. These individuals also help companies ensure that they comply with Indian tax laws and other applicable Acts and protect businesses from fraud. They also highlight discrepancies in the company’s financial statement and accounting methods and help maintain overall compliance.

Need For Statutory Audit

All the companies registered under the Companies Act, 2013 or any previous Company law, whether public Limited Company or Private Limited Company and whether having a share capital or not, are required to maintain proper books of accounts u/s 128 of the Companies Act, 2013. Companies have also to get their Books of accounts audited as required u/s 139 of the Act. The audit is an examination of accounting records undertaken to establish the correctness or genuineness of the transactions reflected therein. It involves intelligent scrutiny of the books of account of a Company concerning documents, vouchers, receipts, and other relevant records to ensure that the entries made therein give a true picture of the business. Hence, there is a need to appoint a Statutory Auditor.

Who Can Be Appointed As Statutory Auditor Of The Company?

As per section 141(1) & (2) of the Companies Act, 2013, the Following person can be appointed as statutory auditor of the Company:

1. Individual: 

A person shall be appointed as an auditor of a company only if he is a practicing-chartered accountant.

1. Chartered Accountant firm:

A chartered Accountant firm shall be appointed as an auditor of a company only if the majority of partners practice chartered accountants in India.

1. Limited liability partnership:

A limited liability partnership shall be appointed as an auditor of a company only if the partners who are practicing chartered accountants shall be authorized to act and sign on behalf of the firm.

Chartered Accountant has been defined under section 2(17) of The Companies Act, 2013 as:

“Chartered Accountant means a chartered accountant as defined in clause (b) of subsection (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) who holds a valid certificate of practice under sub-section (1) of section 6 of that Act” Clause (b) of sub-section (1) of section 2 of the Chartered Accountants Act, 1949 defines a chartered accountant as a person who is a member of the Institute.

Who Can Not Be Appointed As Statutory Auditor Of The Company?

As per section 141(3) of the Companies Act, 2013, the following person shall not be eligible for appointment as statutory auditor of a company

1. Anybody corporate, even if all the directors or members are practicing chartered accountants (It’s not included in the Limited Liability Partnership)
2. An officer or employee of the company

The term officer has been defined under 2(59) of the Companies Act, 2013, It includes any director, key managerial personnel or manager, or any person following whose directions the board of directors is accustomed to act.

1. The person who is a partner, or who is in the employment, of an officer or employee of the company
2. A person who, or his relative or partner
3. Holds any security or interest in the company or subsidiary company, holding company or associate company, or a subsidiary of the such holding company

However relative may security or interest in the company of face value not more than Rs. 1000 or such sum as may be prescribed i.e Rs 1 Lakhs;

1.  Is indebted to the company or subsidiary company, or holding company or associate company, or a subsidiary of a such holding company of amount more than Rs. 5 Lakhs.
2. Provides guarantee or any security concerning the indebtedness of any third person to the company or subsidiary company, or holding company or associate company, or a subsidiary of such holding company of amount more than Rs. 1 Lakhs

The term “relative” has been defined under section 2(77) of the Companies Act, 2013

1. A person or a firm who has a direct or indirect business relationship with the company or subsidiary company, holding company or associate company, or a subsidiary of the such holding company 
2. The person whose relative is a director or is in the employment by the company as a director or KMP
3.  A person who is in full-time employment elsewhere
4. Persons or partners of the firm are at the date of such appointment or reappointment holding appointment as statutory auditor of more than 20 companies.

Relaxation:

In the case of a private company, in counting twenty companies exclude OPC, dormant companies, small companies and private companies having paid-up share capital less than Rs. 100 crores.[Inserted vide notification dated 5th June 2015]

1. The person who has been convicted for an offense involving fraud and a period of ten years has not completed from the date of such conviction.
2. The person provides any service mentioned u/s 144 to the company or holding company or subsidiary company.

