[FAQs] on Company Audit

Appointment of Firm as auditor having common Partner:

• As per Second Proviso to sec. 139(2) of Companies Act, 2013, as 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.
• In the present case, CA X is common partner in the firm AB & Associates and MN & Associates.

Conclusion: MN & Associates is disqualified for appointment as auditor of XYZ Ltd. for a period of 5 years

Appointment of firm as auditor having one of partner was in-charge in previous audit firm:

• As per Explanation given in Rule 6 of Companies (Audit & Auditors) Rules, 2014 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.
• In the present case, CA. X was incharge of M/s. AB & Associates and certifying authority of financial statements of XYZ Ltd. Retires from the M/s. AB & associates and joins MN & Associates.

Conclusion: MN & Associates is disqualified for appointment as auditor of XYZ Ltd. for a period of 5 years

Appointment of First Auditor of Non-Govt. Company:

• Section 139(6) of the Companies Act, 2013 lays down that “the first auditor or auditors of a company shall be appointed by the Board of directors within 30 days from the date of registration of the company”.
• In the instant case, the appointment of CA Mohan, a practicing Chartered Accountant as first auditors by the Managing Director of ABC Pvt. Ltd. by himself is in violation of Section 139(6) of the Companies Act, 2013, which authorizes the Board of Directors to appoint the first auditor of the company.

Conclusion: In view of the above, the Managing Director of ABC Pvt. Ltd. should be advised not to appoint the first auditor of the company.

Note: As the appointment of CA Mohan as such is not valid, there is no relevance of any discussion with regard to his relationship with the managing director.

Appointment of First Auditor of Non-Govt. Company:

• Section 139(6) of the Companies Act, 2013 lays down that “the first auditor or auditors of a company shall be appointed by the Board of directors within 30 days from the date of registration of the company”.
• In the case of failure of the Board to appoint the auditor, it shall inform the members of the company. The members of the company shall within 90 days at an extraordinary general meeting appoint the auditor. Appointed auditor shall hold office till the conclusion of the first annual general meeting.
• In the instant case, the appointment of CA Raj, a practicing Chartered Accountant as first auditors by the members of the company, opposing that Board is not authorised to appoint the auditor, is not in order.

Conclusion: Appointment of CA Raj as first auditor, within 30 days of registration by the members of the company is not in order.

Appointment of First Auditor of Govt. Company

• Section 139(7) of the Companies Act, 2013 lays down that in the case of a Government company or any other company owned or controlled, directly or indirectly, by the CG, or by any SG, or SGs, or partly by the CG and partly by one or more SGs, the first auditor shall be appointed by the CAG of India within 60 days of registration of the company.
• In case the CAG of India does not appoint such auditor within the said period, the BoD of the company shall appoint such auditor within the next 30 days.
• In the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within the 60 days at an EGM.
• Hence in the case of M/s. Healthy Wealthy Ltd., being a government company, the first auditors shall be appointed by the CAG of India.

Conclusion: The appointment of first auditors made by the Board of Directors of M/s. Healthy Wealthy Ltd., is null and void.

Appointment of Auditor of Govt. Company:

• As per Sec. 2(45) of the Companies Act, 2013, a Government company is defined “as any company in which not less than 51% of the paid-up share capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government Company as thus defined”.
• 139(7) requires that the auditors of a government company shall be appointed or reappointed by the Comptroller and Auditor General of India.
• In the given case Ajanta Ltd. is a government company as its 20% shares have been held by Central Govt., 25% by U.P. State Government and 10% by M.P. State Govt. Total 55% shares have been held by Central and State governments.
• Nick Ltd. will also be a government company, being subsidiary company of Ajanta Ltd. and hence the Auditor of Nick Ltd. can be appointed only by C & AG.

Conclusion: Appointment of ‘P’ is invalid and ‘P’ should not give acceptance to the Directors of Nick Ltd.

Filling of Casual Vacancy:

• As per Section 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor shall-
  1. In the case of a non-government company, be filled by the Board of Directors within 30 days. But, if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within 3 months of the recommendation of the Board and the auditor so appointed shall hold the office till the conclusion of the next AGM.
  2. In the case of a government company, the casual vacancy be filled by the CAG of India within 30 days. But if the CAG does not fill the vacancy within the said period the Board of Directors shall fill the vacancy within next 30 days.
• In the given case, CA Mr X, the statutory auditor of Y Ltd. has resigned from the office of auditor. Therefore, such casual vacancy can be filled by the Board of Directors subject to approval by the company at a general meeting convened within 3 months of the recommendation of the Board.

Conclusion: The appointment of CA Mr Y made by the Board of Directors without the approval of the company at a general meeting is invalid and further, if appointment is approved by the company, CA Mr Y can hold office only till the conclusion of the next AGM.

