Any individual trained to review and verify accounting data and recognised as a Chartered Accountant (CA) under the Chartered Accountant Act, 1949 is deemed to be an auditor. Every company needs to appoint an auditor as per the provisions of the Companies Act, 2013.
As per Companies Act, 2013 (hereinafter referred as “said act”), the appointment of an auditor is governed by Section 139. It says that various provisions for the appointment, reappointment, and removal of an auditor. The appointment of an auditor can be made by the company’s Board of Directors or by the company’s shareholders at the Annual General Meeting (AGM).
An Auditor as per Companies Act, 2013
The first auditor of a company shall be appointed by the BOD within 30 Days from the date of Incorporation of the company and such auditor shall hold office till the conclusion of the 1ST AGM in the case of failure of the Board to appoint such auditor, it shall inform the members, who shall within 90 days at an EGM appoint such auditor.
Every company in its 1st Annual General Meeting shall appoint an auditor (Individual or a Firm) who shall hold office from the conclusion of that meeting till the conclusion of 6thAGM and thereafter till the conclusion of every 6th AGM.
Auditor is a person or can be a firm of C.A. who is appointed by a company to having an independent and objective to examine the financial statements of the Company. According to Companies Act, 2013, defines as an auditor “an individual or a firm, including a limited liability partnership (LLP), who is appointed by the company to conduct an audit of its financial statements, as required under the Companies Act.”
The auditor’s duties under the said act include verifying and auditing the financial statements of the company to determine whether they provide a true and fair view of the financial position, performance, and cash flows of the company. The auditor is also responsible for ensuring that the company has maintained proper books of account and internal financial controls.
Furthermore, the auditor is required to report any instances of fraud, non-compliance with laws and regulations, or other material weaknesses observed during the course of the audit to the company’s management and the Board of Directors. The auditor is also required to provide a report on the financial statements audited by them to the shareholders of the company at the Annual General Meeting.
Manner of appointment of auditors
- Appointment by Board of Directors: The Board of Directors shall appoint the first auditor within 30 days of the registration of the company.
- Appointment by Members: The members of the company shall appoint the subsequent auditors at every AGM.
- Eligibility Criteria: The auditor appointed by the company must be a Chartered Accountant in practice.
- Intimation to Registrar of Companies (ROC): The company shall intimate the ROC about the appointment of the auditor within 15 days of the AGM.
- Removal of Auditor: The auditor can be removed from the office before the expiry of his term only by a special resolution of the company after obtaining the prior approval of the Central Government.
- Rotation of Auditors: The said act has also introduced the concept of rotation of auditors. As per this, an auditor can hold office for a maximum of 5 consecutive years in a company. After that, he has to be rotated with another auditor who is not associated with the same firm.
Consent of Auditor
Section 139(1) and Rule 4 the Companies (Audit and Auditors) Rules 2014
- Before appointment the written consent of the Auditor and a certificate shall be obtained from the auditor.
The Auditor shall submit a Certificate that-
- He is not disqualified for appointment under the Act, regulations made there under
- the appointments are as per the terms provided under the act.
- The appointment within the time;
- The proper list of proceedings against the auditors or audit firm pending, if any.
- The notice to the registrar for the appointment of the auditor shall be in form ADT-1 within 15 days from the date of the appointment.
Appointment of First Auditor in case of a Company other than a Government Company
Appointment of auditor in case of Govt. Company Section 139(5)
The CAG of India shall appoint an auditor duly qualified to be appointed as an auditor of companies under this Act, within 180 days from the commencement of the financial year, who shall hold office till the conclusion of the annual general meeting.
In accordance with section 139(6) of the said act, if a company other than a government company, if the Board of Directors fails to appoint the first auditor, then the members of the company shall appoint the first auditor within 90 days at an Extraordinary General Meeting (EGM).
The following steps must be followed for the appointment of the first auditor in case of a company other than a government company:
- The Board of Directors shall propose the name of an auditor to be appointed as the first auditor of the company.
- The proposed auditor shall provide his consent and eligibility certificate as per the provisions of the Act.
- If the Board of Directors fails to appoint the first auditor, the company shall hold an EGM within 90 days of the incorporation of the company to appoint the first auditor.
- The members of the company shall pass an ordinary resolution to appoint the first auditor, and the appointed auditor shall hold office until the conclusion of the first AGM.
- The appointed auditor shall also provide his consent and eligibility certificate to the company.
It is essential to appoint the first auditor of the company within the stipulated time to ensure the proper functioning and compliance of the company with the provisions of the Companies Act, 2013. The appointment of an auditor in the first AGM of the company is mandatory under the Act, and any delay in the appointment of the auditor may result in the company facing penalties and non-compliance issues.
