Appointment of Auditors in a Company : A Complete Guide

As per Chapter X of the Companies Act, 2013, which governs Audit and Auditors, the appointment of an auditor is a critical compliance requirement for companies. An auditor can either be an individual who is a qualified Chartered Accountant under the Chartered Accountants Act, 1949, or a firm where the majority of its members are qualified Chartered Accountants. The role of an auditor is to independently review financial records and ensure they accurately reflect the company’s financial activities.

Appointing an auditor is a crucial step for every company to ensure compliance with financial regulations. Whether it’s the appointment of an auditor for an established company or the first auditor appointment for a newly incorporated business, following the correct legal process is essential.

This article provides a detailed guide on auditor appointment, its rules, timelines, and legal requirements under the Companies Act.

Qualifications and Disqualifications of an Auditor

According to Section 141(3) read with Rule 10 of the Companies (Audit and Auditors) Rules, 2014, the following persons are ineligible to be appointed as auditors:

• A body corporate, except for a Limited Liability Partnership (LLP) registered under the LLP Act, 2008.
• An officer or employee of the company.
• A person who is a partner or employee of an officer or employee of the company.
• A person, or their relative or partner, who:

• • Holds shares in the company or its subsidiary.
  • Is indebted to the company or its subsidiary for more than INR 5 Lakhs.
  • Has given a guarantee for indebtedness exceeding INR 1 Lakh.

• A person having a business relationship with the company, its associate, or its subsidiary.

Restricted Services by an Auditor

As per Section 144 of the Companies Act, 2013, auditors cannot provide certain services to maintain their independence. These restricted services include:

• Accounting and bookkeeping services.
• Internal audit.
• Design and implementation of financial information systems.
• Actuarial services.
• Investment advisory and banking services.
• Management and outsourced financial services.

Appointment of the First Auditor

For Non-Government Companies

• As per Section 139(6), the Board of Directors must appoint the first auditor within 30 days of incorporation.
• If the Board fails to do so, the members shall appoint the auditor within 90 days in an Extraordinary General Meeting (EGM).
• The first auditor holds office until the conclusion of the first Annual General Meeting (AGM).

For Government Companies

• As per Section 139(7), the Comptroller and Auditor General of India (C&AG) must appoint the first auditor within 60 days of incorporation.
• If C&AG fails, the Board of Directors has 30 days to appoint the auditor.
• If the Board also fails, the members must appoint the auditor within the next 60 days through an EGM.

Appointment of Subsequent Auditors

After the first auditor, the company must appoint a new auditor or reappoint the same auditor at its first Annual General Meeting (AGM). The auditor will serve until the end of the sixth AGM (five-year term).

At every AGM, shareholders must confirm or ratify the auditor’s appointment. However, as per an amendment in 2017, ratification is no longer required for private companies. 

For listed and specified companies, the tenure may extend up to 10 consecutive years, subject to a five-year cooling-off period before reappointment. In Government Companies, C&AG appoints the subsequent auditor within 180 days from April 1 each year.

Filing of Form ADT-1

• Companies must file Form ADT-1 within 15 days from the date of appointment to notify the Registrar of Companies (ROC).
• While it is not mandatory for first auditors, it is recommended for good corporate governance.

Casual Vacancy in Auditor’s Position

• If an auditor resigns or their position becomes vacant due to other reasons, the Board recommends a new auditor within three months.
• The members then approve the appointment in a general meeting, and the new auditor holds office until the next AGM.
• In Government Companies, C&AG fills the casual vacancy within 30 days.

Special Notice for Appointment of a New Auditor

• If a company wishes to appoint a new auditor in place of the retiring auditor, a special notice under Section 115 of the Companies Act, 2013, is required.
• The retiring auditor has the right to make a written representation, which must be shared with the company members.
• The company must include the representation in the notice for the meeting or read it out at the meeting.
• However, if the Tribunal finds that the auditor is misusing this right, it can direct that the representation need not be circulated or read out.

By ensuring compliance with these statutory requirements, companies can maintain transparency and accuracy in their financial reporting.

This article is presented by CA B K Goyal & Co LLP Chartered Accountants, your trusted partner in audit and compliance solutions. For expert assistance, feel free to contact us