BoD Powers to fill the Vacancy:

• Board of Directors of the company has been empowered to appoint the auditor other than first auditor in case any casual vacancy arises in the office of auditor. [Sec. 138(8)]
• The present case does not fall u/s 139(8); hence BoD does not have power to fill-up the vacancy.
• Under the circumstances, it may be deemed that no auditor appointed at AGM and provisions of Sec. 139(10) may be invoked which provides that where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.
• Further, clause 9 of Part I of the First Schedule to the Chartered Accountants Act, 1949 provides that a member in practice shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of a company without first ascertaining from it whether the requirements of Sections 139 and 140 of the Companies Act, 2013, in respect of such appointment have been duly complied with.
• In the present case, appointment of Mr John by Board of Directors is not in line with the provisions of Sec. 139 of Companies Act, 2013.
• Vacancy so remains due to non–acceptance by Mr Ashwin can only be filled by the Company in General Meeting.

Conclusion: Board of Directors are not authorised to fill-up the vacancy in case the auditors appointed at the AGM refuse to accept the appointment.

Mr John will be guilty of professional misconduct by virtue of clause 9 of Part I of First Schedule of Chartered Accountants Act, 1949.

Appointment of First Auditor of Government Company:

• As per Sec. 2(45) of the Companies Act, 2013, a government company is defined “as any company in which not less than 51% of the paid-up share capital is held by the C.G. or by any S.G.(s) or partly by the C.G. and partly by one or more S.G.(s) and includes a company which is a subsidiary of a Government Company as thus defined”.
• As per Sec. 139(7) of Companies Act, 2013, in the case of a Government company or any other company owned or controlled, directly or indirectly, by the CG, or by any SG, or SGs, or partly by the CG and partly by one or more SGs, the first auditor shall be appointed by the CAG of India, within 60 days of registration of company.
• In case the CAG of India does not appoint such auditor within the said period, the BoD of the company shall appoint such auditor within next 30 days; In the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within 60 days at an EGM.
• In the present case, 55% of share capital is held by Central Government and State Government, hence it is a case of Government Company and the first auditor need to be appointed by CAG within 60 days of registration of company.

Conclusion: Appointment of First Auditor within 60 days of registration of government company by Board of Directors is not valid.

Applicability of Rotation provisions:

• 139(2) of Companies Act, 2013 provides that no listed company or other prescribed companies, shall appoint or reappoint an audit firm as auditor for more than two terms of five consecutive years.
• An audit firm which has completed its term, shall not be eligible for reappointment as auditor in the same company for five years from the completion of such term.
• It is also provided that as 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.
• In the present case, on completion of tenure of M/s. ABC & Co., retiring auditor, company has appointed M/s. XY as their auditor. After three months of appointment of XY Ltd. as auditor, Mr A, joins M/s. XY as partner. As per provisions of Sec. 139(2), incoming auditor shall not be eligible for appointment in case of common partner as on date of appointment. But in this case, there were no common partner as on date of appointment. Mr A joins after 3 months of appointment.

Conclusion: Applying the provisions of Sec. 139(2), no issue arises as there were no common partners as on date of appointment. 

Note: Interpretation of this provision appears to be against the intention of law, which intends for the cooling off period of retiring auditor for a period of 5 years in case of listed and other prescribed companies.

Reappointment of Retiring Auditor:

A retiring auditor cannot be reappointed at an annual general meeting, if-

• he is disqualified for reappointment;
• he has given the company a notice in writing of his unwillingness to be reappointed; and
• a special resolution has been passed at that meeting appointing some other auditor or providing expressly that he shall not be reappointed;
• where at any annual general meeting, other auditor is appointed or reappointed.

Appointment of Sole Auditor:

When one of the joint auditors of the previous years is considered for reappointment by the members as the sole auditor for the next tenure, it is similar to non-reappointment of one of the retiring joint auditors.  As per Sec. 140(4) of the Companies Act, 2013, special notice shall be required for a resolution at an AGM appointing as auditor a person other than a retiring auditor or providing expressly that a retiring auditor shall not be reappointed, except where the retiring auditor has completed a consecutive tenure of five years or, as the case may be, ten years, as provided u/s 139(2).

Accordingly, provisions of the Companies Act, 2013 to be complied with are as under:

1. Special Notice: Ascertain that special notice u/s 140(4) of the Companies Act, 2013 was received by the company from requisite number of members (1% of total voting power or paid-up capital not less than ₹ 5 Lacs) at least 14 days before the AGM date.
2. Sending copy of notice: Check whether the said notice has been sent to all the members at least 7 days before the date of the AGM.
3. Contents of Notice: Verify that the notice contains an express intention of a member for proposing the resolution for appointing a sole auditor in place of both the joint auditors who retire at the meeting but are eligible for reappointment.
4. Notice to Auditor: Ensure that the notice has also been sent to the retiring auditor.
5. Sending the Representation: Verify whether any representation, received from the retiring auditor was sent to the members of the company.
6. Consideration of representation: Verify from the minutes book whether the representation received from the retiring joint auditor was considered at the AGM.

In addition to requirements of Companies Act, 2013, auditor is required to ensure compliance of Clauses 8 and 9 of Part I of First Schedule to Chartered Accountants Act, 1949.

