What is Auditors? Qualifications, Disqualification, Removal, Appointment

What is Auditor?

An auditor is a person or a firm appointed by a company to execute an audit. To act as an auditor, a person should be certified by the regulatory authority of accounting and auditing or possess certain specified qualifications.

Auditor Qualifications

A person is qualified for the appointment as the auditor of the company only if he is a Chartered Accountant within the meaning of the chartered Accountants Act 1949. Nationality is not important. A firm whereof all the partners practicing in India are qualified for the appointment as auditor, it may be appointed by its firm name to be auditor of the company.

The holder of certificate under the restricted auditor’s certificates rules 1956 shall be entitled to be appointed as an auditor.

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Disqualification of Auditors

Disqualification of Auditors [Section 141 of Company Act, 2013]

Following persons are not qualified for the appointment as auditor of a company

• A Body Corporate.
  
  
• An Officer or Employee of the company.
  
  
• A Partner or Employee of an Officer or Employee of the company.
  
  
• A person who, or his relative, or his partner is holding any security in the company or subsidiary company or holding company or associate company or subsidiary of such holding company.
  
  (Note – Security means an instrument which carries voting rights.)
  
  
• A person who, or his relative, or his partner is indebted, in excess of such amount as may be prescribed (the sum prescribed is Rs. 5 lakh) the company or subsidiary company or holding company or associate company or subsidiary of such holding company.
  
  
• A person who, or his relative, or his partner has given a guarantee or provided any security in connection with the indebtness of any third person, in excess of prescribed amount (Rs. 1 lakh) the company or subsidiary company or holding company or associate company or subsidiary of such holding company.
  
  
• A person or a firm who, whether directly or indirectly, has business relationship of such nature as may be prescribed with the company or subsidiary company or holding company or associate company or subsidiary of such holding company.
  
  
• A person whose relative is a director or is in the employment of the company as a director or key managerial personnel.
  
  
• A person who is in the employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies.
  
  
• A person who has been convicted by a court of an offence involving fraud & a period of 10 years has not been elapsed from the date of such conviction.

141(4): An auditor, who after his appointment becomes subject to any of above disqualifications, shall be deemed to have vacated his office as an auditor.

The list of disqualifications makes the position of an auditor as independent as possible.

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Appointment of Company Auditor

Appointment of first auditor[ Section 139(6) of Companies Act, 2013]

1. As per section 139(6), first auditor will be appointment.
   
   
2. The first auditor shall appointed by the board of directors within one month of the date of registration of the company.
   
   
3. The first auditor so appointed shall hold office until the conclusion of the first Annual General Meeting.
   
   
4. Appointment of first auditor should be by valid resolution at the board meeting. Merely naming in the Article of Association will not be recognized as appointment under the act.
   
   
5. In case the board does not exercise its power in this regard, the board shall inform members of the company who shall appoint the first auditor within 90 days at an extraordinary general meeting.

Appointment of First Auditor in case of Government Company [ Section 139(7) of Companies Act, 2013]

1. Where the company is the Government Company or any other company owned or controlled, directly or indirectly, by CG, or by one or more State Government, or partly by CG & partly by one or more State Government, the first auditor shall be appointed by CAG within 60 days of registration of the company.
   
   
2. In case CAG does not appoint the first auditor within the said period of 60 days, the Board shall appoint the first auditor within next 30 days.
   
   
3. In case of failure of the Board to appoint the first auditor within the said period of 30 days, the Board shall inform the members of the company who shall appoint the first auditor within 60 days at an extraordinary general meeting.
   
   
4. The first auditor shall hold office till the conclusion of the first AGM.
5. Government company means any company in which not less than 51% of the paid-up share capital is held by
   • CG b. SG(s)
   • Partly by CG & partly by SG(s)

Government Company includes a company which is a subsidiary company of Government Company

Appointment in case of Casual Vacancy[ Section 139(8) of Companies Act, 2013]

1. Casual vacancy means vacancy in office of auditor resulting from accidental circumstances such as death, incapacity or disqualification of the auditor.
   
   
2. Casual vacancy shall be filled within 30 days by the Board of Directors.
   
   
3. Where a vacancy is caused by the resignation of an auditor, the vacancy shall be filled within 30 days by the Board of Directors, & the appointment made by the board shall be approved in a general meeting convened within 3 months of the recommendation of the Board.
   
   
4. Where casual vacancy arises in a company whose accounts are subject to audit by an auditor appointed by CAG, such casual vacancy shall be filled within 30 days by CAG.
   
   
5. In case CAG does not fill the casual vacancy within prescribe time, the board shall fill the casual vacancy within next 30 days.
   
   
6. Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next Annual General Meeting.

Appointment of Subsequent Auditor in case of a Government Company[ Section 139(5) of the Companies Act 2013]

• This section applies to
  • a. Government Company
  • b. Any other company owned or controlled, directly or indirectly, by:
    • – CG; or
    • One or more State Government; or
    • Partly by CG & partly by one or more SG
      
      
• In case of aforesaid companies, CAG 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.
  
  
• The auditor shall hold office till the conclusion of the AGM.

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Removal of Auditor

1. Removal of auditor before the expiry of his term
2. Resignation by Auditor
3. Requirement of Special Notice

Removal of auditor before the expiry of his term

• Previous approval of Central Government must be obtained within 30 days of passing of the Board resolution.
• The company shall hold the general meeting within 60 days of receipt of approval of CG for passing the special resolution.
• Before taking any action for removal, the auditor shall be given a reasonable opportunity of being heard.

Resignation by Auditor

When an auditor resigns, he is required to file a statement in the prescribe form. The statement shall indicate the reasons & other facts as may be relevant with regard to his resignation. The statement shall be filed with

• the company
• the Registrar
• CAG in case of a Government Company.

The statement shall be filed within 30 days from the date of resignation.

Requirement of Special Notice

1. At an AGM, special notice shall be required for
   • Appointing as auditor a person other than the retiring auditor, or
   • Providing expressly that the retiring auditor shall not be reappointed.
     
     
2. On the receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.
   
   
3. Retiring auditor is entitled to make a representation against his removal. The representation shall be in writing & shall be sent to the company.
   
   
4. He may request the company to circulate the representation to the members of the company.
   
   
5. If copy of the representation is not sent because it was received too late or because of the company’s default, then the auditor may require that the representation shall be read out at the meeting. A copy of representation shall be filed with the registrar.

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Auditors Remuneration

• Where appointment by the Board of Directors: When an auditor is appointed by the Board of Directors, remuneration is also fixed by them. The resolution appointing the auditor should also prescribe the remuneration.
  
  
• Where appointed by Shareholders: In this case, the remuneration is determined by the shareholders at the AGM. Sometimes, shareholders may delegate the power of fixing remunerations to the Board of Directors or the Chairman.
  
  
• Where appointed by the Comptroller & Auditor General of India: The remuneration shall be fixed by the company in general meeting or in such manner as the company in general meeting may determine.
  
  
• Remuneration other than audit fees: Where an auditor renders services other than those as an auditor, he is entitled to get extra remuneration. Such remuneration may not be fixed in advance by the appointing authority while appointing him as an auditor & while fixing his remuneration.