A. Auditors Appointment
1. What are the critical aspects to be considered before accepting appointment as auditor
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Parameter |
Act Reference |
Content |
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Education |
Sec 141(1) |
A Chartered Accountant shall only be an appointed as an auditor of a Company |
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A firm can be appointed as an Auditor only if a majority of the partners practicing in India are Chartered Accountants |
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A firm includes an LLP and can be appointed as an Auditor |
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Only the Chartered Accountants in the LLP can act and sign as auditors. Based on the above, the LLP can be an auditor only if it is manned in majority by Chartered Accountants |
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Tenure |
Sec 139 |
An auditor or an audit firm who have completed their maximum tenure under Section 139 cannot be appointed as auditors |
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Retiring auditor |
Sec 139(9) |
Is not disqualified Has not given his notice of unwillingness to be re-appointed Special resolution has been passed at that meeting that some other auditor has been appointed or the retiring auditor shall not be reappointed |
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Other Services |
Sec 144 |
The Act prohibits auditors from rendering certain other services such as Internal Audits, Accounting, Book keeping etc. Although this section speaks of Auditors rendering other services, there is also an inference that an auditor or a firm providing such other services cannot be appointed as an auditor to perform both functions |
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Categories of Persons |
Sec 141(3) |
Certain categories of persons / relatives cannot be appointed as auditors as described in detail below |
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Category Sec 141(3) |
Description |
Value limits |
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Entity Type |
Body corporate other than LLP as per the section cannot be an auditor |
None |
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Person being the proposed auditor is |
An Officer or employee of the Company for which the audit appointment is proposed |
None |
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A Partner of an Officer or employee of the Company |
None |
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Is in employment of an Officer or employee of the Company |
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Is in full time employment elsewhere |
None |
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Person or partner of a firm holding appointment in more than 20 companies as the auditor |
None |
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Has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction; |
None |
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Any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144. |
None |
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In Full time employment elsewhere |
None |
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In Full time employment of a person or a partner of a firm holding appointment as an auditor if such person or partner is as at the date of such appointment or reappointment holding appointment as auditor of more than 20 Companies |
None |
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Convicted of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction |
None |
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A person whose subsidiary or associate company or any other form of entity is engaged on the date of appointment in consulting or specialized services as provided in Sec 144 |
None |
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Person being the proposed auditor or his relative or partner |
Holds security or interest in : · The Company-Holding- Subsidiary-Associate · Subsidiary of its holding company The rule provides for corrective action to be initiated within 60 days of such acquisition of interest |
Not exceeding Rs. 1 lakh. |
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Is Indebted to · The Company-Holding- Subsidiary-Associate · Subsidiary of its holding company |
Rs 5 lakhs |
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Has provided a guarantee to or provided any security in connection with the indebtedness of a third person to · The Company-Holding- Subsidiary-Associate · Subsidiary of its holding company
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Rs 1 lakh |
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Person of firm whether directly or indirectly has business relationship with |
The Company-Holding- Subsidiary-Associate Subsidiary of its holding company Note: Business relationship:- Any transaction entered into for a commercial purpose excluding commercial transactions - In the nature of professional services permitted to be rendered by an auditor or firm under the Companies Act or the CA Act or rules and regulations - Which are in the ordinary course of business at Arms Length Price Eg:- Sale of products or services to the auditor as customer in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels, etc.
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A person whose relative |
Is a director OR Is in the employment of the company as a director or key managerial personnel |
2. As per the old Act, the Auditors were required to submit details of their appointment to MCA for compliance with Sec 224(1) (B) limits. What is the present status
The auditor should be appointed in the AGM. The Company has to intimate the Company and the registrar within 15 days of the meeting. Previously the auditor was required to intimate the RoC. This information is now required to be filed by the Company in Form ADT - 1
3. Is there any requirement of Auditors Consent under the new Act 2013
Section 139 ( provisio to Sec 139(1) requires the following to be complied with before the appointment of an auditor. And this carries a penalty for non-compliance, the auditors portion being Rs 25000 to Rs 5 lakhs ( Sec 147 (2) )
Provided further that before such appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor:
Provided also that the certificate shall also indicate whether the auditor satisfies the criteria provided in section 141
Provided also that the company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed.
Coming to the aspect of the respect of the written consent and the certificate, the relevant rule for the Certificate is as per Rule 4 of the Companies ( Audit and Auditors Rules ) 2014.
A certificate format requires the following.
o The auditor or firm is eligible for appointment and is not disqualified for appointment under the Companies Act, 2013 (the Act), the Chartered Accountants Act, 1949 and the rules or regulations made thereunder;
o The proposed appointment is as per the term provided under the Act.
o The proposed appointment is within the limits laid down by the Act under Clause (g) of Sub-section (3) of Section 141of the Act.
o Confirmation that there are no proceedings against our firm or any partner of the firm with respect to professional matters of conduct or that Or that the following proceedings against our firm or any partner of the firm with respect to professional matters of conduct is true and correct.
4. My clients previous auditor does not want to continue as auditor for 2014-15. He has been appointed in the AGM held in Aug 2014. What is the solution ? We are proposed to be appointed as auditors
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Casual Vacancy |
Resignation : Filled by the BoD within 30 days and also approved by the Company at a General Meeting convened within 3 months of recommendation of the BoD. Holds office till the conclusion of the next AGM Other reasons : Filled by the BoD within 30 days. No EGM approval is required |
5. If an auditor who has been appointed for a 5 year term has not been ratified in a subsequent AGM will it be a casual vacancy to be filled by the BoD
The Act specifies a 5 year appointment. However if the ratification is not done, then the new auditor need not be appointed by the BoD but can be appointed by the AGM. It need not be treated as a casual vacancy.
6. Should auditors of companies be compulsorily appointed for 5 years. My client does not come under the category relevant for rotation.
Sec 139 of the Act states that the auditor of a Company shall be appointed for a five year term. The reference to the first AGM can be construed as First AGM of the Company as well as First AGM under the Act. Hence it appears that the AGM can appoint for five years and ratify every year. Hence, if you are proposed as an auditor of a non-rotation type company, then you can be appointed for a 5 year term.
“Subject to the provisions of this Chapter, every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed”
7. My new client has failed to appoint the Statutory Auditor till date. They were incorporated on Feb 15, 2015
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Parameter |
Others |
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First Auditor |
Appointed by the BoD within 30 days of registration If the above is not done, The appointment to be done by members in an EGM to be held within 90 days. Such auditor shall hold office until the conclusion of the first AGM |
Non compliance with the above may result in penalties as specified in Sec 147 of the Act
a) Mr Ram was the Managing Partner of Ram & Co Chartered Accountants who were the auditors of a large listed company Best Wishes Limited. He quit the firm and joined RR & Associates. Are RR & Associates eligible to be appointed as auditors of Best Wishes Limited. What will the position be if
a. Mr Ram was the signing partner in charge of the engagement
b. Mr Ram was “not” the signing partner in charge of the engagement
Reply:
There is an ambiguous position on this aspect as of date. The Act specifies as under Sec 139 (2 ) regarding Commonality of partners between incoming and outgoing firm between the Act and the rules. Four different scenarios emerge. The Act and rules have been elaborated below. This will need further clarification
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Sec 139 Proviso 2 |
On the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year shall be appointed as auditor of the same company for a period of five years.
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Rule 6 (3) (ii)(b) |
if a partner , who is in charge of an audit firm and also certifies the financial statements of the Company, retires from the said firm and joins another firm of Chartered Accountants, such other firm shall also be ineligible to be appointed for a period of five years |
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