PRACTICAL AUDITING

UNIT - IV

APPOINTMENT RELATED TO AUDITOR

APPOINTMENT OF AUDITOR (Section 139)

• The process of appointing auditors in accordance with the Companies Act, 2013 involves
a structured set of rules and regulations.
• Understanding the provisions outlined in Section 139, as well as the associated rules and
guidelines, is crucial for companies to ensure a smooth and compliant auditor appointment
process.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 1
APPOINTMENT OF THE FIRST AUDITOR [SEC. 139(6)]

• The first auditor of a company, other than a Government company, shall be appointed by
the Board of Directors (only by BOD) within 30 days from the date of registration (i.e.,
Date of Incorporation) of the company.
• In the case of failure of the Board to appoint such auditor, it shall inform the members of
the company, who shall appoint within 90 days at an extraordinary general meeting
(EGM).
• The first auditor shall hold office from the date of appointment to till the conclusion of
the first AGM.

APPOINTMENT OF THE FIRST AUDITOR OF GOVERNMENT COMPANY [SEC. 139(7)]

For a government company; or any other company owned or controlled directly or indirectly
by Central Govt.(CG) or any State Govt.(SG) or partly by CG & SG(s)

• First auditor shall be appointed by the Comptroller & Auditor General (CAG)
within 60 days from the date of registration of the company.
• In case the CAG does not appoint such auditor within the said period, the Board
of Directors of the company shall appoint such auditor within 30 days.
• In the case of failure of the Board to appoint such auditor, it shall inform the
members of the company within the next 30 days and who shall appoint such
auditor within the 60 days at an EGM.
• The auditor so appointed shall hold office from the date of appointment till the
conclusion of the 1st AGM.

APPOINTMENT OF SUBSEQUENT AUDITOR

Appointment of subsequent auditor(s) other than Government Companies [Sec 139(1)]

• Every company shall, appoint an individual or a firm (includes LLP) as an auditor of

the company at the First AGM by passing an Ordinary Resolution.
• Every company means ALL the companies incorporated under the Act which includes
one-person company, Sec. 8 company, etc.;
• The auditor shall hold office from the conclusion of 1st AGM till the conclusion of its
6th AGM (i.e., for 5 years).

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 2
 • The Notice to the registrar about appointment of auditor shall be in Form ADT-1 within 15
days from the date of appointment.
Appointment of subsequent auditor(s) in case of a Government Company [Sec 139(5)]
• In case of a Government Company, the Comptroller and Auditor-General (CAG) of India
shall, in respect of financial year, appoint an individual or a firm as auditor within a period
of 180 days from the commencement of financial year.
• The auditor shall hold the office till the conclusion the AGM.
• The CAG cannot appoint an auditor for more than one financial year at a time.
• The auditor to be appointed by the CAG shall fulfil the conditions pertaining to eligibility,
qualification as stipulated in section 141 of the Companies Act, 2013.

APPOINTMENT IN CASE OF CASUAL VACANCY [SEC 139(8)]:

• Casual vacancy may arise out of death, disqualification, resignation or removal etc. of the
auditor.
• In case of Company other than Govt. Company, be filled by the BOD within 30 days.
• In case such casual vacancy arises as a result of resignation of an auditor, such
appointment shall be approved by the company at general meeting convened within 3
months of recommendation of the Board and hold the office till the conclusion next AGM.
• In case of Government Company casual vacancy be filled by the C&AG of India within
30 days and in case of failure of C&AG of India, the BOD shall fill the vacancy within
next 30 days.

RE-APPOINTMENT OF AUDITORS [SEC 139(9)]:

As provided in sub-section (9) of section 139, a retiring auditor may be reappointed at an annual
general meeting, if following three conditions are satisfied:

• He is not disqualified for the appointment.

• He has not given a notice in writing of his unwillingness to be reappointed.
• Special resolution has not been passed at that meeting appointing some other auditor or
providing expressly that he shall not be reappointed.
Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to
be the auditor of the company.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 3
QUALIFICATIONS OF AN AUDITOR [SECTION 141(1) & (2)]

• A person shall be eligible for appointment as an auditor of a company only if he is a

chartered accountant within the meaning of the Chartered Accountants Act, 1949.
[CA means a Chartered Accountant who holds valid Certificate of PRACTICE –
Section 2(17)]

• A firm where majority of partners practicing in India are qualified for appointment as
aforesaid may be appointed by its firm name to be auditor of a company.

• 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
authorised to act and sign on behalf of the firm. [Section 141(2)]

DISQUALIFICATIONS OF AUDITORS [Section 141(3):

The following persons shall not be eligible (disqualified) for appointment as an auditor of a
company, namely:

• “A body corporate other than a limited liability partnership (LLP) registered under
the Limited Liability Partnership Act, 2008”;
• An officer or employee of the company; As per Section 2(59), ‘Officer’ includes: Any
director; Manager; Key managerial personnel (KMP); or
• A person who is a partner, or who is in the employment (employee), of
an officer or employee of the company;
• A person 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;
• A person who, or his relative or partner 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;
• A person who, or his relative or partner who has given a guarantee or provided any
security in connection with the indebtedness 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 ` 1 Lac;
• A person (auditor) or a firm who, whether directly or indirectly (through
agent/relation), has business relationship with the company, or its subsidiary, or its

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 4
 holding or associate company or subsidiary of such holding company or associate
company;
• A person who is in full time employment elsewhere;
• A person or a partner of a firm holding appointment as its auditor, if such persons or
partner is at the date of such appointment or reappointment holding appointment as
auditor of more than 20 companies;
• 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.

