Eligibility | Appointment | Duties of Auditors under Companies Act, 2013

Under the Companies Act, 2013, companies must appoint a qualified Chartered Accountant as an auditor at the first AGM, serving until the sixth AGM. Auditors can be individuals or firms, and their eligibility is governed by Section 141. For government companies, the CAG appoints the auditor. The Companies Act ensures auditor independence through mandatory rotation and outlines processes for removal or replacement with prior government approval, ensuring transparency and accountability in financial reporting.

Table of Contents

1. Eligibility for Appointment of an Auditor
2. Appointment of Auditor
3. Compulsory Reappointment
4. Ceiling on Number of Audits
5. Remuneration of the Auditor – Section 142
6. Removal of Auditor
7. Rights/Powers of an Auditor
8. Duties of Auditor – Section 143, Section 144, Section 145, and Section 146

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1. Eligibility for Appointment of an Auditor

Section 141 of the Companies Act, 2013 (hereinafter referred to as the Act) lays down provisions regarding the eligibility of appointment of an auditor. These provisions are applicable to all types of companies, be it a private company, a public limited company, a Government company or a licensed company.

1.1 Auditor’s qualifications

The main purpose of section 141(1) and 141(2) of the Act is to ensure that only a qualified person possessing the requisite professional knowledge and technical skills is appointed as an auditor. The prescribed qualifications are:

1.2 Disqualifications of an Auditor

The object of section 141 is to ensure independence of the auditor. Accordingly, none of the following persons shall be qualified for appointment as an auditor of a company :

• Body corporate other than LLP; or
• Officer or employee of the company; or
• Person who is a partner or who is in the employment of an officer or employee of the company; or
• Any person who has a business relationship with the company/its subsidiary/associate/its holding company/subsidiary or associate of its holding company (business relationship disqualification); or
• A person whose relative is a non-executive/executive director or key managerial personnel of the company; or
• A person or his relative or partner is indebted to the company for an amount exceeding ` 5,00,000 or has given guarantee in connection with indebtedness of third person for an amount exceeding ` 1,00,000; or
• A person or his relative or partner is holding any security in the company or its subsidiary; or
• A person who 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; or
• A person who is in full-time employment elsewhere; or
• Any person whose appointment will result in the person being the auditor of more than 20 companies; or
• Any person whose subsidiary or associate or any other form of entity is engaged in providing non-audit services as on the date of appointment (non-audit services disqualifications).

1.3 Automatic vacation on becoming disqualified

According to section 141(3), if an auditor after his appointment becomes disqualified on account of provisions of this section, he shall be deemed to have vacated his office automatically. This would be treated as casual vacancy.

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2. Appointment of Auditor

Under section 139 of the Act detailed provisions regarding appointment of statutory auditor has been laid out. The provisions are applicable to unlisted company as well as listed company. Sub-section (5) to sub-section (8) of section 139 contains provision with regard to appointment of auditor of a Government company. Auditors can be first auditors, subsequent auditors or auditors appointed to fill casual vacancy.

2.1 Appointment of Auditor of listed as well as company to which Companies (Audit and Auditors) Rules, 2014

The provisions have been summarised as below:

Mandatory rotation of auditor

• The Ministry of Corporate Affairs has notified the Companies (Audit and Auditors) Rules, 2014. According to these Rules, rotation of auditors has been made mandatory for:

1. 1. listed companies.
   2. unlisted companies with a share capital of more than ₹ 10 crores,
   3. all private companies with paid-up capital of ₹ 50 crores or more, and
   4. all unlisted and private companies with public deposits of a minimum of ₹ 50 crores.

• The mandatory rotation of auditor has been introduced both at individual level as well at the audit firm level.
• If joint auditors have been appointed, the rotation of auditors may be done in such a manner that both or all of the joint auditors as the case may be, do not complete their term in the same year.
• According to section 139(2) of the Act, none of the above stated companies can appoint or reappoint —

1. 1. Individual auditor for not more than 1 term of 5 consecutive years.
   2. Audit firm including Limited Liability Partnership (LLP) for not more than 2 terms of 5 consecutive years.
   3. Cooling off period for rotated individual auditor is 5 years from the completion of the term i.e. if an individual auditor has completed 5 years of his original term, he shall not be eligible for reappointment in the same company for a period of five years. For audit firm including LLP too cooling off period stands at five years.

