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written by | April 27, 2022

Companies Act, 2013 - Appointment of Auditors

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An audit is an independent examination of the financial statements of the company, which ensures that the financial statements are free from material misstatements. The companies must get their accounts audited whether they are profit-oriented or not, irrespective of their size and legal form. An auditor is a chartered accountant, as per the Chartered Accountant Act, 1949, who gets appointed for conducting the company's audit and who is eligible to review the company's accounting data. The new provisions of the Companies Act, 2013 have changed the rules and procedures for the appointment of a company auditor.

Did You Know?

An audit doesn't give 100% assurance about the correctness of accounts of the company.

Purpose of Appointment of an Auditor

In most large companies, the directors represent themselves as the company's real owner. Due to incorrect or absence of checking, the directors can commit fraud and mismanage the organisation's finances. So members have to ensure an accurate and fair view of the accounts of their company. 

For this purpose, every company must appoint an auditor per the Companies Act 2013 to get their accounts audited. Audit of financial statements of the company protects the interests of the shareholders. The auditors are independent of the organisation with a professional attitude and give reasonable assurance that the company's financial statements are free from material misstatements.

Also Read: Difference Between Company vs Partnership Firm vs LLP

Appointment of an Auditor for Different Kinds of Companies

As per the provisions of the Companies Act, 2013, there are different rules for the appointment of company auditors in different types of companies. The procedure for the appointment of an auditor is –

In the Case of a Non-government Company

The rules for the appointment of an Auditor in the case of a non-government company are in Section 139(1) and 139(8) of the Companies Act, 2013.

• Appointment of subsequent auditor

(a) An individual or firm is appointed as the company's auditor at its first Annual General Board meeting.

(b) This appointed auditor holds the office from the first AGM till the sixth AGM

• Appointment of the first auditor

(a) The duty of the appointment of the first auditor of the non-government company is in the hands of the BOD. It has to appoint the first auditor of the company within 30 days of the starting of the company.

(b) If the board of directors doesn't appoint the first auditor within 30 days, then it becomes the duty of the members of the company to appoint the first auditor within the next 90 days.

• Appointment of auditor to fill casual vacancy – Section 139(8)

Suppose the reason for the casual vacancy of the auditor is anything other than resignation. In that case, the board of directors fill the vacancy by appointing a new auditor within 30 days of such vacancy.

However, suppose the reason for such a casual vacancy is a resignation. In that case, a general meeting is held for the appointment of the auditor within the 3 months of such resignation with a special resolution, and the company shall approve it.

The new individual or firm appointed as the auditor will act as the company's auditor till the next annual general meeting.

In the Case of Listed and Other Specified Class of Companies

The rules for the appointment of an Auditor in the case of listed and other specified companies are present in Section 139(2) and 139(8) of the Companies Act, 2013.

• Appointment of subsequent auditor

(a) Every listed and specified company has to appoint any individual or firm as an auditor in its First Annual General Meeting.

(b) No listed or specified companies shall not appoint or re-appoint an individual for more than 1 term of 5 consecutive years as an auditor

(c) No listed or specified companies shall not appoint or re-appoint any firm for more than 2 terms of 5 consecutive years as an auditor.

Please note that a cooling-off period of 5 years must be there before the appointment of the same individual or firm as the auditor of the company.

• Appointment of the first auditor

(a) The appointment of the first auditor of the non-government company is made by the board of directors within 30 days of the registration of the company. The first auditor of the company holds the office till the conclusion of the first AGM.

(b) If the board of directors fails to appoint the first auditor within 30 days, they may inform the company members who will appoint the auditor within 90 days at the extraordinary general meeting.

Appointment of auditor to fill casual vacancy – Section 139(8)

Suppose the reason for the casual vacancy of the auditor is other than the resignation. In that case, the board of directors fill this kind of casual vacancy by appointing a new auditor within the 30 days of such vacancy.

However, suppose the reason for such a casual vacancy is a resignation by the auditor. In that case, a general meeting needs to be held for the appointment of the auditor within the 3 months of such resignation with a special resolution, and the company shall approve it.

The new individual or firm appointed as the auditor will act as the auditor of the company till the next Annual General Meeting.

Also Read: Articles of Association (AoA) Of Company in India

In the case of a Government Company

The rules for the appointment of an Auditor in the case of a Non-Government company are given in Section 139(5), 139(7), and 139(8) of the Companies Act, 2013.

Appointment of subsequent auditor

(a) The Comptroller and Auditor General of India appoints an auditor for a government company regarding a financial year.

(b) Within 180 days from the beginning of the financial year, the auditor has to be appointed, and he will hold the office till the conclusion of the Annual General Meeting

• Appointment of the first auditor

(a) The appointment of the first auditor of the government company is made by the Comptroller and Auditor General of India within 60 days of the registration of the company. The first auditor of the company holds the office till the conclusion of the first AGM.

(b) If the CAG fails to appoint the first auditor within 60 days, he may inform the BOD of the company that will appoint the auditor within the next 30 days.

(c) If the BOD also fails to appoint the first auditor within the next 30 days, it shall inform the members of the company. They may appoint the first auditor within 60 days at an extraordinary general meeting.

• Appointment of auditor to fill casual vacancy – Section 139(8)

Suppose the reason for the casual vacancy of the auditor is other than the resignation. In that case, the board of directors fill this kind of casual vacancy by appointing a new auditor within the 30 days of such vacancy.

However, suppose the reason for such a casual vacancy is a resignation by the auditor. In that case, a general meeting is held for the appointment of the auditor within the 3 months of such resignation with a special resolution and approved by the company.

The new individual or firm appointed as the auditor will act as the auditor of the company till the next Annual General Meeting.

Appointment of an auditor other than the retiring auditor by a special resolution

• If the retiring auditor of the company has not completed the consecutive 1 or 2 terms of 5 years, as the case may be, then the Annual General Meeting may pass a special note. An auditor other than the retiring auditor is appointed through this special resolution, and it also states that a retiring auditor shall not be re-appointed.

• On receiving such special notice, the company shall send its copy to the retiring auditor

• The retiring auditor shall give the representation in writing to the company and present the misrepresentation to the company members. He must also send a copy to every member of the company who will attend the meeting.

• If the copy of the representation is received late or not delivered to the members due to the company's delay, the auditor can request it be read out at the meeting.

• In case the copy of representation is not sent out, then its copy must be filed with the registrar

• If the tribunal is satisfied that the auditor is abusing the rights, it may decide not to send a copy of the representation for the meeting.

Conclusion

An audit is the detailed examination of the financial statements. The term audit is linked with the accounts of the companies, but there are other kinds of audits too, such as internal audits, external audits, tax audits, forensic audits, public sector audits, etc. The companies must make sure that the auditor appointed for this purpose qualifies all the conditions for being an auditor. He must not be biased towards the company and must do his work independently.
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FAQs

Q: What is the term of an individual or firm as an auditor in a listed company?

Ans:

An individual serves 1 term of 5 years in the case of listed or specific companies, whereas a firm can be an auditor for 2 terms of consecutive 5 years in listed companies.

Q: Who appoints the first auditor for a government company?

Ans:

The Comptroller and Auditor General of India appoint the auditor for the government company.

Q: Who appoints the first auditor for the non-government companies?

Ans:

The Board of Directors has to appoint the first auditor of the non-government company.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.