Appointment of Auditor

The Auditor’s appointment is a vital procedure for a company as it makes sure about the transparency and accuracy of the company’s financial statements. An auditor is an independent professional who is appointed to measure the company’s financial statements. An auditor is a one who express an opinion on whether they give a fair and correct view in relation to company’s financial position and functionality.
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). The Appointment Of Auditor Companies Act 2013 is mandatory for all companies, whether they are private, public, or government companies.

What do you understand by an Auditor as per Companies Act, 2013?

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.

Appointment of Auditor according to Companies Act, 2013

Section 139(1) of the said act deals with the appointment of a subsequent auditor and the manner of appointment.

According to this section, every company shall appoint an auditor in its first AGM who shall hold office from the conclusion of that meeting until the conclusion of the sixth AGM. After that, the company shall appoint an auditor for a term of five consecutive years at a time, subject to ratification by the members at every AGM.

Manner of Auditor’s appointment

The manner of appointment of an auditor is as follows:

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.

Section 139(1) mandates the appointment of an auditor in the first AGM of the company and subsequent auditors for a term of five consecutive years at a time. The appointment of the auditor can be made by the Board of Directors or the members of the company, and certain eligibility criteria and procedures need to be followed.

Appointment of First Auditor in case of a Company other than a Government Company

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.

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.

The appointment of the auditor in the case of a government company is different from the appointment of the auditor in the case of a non-government company. In the case of a government company, the CAG appoints the first auditor, whereas, in the case of a non-government company, the Board of Directors proposes the name of the auditor, and the shareholders appoint the auditor in the first AGM.

Rotation of an Auditor

Sections 139(2), 139(3), and 139(4) of the said act are known as Rotation of an Auditor and these are as:

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

The role of an auditor under the said act is outlined in various sections of the act. The key sections that define the role of an auditor are:

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.

By signing the audit report and providing the required details, the auditor is certifying that they have conducted the audit in accordance with the auditing standards and have expressed an opinion on the true and fair view of the company’s financial position.

Disqualifications of an Auditors

In accordance to section 141 of the said act lays down disqualifications of an Auditor, which prevent a person/ firm from acting as an auditor. These disqualifications are as follows:

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.

Removal, Resignation and Replacement of an Auditor

As per section 142 of the said act, provides the procedures for removal, resignation, and replacement of an auditor. The auditor can be removed by passing a special resolution and obtaining the approval of the Central Government. In case of resignation, the auditor should intimate the company and the ROC in writing. The company should appoint a new auditor within 30 days of the resignation or removal.

Audit Committee

Section 139(11) of the said act requires every company to constitute an Audit Committee, which shall consist of a minimum of three directors, and in the case of a company having a paid-up share capital of Rs. 10 crore or more, it shall consist of a majority of independent directors.

The Audit Committee is responsible for overseeing the financial reporting process, ensuring the integrity of the company’s financial statements, and reviewing the effectiveness of the company’s internal control and risk management systems. The Audit Committee is also responsible for recommending the appointment, remuneration, and terms of appointment of the auditors to the Board of Directors.

Takeaway

The appointment of an auditor is a crucial requirement under the Companies Act, 2013, which helps ensure that a company’s financial statements are accurate and reliable. The Act sets out various provisions related to the appointment, qualifications, disqualifications, rights, duties, and removal of auditors, with the aim of ensuring their independence, objectivity, and accountability. The auditor plays a vital role in ensuring that the financial statements of a company reflect a true and fair view of its financial position, and that it complies with the relevant laws and regulations. The auditor is required to express an opinion on the financial statements and report any material misstatements or weaknesses in internal controls.

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