Last updated: June 20th, 2024 4:12 PM

Comprehensive Guide to Audit and Appointment of Auditors

All companies registered in India are required to appoint an Auditor and have its book of accounts audited each year. In this article, we look at all aspects of audit and appointment of auditors under the Companies Act in detail.

Definition and Role of an Auditor Under the Companies Act

Under the Companies Act, an auditor is defined as a qualified individual or a firm appointed by the members of a company to conduct an audit of its financial records and statements. The auditor's role is to provide an independent assessment of the financial statements, ensuring they are free from material misstatement and give a true and fair view of the company's financial position and performance. To qualify as an auditor under the Companies Act, the individual or firm must be a Chartered Accountant in practice, as per the Chartered Accountants Act, 1949. If the auditor is firm, the majority of its partners practising in India must be qualified Chartered Accountants. The auditor is responsible for examining the company’s books of account, giving an unbiased opinion on the financial statements to the shareholders, and ensuring compliance with the statutory requirements.

Appointment of Auditors Under the Companies Act

Upon the incorporation of a company, the appointment of the first auditor must be completed by the Board of Directors within 30 days. If the Board fails to proceed with the appointment of company auditor, the company members must do so within 90 days at an Extraordinary General Meeting (EGM). This first auditor holds office until the conclusion of the first Annual General Meeting (AGM). For subsequent appointments, auditors are typically appointed during the first AGM by the Board of Directors and usually hold office until the conclusion of the sixth AGM or for a term of five years, whichever is earlier. Auditor appointments can also be made annually, with each term being renewable at subsequent AGMs.

Purpose of  Appointment of Auditor

The appointment of an auditor in a company serves a crucial role in safeguarding shareholder interests. Legally mandated to scrutinize the accounts maintained by the directors, auditors provide an essential check on corporate governance. Their primary duty is to accurately assess and report on the company’s financial status, offering an independent opinion to the shareholders. This independent assessment helps ensure that the company remains in a secure financial position, thereby protecting the investments and interests of the owners and shareholders.

Required Documents for Auditor Appointment

When a company appoints a new auditor, specific documents and information must be submitted to ensure compliance with regulatory requirements. Below is a detailed list of what needs to be filed:

• Form MGT-14: Must be submitted along with proof of the resolution passed in the board meeting that approved the appointment of the new auditor.
• Form ADT-1: This form needs to be filed with the Registrar of Companies (ROC) to formally record the appointment of the new auditor.

IndiaFilings can assist you in filing Form ADT-1.[shortcode_80] Additional Information Required for ROC Submission for auditor appointment:

• Name of the New Auditor Firm: The complete legal name of the auditing firm being appointed.
• Address of the New Auditor Firm: The physical office address of the firm.
• Email Address and PAN Number: Contact details and Permanent Account Number of the firm.
• Appointment Term: Specify the number of years for which the auditor firm is appointed.
• Details of the Resigning Auditor Firm: Information about the auditor firm that is being replaced.
• Appointment Date: The official date on which the new auditor firm's appointment becomes effective.
• Digitally Signed Form ADT-1: This form should be signed digitally by one of the company directors to authenticate the submission.

Procedure for the Appointment of Auditor

The process of appointment of company auditor involves several key steps that align with the requirements under the Companies Act 2013. Here's a detailed procedure:

Eligibility of the Auditor

Only a practicing Chartered Accountant (CA) can be appointed as the auditor of a company. This is in compliance with the eligibility criteria outlined in Section 141 of the Companies Act 2013, which relates to audit and auditor provisions.

Obtaining Consent and Certificate

Prior to the appointment, the company must obtain the auditor's written consent. In addition, a certificate from the auditor is required. The certificate should state that the appointment, if made, will be in accordance with the prescribed conditions and that the auditor meets all the necessary criteria specified in Section 141.

Filing of Form ADT-1

For the appointment of the first auditor, filing Form ADT-1 with the Registrar of Companies (ROC) is optional. For subsequent company auditor appointments, Form ADT-1 is typically required.

Board Resolution for Appointment

Upon obtaining the necessary consent and certificate from the auditor, the Board of Directors can pass a resolution to appointment of company auditor.

Notification to the Registrar

The appointment of company auditor must be conveyed to the Registrar of Companies within fifteen days of the appointment. This is to ensure that the ROC is informed of the auditor’s appointment promptly.

Tenure of the First Auditor

The first auditor appointed can hold office from the conclusion of the meeting in which they are appointed until the conclusion of the company's sixth Annual General Meeting (AGM).

Ratification at AGM

Although it was previously required, amendments to the Companies Act have removed the need for annual ratification of the auditor’s appointment at every AGM. It is important to keep current with the latest legislative changes to ensure compliance.