CEILING ON NUMBER OF AUDITS [Sec 141(3)(g)]

• Ceiling refers to the number of companies of which a person or a firm could be the auditor.
• Sec 141(3)(g) says, “no company or its Board shall appoint or reappoint any person or a
partner of a firm, holding appointments as auditor of more than twenty companies”
Objectives of Ceiling
The main objectives of imposing ceiling limit on audit is:
• To bring dissociation of auditors from groups of companies.
• To achieve an equitable distribution of audit-work among the auditors.

Audits excluded for computing Ceiling Limits:

The ceiling limit of 20 companies does not include:

• One Person Companies (OPC)

• Dormant Companies
• Small Companies
• Private Companies with paid-up share capital of less than Rs.100 crore
• Branch Audit
• Special Audit or Audit of Statutory companies
• Audit of foreign companies.

REMOVAL OF AUDITOR [SEC 140(1)]:

The auditor appointed under section 139 may be removed from his office before the expiry
of his term only by a special resolution of the company, after obtaining the previous
approval of the Central Government in that behalf.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 5
Mandatory Requirements for Removal of Auditor

• Approval of Central Government is required for removal of auditor.

• The concerned auditor shall be given an opportunity of being heard.
• Company has to take Shareholders’ approval within 60 days of receipt of approval of
Regional Director.
PROCEDURE IS TO BE FOLLOWED FOR REMOVAL OF AUDITOR

Approval for Removal from the Audit Committee

• Where a Company is required to constitute an Audit Committee under section 177 then
the proposal to remove the auditor shall be approved by the Audit committee in a duly
convened meeting of Committee.

Convene a Meeting of Board of Directors

• Fix the date of Board Meeting for removal of auditor in and Issue Notice of Board
Meeting to all the Directors of Company at their addresses registered with the Company,
at least 7 days before the date of Board Meeting.

• Intimate the concerned auditor about the date of Board Meeting at which resolution for
his removal shall be passed in order to give him an opportunity of being heard.

• Hold a meeting of Board of Directors and pass the Board Resolution to consider the
removal of the auditor before expiry of his tenure.

File an Application to the Regional Director

• Company shall file an application to the Regional Director for removal of Auditor
within 30 days of the resolution passed in the Board Meeting in Form ADT-2 along
with the details of the grounds for seeking removal of auditor.
Hearing and Order by Regional Director
• On receiving the application, Regional Director shall give a date for the hearing.
• After hearing, RD may give approval for removal of the Auditor.
File Certified Copy of Order with ROC
• Company shall file certified copy of order with ROC in Form INC-28 within 30 days
from the date of issue of certified copy of order.

Convene General Meeting

• Notice of General Meeting specifying the date and venue of the meeting shall be given
at least clear 21 days before the actual date of a General Meeting to all the Directors,

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 Members, Auditors of Company, Secretarial Auditor, Debenture Trustees and to others
who are entitled to receive the notice of the General Meeting.
• Hold the General Meeting within 60 days from the date of receipt of approval of Central
Government and pass Special Resolution for removal of auditor before expiry of his
tenure.
• Listed Companies shall disclose the proceedings of General Meeting to the Stock
Exchange within 24 hours from the conclusion of General Meeting and same shall be
posted on the website of the company within 2 working days.

File Form MGT-14 with ROC

File Form MGT-14 with the ROC within 30 days of passing Special Resolution in General
Meeting along with fee as specified in the Companies (Registration offices and fees) Rules,
2014 and with the following attachments:

• Certified True Copies of the Special Resolution passed along with Explanatory
Statement
• Certified Copy of Order of RD
• Copy of the Notice of meeting sent to members along with all the annexure
• Copy of Attendance Sheet of General Meeting
• Any other attachment as may be applicable.

REMUNERATION OF AUDITOR [Sec 142 & 142(1)]

• The remuneration of the auditor of a company shall be fixed in its general meeting or in
such manner as may be determined therein.
• Provided that the Board may fix remuneration of the first auditor appointed by it.
• The remuneration under Section 142(1) shall, in addition to the fee payable to an auditor,
include the expenses, if any, incurred by the auditor in connection with the audit of the
company and any facility extended to him.
• However, it does not include any remuneration paid to him for any other service rendered
by him at the request of the company.
• The auditor can claim expenditure from the company, for legal or technical advice sought
by him: as adviser in taxation matters, company law matters, management services etc.,
• The Profit and Loss account of the company must contain detailed information as regards
to all amounts paid to the auditor.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 7
POWERS (OR) RIGHTS OF AN AUDITOR [SEC.143]

The Companies Act 2013 has conferred certain rights on auditor's so as to enable them
to discharge their duties smoothly.