Conditions For Appointment Of Auditor

The company shall obtain written consent and certificate from the proposed auditor that the appointment, shall be made following the conditions as prescribed under rule 4 of Companies (Audit and Auditors) Rules, 2014, as follow: 

• The individual or firm is eligible for appointment/reappointment and is not disqualified for appointment/reappointment under the Act, the Chartered Accountants Act, 1949, and the Rules and Regulations made therein. 
• The proposed appointment/reappointment is within the term allowed under the Act. 
• The proposed appointment/reappointment is within the limit provided by the Act. 
• The list of proceedings pending against the auditor concerning professional misconduct, as mentioned in the certificate, is true and correct.

The certificate shall prescribe that the auditor satisfies the criteria provided in section 141 of the Companies Act, 2013.

Appointment Of First Auditor 

The appointment of the first auditor can be divided under two broad headings

1. Appointment of the first auditor in every company other than the Government company
2. Appointment of the first auditor in the Government company

Appointment of the first auditor in every company other than the Government company

The first auditor of a company shall be appointed by the Board of Directors of the company within 30 days from the date of incorporation of the company.

If the Board fails to appoint such an auditor, it shall inform the members of the company and the members shall make the appointment within 90 days of information at an EGM.

The first statutory auditor shall hold office till the conclusion of the first annual general meeting of the company.

Appointment of the first auditor in the Government company.

The first auditor shall be appointed by the Comptroller and Auditor-General of India (CAG) within 60 days from the date of incorporation of the company. 

If CAG fails to appoint the first auditor within the prescribed time, then the Board of Directors of the company shall appoint the first auditor within the next 30 days.

If the Board of Directors of the company fails to appoint the first auditor within the prescribed time, then it shall inform members and members shall appoint the first auditor within 60 days of information at an EGM.

The First statutory Auditor shall hold office till the conclusion of the first AGM.

According to section 2(45) of the Act, Government company means any company in which not less than fifty-one percent of the paid-up share capital is held by-

a) Central Government; or

b) State Government or

c) Partly by the Central Government and partly by one or more State Governments.

‘Government Company’ includes a company that is a subsidiary company of a Government Company.

Appointment Of Auditors At The Yearly General Meeting 

1. Appointment of Subsequent Auditor in the company other than Government Company:

Appointment of a statutory auditor shall be made by members of the company at First AGM and every subsequent 6th AGM.  

Every company other than the Government company shall appoint an individual or a firm as an auditor at the first AGM and such auditor shall hold office from the conclusion of the 1st AGM till the conclusion of the 6th AGM. 

After the 1st AGM of the company, when the Auditor is being appointed at AGM, the auditor so appointed shall hold office till the conclusion of the 6th AGM, with the AGM wherein such appointment has been made is considered as the 1st AGM.

At every AGM, the appointment of an auditor shall be ratified by the members of the company. If at any AGM, the appointment of the auditor is not ratified by the members, then the auditor has to vacate his office. The Board shall appoint another individual or firm as auditor of the company.

1. Appointment of Subsequent Auditor in case of Government Company:

Appointment or reappointment of auditor in case of Government Company shall be made by Comptroller and Auditor-General of India (CAG) within 180 days from the commencement of the financial year i.e. 1st April of each year. The statutory Auditor shall hold office till the conclusion of the AGM.

Tenure Of Statutory Auditors

Section 139 of the Companies Act, 2013 read with rule 5 of the Companies (Audit and Auditors) Rules, 2014 provides that the following class of companies shall not appoint/reappoint:

1. an individual as statutory auditor for more than one term of five consecutive years
2. an audit firm as statutory auditor for more than two terms of five consecutive years

Cooling Period:

An individual auditor or an audit firm that has completed the above term, shall not be eligible for re-appointment in the same company for five years from the completion of the above term.

Class of company shall mean the following classes of companies:

1. Listed Company
2. Following classes of companies other than OPC and small companies
3. Public companies having paid-up share capital of Rs 10 crore or more
4. private limited companies having paid-up share capital of Rs 50 crore or more
5. all companies having paid-up share capital less than the threshold limit provided in (a) and (b), but having public borrowings from financial institutions, banks, or public deposits of RS 50 crores or more.

Note: If the proposed audit firm has a common partner or partners of a retiring audit firm, then such proposed audit firm shall not be appointed as auditor of the same company for five years.

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