Common Partners Restriction

No audit firm having a common partner/s with 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 5 years.

Role of Audit Committee in appointment of the auditor

If a Government or a non-Government company constitutes an Audit Committee as required under this Act, all appointments, including the filling of a casual vacancy of an auditor shall be made after taking into account recommendations of such Committee.

2.2 Appointment of auditor in case of Government companies (Section 139)

3. Compulsory Reappointment

Ordinarily, an auditor appointed by whatsoever authority, is to be compulsorily re-appointed by passing a resolution at the annual general meeting. However, the retiring auditor shall not be re-appointed in the following cases [section 139(9)] :

• if he is not qualified for reappointment; or
• if he has given the company notice in writing about his unwillingness to be reappointed; or
• if a special resolution has been passed at the meeting—

1. 1. appointing somebody other than him; or
   2. providing expressly that he shall not be reappointed; or

• if the auditor on reappointment will violate the ceiling on the number of audit.

If at any AGM, no auditor is appointed or reappointed, the existing auditor shall continue to be the auditor of the company.

4. Ceiling on Number of Audits

• Provisions of the Act: The auditor, who has been appointed or reappointed under section 139, has to comply with the ceiling on number of audits prescribed under section 141(3)(g).
• Objective of the ceiling: The objective of such a ceiling is to prevent concentration of audits in few hands.
• How is compliance ensured: Before such appointment or reappointment, a certificate in writing is required to be obtained by the company from the auditor regarding compliance of such ceiling.
• Ceiling in case of individuals: The specified number of audit stands at twenty. The limit of twenty companies includes public companies and private companies having paid up capital of ` 100 crore or more. It excludes the audits of—

1. 1. one person companies
   2. dormant companies
   3. small companies
   4. private limited companies with less than ` 100 crores paid capital.

• Ceiling in case of partnership firm: The ceiling is twenty companies per partner of the firm. Any partner who is in full time employment elsewhere is not to be taken into account while computing the ceiling of number of companies that the firm can audit.

5. Remuneration of the Auditor – Section 142

• Who would fix remuneration?

1. 1. In case of first auditor appointed by the board of directors – Board of Directors.
   2. In case of auditors appointed by the shareholders in general meeting – Shareholders in the general meeting.
   3. In case of auditors appointed by the CAG for Government company – Shareholders in the general meeting.

The general meeting may even delegate powers to fix the remuneration to the board of directors.

• Remuneration includes what?

1. 1. Fees to auditor.
   2. Expenses, if any, incurred by the auditor in connection with the audit of the company.
   3. Cost of any facility provided to the auditor.

• Disclosure of the amount paid to the auditor should be as per require- ment of Schedule III to the Companies Act, 2013.

6. Removal of Auditor

6.1 Removal of auditor from his office before the expiry of his term – Section 140(1)

• Object: The purpose of this section is to make the removal of an independent and conscientious auditor difficult.
• Special resolution: The 2013 Act requires that removal of auditors before expiry of his term shall require special resolution and previous approval of the Central Government for the removal of auditor before the expiry of the term.
• Rule of natural justice: The auditor shall be given a reasonable opportunity of being heard before being removed.
• The Companies (Audit and Auditors) Rules, 2014: According to these Rules:

1. 1. The application to Central Government has to be made within 30 days of passing the board resolution.
   2. The company shall pass a special resolution in a general meeting within 60 days of receipt of approval of the Central Government.

6.2 Resignation of the auditor – Section 140(2) and (3)

• Statement of purpose to be filed:

1. 1. The auditor who has resigned from the company shall file within a period of 30 days from the date of resignation, a statement in the prescribed form with the company and the Registrar of Companies (RoC), indicating the reasons and other facts as may be relevant.
   2. In case of Government companies and Government owned or controlled by the Government, the auditor shall also file such statement with the CAG, indicating the reasons and other facts as may be relevant with regard to his resignation.