Professional Obligations in case of resignation by auditor:

• SA 705 “Modifications to the Opinion in the Independent Auditor’s Report” provides the consequence of an inability to obtain sufficient appropriate audit evidence due to a management – imposed limitation after the auditor has accepted the engagement. The practicability of resigning from the audit may depend upon the stage of completion of the engagement at the time that management Imposes the scope limitation.
• When the auditor concludes that resignation from the audit is necessary because of a scope limitation, there may be a professional, regulatory or legal requirement for the auditor to communicate matters relating to the resignation from the engagement to regulators or the entity’s owners.
• 140(2) of Companies Act, 2013 requires that 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 (ADT-3) with the company and the Registrar.
• In case of Government companies, such statement is also required to be filed with the Comptroller and Auditor-General of India.
• Statement must indicate the reasons and other facts as may be relevant with regard to his resignation.
• Sec. 140(3) of Companies Act, 2013 provides that if the auditor does not comply with Sec. 140(2), he shall be punishable with fine of ₹ 50,000 or the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of ₹ 500 for each day after the first during which such failure continues, subject to a maximum of ₹ 2 lakh.

Power of Tribunal in case Auditor acted in a Fraudulent Manner:

• 140(5) of the Companies Act, 2013, provides that the Tribunal either suo motu or on an application made to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct the company to change its auditors.
• However, 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 15 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.
• It may be noted that 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 of the said Act.
• It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or officers.

Disqualification as to Security:

• As per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.
• However, the relative of the auditor may hold the securities or interest in the company of face value not exceeding ₹ 1,00,000.

Conclusion: In the present case, Mr A. is holding security of ₹ 900 in the XYZ Ltd., therefore he is not eligible for appointment as an Auditor of “XYZ Ltd”.

However, in second case, Mr A is eligible, as relative may hold securities of face value upto ₹ 1 Lac.

Disqualifications as to Securities:

• As per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.
• However, the relative of the auditor may hold the securities or interest in the company of face value not exceeding ₹ 1,00,000.

Conclusion: In the present case, Mr Q (relative of Mr P, an auditor), is having securities of ₹ 90,000 face Value in the ABC Pvt. Ltd., which is as per requirement of proviso to section 141(3)(d)(i), Therefore, Mr P will not be disqualified to be appointed as an auditor of ABC Ltd.

Disqualifications as to security:

• As per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his relative or partner holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.
• However, the relative of the auditor may hold the securities or interest in the company of face value not exceeding of ₹ 1,00,000.

Conclusion: In the instant case BC & Co., will be disqualified for appointment as an auditor of MWF Ltd. as the relative of Mr C i.e. partner of BC & Co., is holding the securities in MWF Ltd. which is exceeding the limit mentioned in proviso to section 141(3)(d)(i).

Disqualification as to partner of employee:

• Section 141(3)(c) of the Companies Act, 2013 prescribes that any person who is a partner or in employment of an officer or employee of the company will be disqualified to act as an auditor of a company.
• 141(4) provides that an auditor who becomes subject, after his appointment, to any of the disqualifications specified in Sec. 141(3), he shall be deemed to have vacated his office as an auditor.

Conclusion: In the present case, A, an auditor of M/s. Laxman Ltd., joined as partner with B, who is Manager Finance of M/s. Laxman Limited, will be disqualified by Sec. 141(3)(c) and, therefore, he shall be deemed to have vacated office of the auditor of M/s. Laxman Limited.

Auditor holding securities of a company:

• As per Sec. 141(3)(d) of the Companies Act, 2013, a person shall not be eligible for appointment as an auditor of a company, who, or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.
• In the present case, Mr Hanuman, Chartered Accountant, a partner of M/s. Ram and Hanuman Associates, holds 100 equity shares of Shiva Ltd. which is a subsidiary of Krishna Ltd.

Conclusion: The firm, M/s. Ram and Hanuman Associates would be disqualified to be appointed as statutory auditor of Krishna Ltd., which is the holding company of Shiva Ltd., because one of the partner Mr Hanuman is holding equity shares of its subsidiary.

Disqualification as to indebtedness:

• As per Sec. 141(3)(d)(ii) of the Companies Act, 2013, a person is not eligible for appointment as auditor of any company, If he is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ₹ 5 Lacs.
• In the given case Mr Amar is disqualified to act as an auditor u/s 141(3)(d)(ii) as he is indebted to M/s. Chaudhary Finance Ltd. for more than ₹ 5 Lacs.
• Further he cannot act as an auditor of any subsidiary of Chaudhary Finance Ltd. e. he is also disqualified to work in Charan Ltd. & Das Ltd.
• Further Sec. 141(4) provides that a person appointed as auditor incurs any of the disqualification mentioned u/s 141(3) after his appointment, he shall vacate the office immediately and it will be treated a casual vacancy.

Conclusion: Mr Amar should vacate his office immediately and Das Ltd. must have to appoint any other CA as an auditor of the company.