Right to Access Books and

Vouchers:
• Every auditor of a company
has a right to access book of accounts
and vouchers of the company at all
times. Vouchers include all
documents, correspondence,
agreements, etc.
• Books include financial,
accounting, statutory and statistical
books of the company. The term all
times means only during the normal
business hours.

Right to Obtain Information and

Explanation:

• An auditor has the right to

seek information and explanation
from the directors and officers of the
company. That will enable him to
perform his duties successfully.
• Every officer of the company
must furnish the necessary
information to the auditor. If the officer refuses to do so, the auditor may report to the
members of the company.

Right to Sign Audit Report [Sec.145]:

• The auditor has the right to sign the auditor’s report.

• The auditor can also sign or authenticate any document which the law requires to furnish.

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Right to receive Notices and attend General Meeting [Sec.146]:

• The company must send all notices and communications to the auditor relating to any
general meeting.
• The auditor shall attend the meeting either through himself or through his representative,
who shall be an auditor.
• The auditor in general meeting must be given reasonable opportunity to speak on any part
of the business, which concerns him as the auditor.

Right to visit Branches:

• The auditor has the right to access all books and vouchers kept at the head office or at any
branches of the company.
• In case the accounts of branches are audited by a person other than the company’s auditor,
he shall be entitled to visit the branch office.
• The company auditor can get copies of accounts certified by the branch auditor.

Right to get Remuneration:

• The remuneration of the auditor of a company shall be fixed in its general meeting for
auditing the books of accounts of the company.
• The auditor can claim remuneration from the appointing authority. At the time of winding
up of the company, he can claim remuneration as creditor of the company.

Right to Report to Members:

• The auditor has the right and duty to report to the members of the company regarding the
accounts examined by him.
• He is also required to give his opinion about whether the financial statements give a true
and fair picture of the state of affairs of the company.

Right to seek Legal and Technical Advice:

• The auditor has the right to seek expert advice in respect of legal or technical matters at
the expense of the company.

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Right to give Suggestions to the Board:

• The auditor has the right to suggest some modifications in the books of accounts to the
Board. But the auditor cannot make changes in the books of accounts of his own.
• The Board should comply with the suggestions made by the company auditor. If not, the
auditor should report the same to the members.

DUTIES OF AN AUDITOR [SEC.143]

Duty to report to the Members [Sec.143 (3)]:

• The auditor shall make a report to the members of the company on accounts and
financial statements examined by him.
• The report shall state:

▪ Whether he has sought and obtained all necessary information and

explanations.
▪ Whether proper books of accounts have been kept.
▪ Whether company’s Balance Sheet and Profit and Loss account are in
agreement with books of accounts and returns.

Duty to Enquire [Sec.143 (1)]:

It is the duty to inquire into the following matters:

▪ Whether loans and advances made by the company based on security have been
properly secured
▪ Whether loans and advances made by the company have been shown as deposits.
▪ Whether personal expenses have been charged to revenue account.
▪ Whether it is stated in the books and documents of the company that any shares have
been allotted for cash, whether cash has actually been received in respect of such
allotment.

Duty to comply with Auditing Standards [Sec.143 (9)]:

▪ Every auditor shall comply with the auditing standards.

▪ The Central Government shall notify standards in consultation with National Financial
Reporting Authority, (NFRA).
▪ The government shall also notify that auditor’s report shall include a statement on such
matters as notified.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 10
 Duty to report on Frauds [Sec. 143 (12)]:

▪ When an auditor suspects an

offence involving fraud is being
committed by officers or employees
of the company, he shall immediately
report the matter to the Central
Government in such manner as may
be prescribed.

Duty to state the reasons for

qualified or negative report
[Sec.143 (4)]:
• In case of negative or qualified
report, the reasons must be stated in
the report.
Duty to Assist Investigation:

▪ It is the important duty of the

auditor to assist the investigator to
investigate the affairs of the
company.
▪ Further, it is the duty of the
auditor, to provide and preserve the
necessary documents which are in his
custody to the investigator, and

Duty to certify Statutory Report: The auditor has to certify statutory report as correct to the
extent of –

▪ Shares allotted by the company,

▪ Cash received in respect of such shares, and
▪ An abstract of receipts and payments of the company.

Duty to certify Prospectus:

▪ It is the duty of auditor to certify a report showing statement of profits or losses and
assets and liabilities of the company and its subsidiaries.
▪ The report shall also include rates of dividend paid by the company for each of five
financial years preceding the issue of prospectus.

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Duty to report under Voluntary winding up:

▪ When the company proposes for voluntary winding up, directors of the company have
to make a declaration of solvency.
▪ The auditor has to certify a report upon the solvency based on the Profit and Loss
Account and Balance Sheet.

Duty to preserve Working Papers:

▪ It is the duty of an auditor to preserve all books and working papers relating to the
company under audit in his safe custody.

Prepared By: T. Thavaprabhu, Assistant Professor of Commerce, The New College, Chennai - 14 12