December 14, 2018

PROCEDURE OF APPOINTMENT OF AUDITORS IN COMPANY UNDER COMPANIES ACT, 2013

     APPOINTING AUTHORITY FOR AUDITORS IN COMPANY

In term of section 139(1) of the Companies Act, 2013 read with rule 3 of Companies (Audit & Auditors) Rules, 2014, every company shall at the first 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 (AGM) and thereafter till the conclusion of every sixth meeting.

The manner and procedure of selection of auditors by the members of the company at such meeting shall be such as prescribed under:-

→ In case of a company that is required to constitute an Audit Committee under section 177, such committee, and, in cases where such a committee is not required to be constituted, the Board shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company.

For the purpose of constitution of Audit Committee section 177 of the Act read with Companies (Meetings of Board and its Powers) Rules, 2014 provides that:

The Board of directors of every listed companies and the following classes of companies shall constitute an Audit Committee of the Board-

♠ all corporates with a paid up capital of ten crore rupees or more;

♠ all public companies having turnover of one hundred crore rupees or more;

♠ every public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees or more.

→ Before considering the appointment of auditor, the Audit Committee or the Board, as the case may be, shall consider any pending proceeding relating to professional matters of conduct against the proposed auditor before the ICAI or any competent authority or any Court. Further they may call for such other information from the proposed auditor as it may deem fit.

→ Where a company is required constitute the Audit Committee, the committee shall recommend the name of an individual or a firm as auditor of the Board for consideration.

And the Board shall consider and recommend and individual or a firm as auditor to the members in the AGM for appointment.

→ If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the appointment of auditor to the members in the AGM otherwise, it shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement.

→ Thereafter if the Audit Committee decides not to consider its original recommendation, then Board shall record reasons for its disagreement with the Audit Committee and send its own recommendation for consideration of the members in the AGM and if the Board agrees with the recommendations of the Audit Committee, it shall place the matter for consideration by members in the AGM.

→ The auditor appointed in the AGM meeting shall hold office from the conclusion of that meeting till the conclusion of sixth annual general meeting, with the meeting wherein such appointment has been made been counted as the first meeting.

→ Such appointment shall be subject to ratification in every AGM till the sixth AGM by way of passing of an ordinary resolution. If the appointment is not ratified by the members of the company, the Board of Directors shall appoint another individual or firm as its auditor or auditors after following the procedure laid down in this behalf under the Act.

CONDITION FOR APPOINTMENT AND NOTICE TO REGISTRAR-

RULE 4 OF THE COMPANIES (AUDIT AND AUDITORS) RULES

  • The individual/firm is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act. 1949 & the rules or regulations made thereunder;
  • The proposed appointment is as per the term provided under the Act;
  • The proposed appointment is within the limits laid down by or under the authority of the Act;
  • The list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true & correct.

The certificate shall also shows whether the auditor satisfies the criteria provided in section 141 of the Act.

The concerned auditor shall be informed by the company of its appointment and also file a notice of such appointment with Registrar in Form ADT-1 within 15 days of the meeting in which the auditor is appointed.

ELIGIBILITY & QUALIFICATION OF AUDITOR

Section 141 (1) & (2) of the Act prescribed the following eligibility and qualifications of auditor which are as under:-

Only a Chartered Accountant (individual) or a firm where majority of partners practicing in India can be appointed as auditor.

Where a firm including a limited liability partnership (LLP) is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorized to act and sign on behalf of the firm.

DISQUALIFICATIONS OF AUDITOR

Section 141 (3) of the Act read with Rule 10 prescribed the following persons shall not be eligible for appointment of an auditor which are as under:-

♣ A body corporate, except LLP;

♣ An officer or employee of the company;

♣ Any partner/ employee of officer or employee of company;

♣ A person who himself or his relative/partner is holding any security or interest in the company, or any company which is its holding, subsidiary, associate;

♣ A person whose relative is holding security or interest not exceeding Rs. One face value in companies as mentioned above. Provided that this condition be also applicable in the case of a company not having share capital or other securities, wherever relevant. Provided further that in the event of acquiring any security or interest by a relative, above the threshold limit i.e. Rs. One lac, the corrective action to maintain the limits shall taken by the auditor within 60 days of such acquisition or interest;

♣ A person who or whose relative or partner is indebted to the company or its subsidiary or its holding or associate company or a subsidiary company of such holding company, in excess of rupees five lakh shall not be eligible for appointment;

♣ An Individual who or whose relative or partner has given a guarantee or provided any security in connection with the indebtness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of one lakh rupees shall not eligible for appointment;

♣ A person or a firm who, whether directly or indirectly, has “business relationship” with the company, or its subsidiary, or its holding or associate company;

According to section 141(4) where a person appointed as an auditor of a company incurs any of the disqualifications mentioned as above after his appointment, he shall vacate his office as such auditor and such vacation shall deemed to be a casual vacancy in the office of the auditor.

TERM OF AUDITOR 139(2) AND RULE 5

Listed companies or all unlisted companies having paid up share capital of Rs. 10 crore or more, all private limited companies having paid up share capital of Rs. 20 crore or more, all companies having public borrowings from financial institutions, banks or public deposits of Rs. 50 crores or more shall not appoint or re-appoint an individual as auditor for more than one term of 5 consecutive years; and an audit firm as auditor for more than two terms of 5 consecutive years. These auditors (either individual/audit firm)

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