Guidelines for Auditor Appointments Across Different Types of Companies

Appointment of the First Auditor after Incorporation

• Non-Government Company: The Board of Directors appoints the first auditor within 30 days of company registration. The members may do so at an Extraordinary General Meeting (EGM) within 90 days if not appointed.
• Listed/Specified Company: Similar to non-government companies, the auditor is appointed by the Board within 30 days of registration, with the possibility of member appointment at an EGM within 90 days.
• Government Company: The Comptroller and Auditor General of India appoints the auditor within 60 days from the registration date. Alternatively, the Board of Directors or the members at an EGM can be appointed within 30 and 60 days of incorporation, respectively.

Auditor Appointment at the First Annual General Meeting (AGM)

• Non-Government and Listed/Specified Companies: Members appoint the auditor who holds office until the conclusion of the 6th AGM. Listed/Specified companies may appoint an auditor for a term of up to 5/10 consecutive years, subject to a 5-year cooling-off period before reappointment.
• Government Company: The Comptroller and Auditor General of India appoints the auditor within 180 days from the start of the fiscal year on April 1st.

Appointment of Subsequent Auditors

• Non-Government and Listed/Specified Companies: Auditors are appointed by the members to hold office until the end of the 6th AGM following their appointment, with terms and conditions similar to those at the first AGM.
• Government Company: Appointments are similarly handled by the Comptroller and Auditor General within 180 days starting from April 1st.

Appointment in the Event of a Casual Vacancy

• Non-Government and Listed/Specified Companies: A casual vacancy due to resignation or other reasons is filled by the members within three months following the Board’s recommendation. The appointed auditor serves until the next AGM.
• Government Company: The Comptroller and Auditor General fill the vacancy within 30 days.

Changing the Auditor: Special Notice Requirements Under the Companies Act

When a company wishes to appoint a new auditor in place of the retiring one or decides not to reappoint the retiring auditor, a special notice must be issued under Section 115 of the Companies Act, 2013. This notice is required to propose such a resolution at the upcoming annual general meeting (AGM).

• Exemption from Special Notice: A special notice is not required if the retiring auditor has completed a consecutive tenure of either five years or ten years, as applicable.
• Written Representation by the Auditor:
  • If the auditor submits a written representation to the company and requests its notification to the members, the company must:
  • Mention the fact of the representation in any notice concerning the resolution.
  • Send a copy of the representation to those members to whom the meeting notice is sent, regardless of whether this happens before or after receiving the representation.
  • The representation must be filed with the Registrar if it is not sent to the members.
• Actions Upon Receiving Special Notice:
  • Upon receiving the special notice for removing the auditor, the company must forward a copy to the retiring auditor.
• Length and Timing of Representation:
  • The auditor’s representation should be reasonably concise.
  • The special notice must be received by the company on time to allow for adequate circulation to members.
• Meeting Requirements:
  • If the representation is not notified to members due to late receipt or a default by the company, the auditor can request that it be read out during the meeting.
• Protection Against Abuse of Rights:
  • If the Tribunal finds that the auditor's rights are being misused, based on an application by the company or an aggrieved individual, it may decide:
  • Not to send a copy of the representation to the members.
  • Not to read the representation at the meeting.

Rotation of Auditors

While re-appointing Auditors for a limited company or specified company, it is important to be aware of the regulations pertaining to the rotation of auditors. Individuals as an Auditor cannot be appointed as an Auditor for a term of more than 5 years. A firm of Auditors cannot be appointed as Auditors for more than two terms of 5 years. An Auditor who has completed his/her term of 5 years will also not be eligible for re-appointment for 5 years from completion of his/her term. While rotating Auditors of a company, the following points must be taken into account by the Board of Directors:

• In the case of an auditor, the period for which he has held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as the case may be.
• The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms
• Break in the term for a continuous period of five years shall be considered as fulfilling the requirement of rotation.
• 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, such other firm shall also be ineligible to be appointed for a period of five years.

Casual Vacancy of Auditor

Any casual vacancy of the auditor must be filled by the Board of Directors within 30 days. If the casual vacancy is on account of the resignation of an auditor, then the appointment of the auditor must be approved at an Extra-Ordinary General Meeting convened within 3 months of the recommendation of the Board.

Re-appointment of Retiring Auditor

A retiring auditor can be re-appointed at an Annual General Meeting if:

• The auditor is not disqualified for re-appointment.
• The auditor has not given the company a notice in writing of his unwillingness to be re-appointed.
• A special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed.

If at any Annual General Meeting, no auditor is appointed or re-appointed, the existing auditor will continue to be the auditor of the company.