The first auditor of a company (except govt. co.), shall be appointed by the BOD within 30 Days from the date of Incorporation of the company and in the case of failure of the Board to appoint such auditor, it shall inform the members, who shall within 90 days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting.
Appointment of First Auditor in case of a Government Company
Section 139(7) of the said act deals with the appointment of the first auditor in the case of a government company. In this section, the Comptroller and Auditor-General (CAG) of India shall appoint the first auditor of a government company within 60 days from the date of registration of the company.
The CAG may either appoint an auditor from the panel of auditors maintained by the CAG, or he may appoint any other auditor qualified to be appointed as an auditor of a government company.
Once the CAG appoints the first auditor of the government company, the Board of Directors of the company shall take necessary steps to convene the AGM of the company to appoint the auditor for the first financial year. In the AGM, the shareholders of the company shall appoint the auditor for the first financial year, who shall hold office until the conclusion of the first AGM.
Rotation of an Auditor
- Section 139(2) – Appointment of a Subsequent Auditor: This section mandates every company to appoint an auditor in each AGM after the first AGM until the conclusion of the sixth AGM. The appointment shall be made by the shareholders of the company.
- Section 139(3) – Remuneration of Auditor: This section states that the remuneration of the auditor shall be fixed by the Board of Directors or the Audit Committee. The remuneration should be in accordance with the prescribed guidelines and should be approved by the shareholders.
- Section 139(4) – Eligibility of an Auditor: This section lays down the eligibility criteria for an auditor. The auditor must be a Chartered Accountant in practice and should not be disqualified under Section 141.
Role of an Auditor
- Section 143: Powers and Duties of Auditors and Auditing Standards- This section outlines the powers and duties of auditors, which include accessing all the relevant books, records, and documents of the company, making enquiries and seeking explanations from the company’s officers, and reporting on any material fraud or non-compliance with laws and regulations. It also mandates the use of auditing standards by auditors.
- Section 144: Auditor’s Report- This section mandates the preparation of an auditor’s report by the auditor. The auditor’s report must include a statement on the company’s financial statements, an opinion on the true and fair view of the company’s financial position, and a statement on any material misstatements or omissions in the financial statements.
- Section 145: Auditor to Sign Audit Report- It deals with the signing of audit reports by the auditor. The auditor must sign the audit report in the following manner:
- Where the auditor is a firm, the report must be signed in the name of the firm by a partner or partners of the firm.
- Where the auditor is an individual, the report must be signed by that individual
In addition to signing the audit report, the auditor must also provide the following details:
- The auditor’s name.
- The auditor’s membership number, if applicable.
- The auditor’s registration number, if applicable.
- The date of the audit report.
Disqualifications of an Auditors
In accordance to section 141
- If the person is not eligible to be appointed as an auditor under Section 139(4) of the Companies Act, 2013.
- If the person is indebted to the company or its subsidiary or its holding company or any other subsidiary of such holding company, or has given any guarantee or provided any security in connection with the indebtedness of any third party to the company, its subsidiary or its holding company, or any other subsidiary of such holding company, exceeding the prescribed limit.
- If the person, or any partner or director of the audit firm, or any relative of such partner or director, is a director or holds any other office of profit in the company, its subsidiary or its holding company, or any other subsidiary of such holding company.
- If the person or the audit firm, or any partner or employee of the audit firm, has any business relationship with the company, its subsidiary or its holding company, or any other subsidiary of such holding company, which may reasonably be perceived to impair their independence and objectivity.
- If the person or the audit firm, or any partner or employee of the audit firm, has any pecuniary relationship with the company, its subsidiary or its holding company, or any other subsidiary of such holding company, other than remuneration for the audit or other services rendered by the audit firm.
- If the person or the audit firm, or any partner or employee of the audit firm, has been convicted by a court of an offence involving fraud or any other offence punishable with imprisonment for a term exceeding six months.
- If the person or the audit firm, or any partner or employee of the audit firm, has been held guilty by the Securities and Exchange Board of India (SEBI) or any other regulatory body for violation of any securities law.
- If the person or the audit firm, or any partner or employee of the audit firm, has been disqualified from acting as an auditor of any other company.
FAQs
Who can be appointed as an auditor of a company under the Companies Act, 2013?
A person or firm qualified for appointment as an auditor under the Act can be appointed. Generally, this includes Chartered Accountants or firms of Chartered Accountants.
What is the procedure for appointing an auditor under the Companies Act, 2013?
The appointment of an auditor is usually done by the members of the company in the Annual General Meeting (AGM) through passing a resolution.
Is it mandatory to rotate auditors under the Companies Act, 2013?
Yes, as per the provisions of the Act, the auditors of a company are required to be rotated periodically. This is to ensure independence and objectivity in the audit process.
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