• Contravention: If auditor does not file such statement as above, he shall be punishable with a fine of not less than ₹50,000 but which may extend to ₹2,00,000.

6.3 Appointment of an auditor in place of a retiring auditor – Section 140(4) and (5)

Procedure for appointment of a new auditor in place of a retiring auditor is as follows:

• Special notice shall be required for a resolution at an annual general meeting except in case of listed companies when the term of auditor expires due to mandatory rotation.
• On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor.
• Where notice is given of such a resolution and the retiring auditor makes representation in writing to the company (not exceeding a reasonable length) and requests its notification to members of the company, the company shall, unless the representation is received by it too late for it to do so,—

1. 1. in any notice of the resolution given to members of the company, state the fact of the representation having been made;
   2. company is required to send a copy of the representation to every member and if copy of representation is not sent then a copy shall be filed with Registrar; and
   3. if a copy of the representation is not sent because it was received too late or because of the company’s default, the auditor may (without prejudice to his right to be heard orally) require that the representation shall be read out at the meeting.

• If the Tribunal, on the application either of the company or of any other aggrieved person, is satisfied that the auditor is securing needless publicity of a defamatory matter, it can exempt the company from sending the copy of representations to the members or reading them out at the general meeting. At the AGM ordinary resolution is to be passed to appoint new auditor in place of retiring auditor.

6.4 Removal by Tribunal – Section 140(5)

• If the Tribunal is of the view that the auditor of a company has committed/colluded in a fraud in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.
• This power can be exercised either

1. 1. Suo motu or
   2. on an application made to it by the Central Government or
   3. by any person concerned.

• If the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor and the Central Government may appoint another auditor in his place.
• An auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the date of passing of the order and the auditor shall also be liable for action under section 447.

7. Rights/Powers of an Auditor

There are various rights conferred upon the auditor by the Companies Act, 2013 (hereinafter referred to as the Act). The principal rights, except those in case of removal of the auditor, are mentioned below:

• Right of access at all times to books of account and vouchers of the company

1. 1. Section 143(1) confers upon the auditor right of access at all times to books of account and vouchers of the company, whether kept at the registered office of the company or elsewhere.
   2. The auditor can exercise this right at all times which implies normal business hours on any working day.

• Right to obtain information and explanations

1. 1. Section 143 empowers the auditor to call for any explanation or information from the employees and officers including managing director and other directors of the company, which he thinks is relevant for the purpose of audit and proper discharge of his duties.
   2. In case any information or explanation is not given to him, he should mention this fact in his audit report.

• Right of access to records of subsidiaries

1. 1. Auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries insofar as it relates to the consolidation of its financial statements with that of its subsidiaries.

• Right to sign audit reports, etc.

1. 1. The person appointed as an auditor of the company shall sign the auditor’s report or sign or certify any document of the company.

• Right to receive notice of and attend general meeting

1. 1. Auditor has a right to receive notice of any general meeting.
   2. He has a right to be heard at such meeting on any part of the business which concerns him as the auditor.

8. Duties of Auditor – Section 143, Section 144, Section 145, and Section 146

• Compliance with audit standard: Every auditor shall comply with auditing standard issued by ICAI. [143(9)]
• Duty to report fraud: Auditor shall report the material fraud to the Central Government within prescribed time and manner. The same shall not be construed as breach of duty.
• Duty not to render certain services: According to section 144 of the Act, an auditor can render services as are approved by the BOD or the Audit Committee. He cannot render “consulting and specialized services”.
• Duty to sign audit reports, etc. (section 145): The auditor of the company (in case where auditor is a firm/LLP with CA partners and non-CA partners, only CA partner) shall sign the auditor’s report or sign or certify any other document of the company in accordance with the provisions of sub-section (2) of section 141.
• Duty to attend general meeting: Under section 146, auditor has a duty to attend any general meeting either by himself or through his authorised representative who is qualified to be an auditor.
• Duty to report & Duty to enquire