A company registered under the Companies Act, 2013 has a separate legal entity and is deemed to be different from its owners. The owners of the Companies are called Shareholders/members and they appoint directors of the company who are collectively responsible for the management part.
Do you think Directors, having enormous authority and power to take day to day decisions of Company, perform their task with integrity and responsibilities? The directors may mismanage the finances of the organization in which the public has invested their hard-earned money with trust. So, there is a requirement to conduct a check on activities/decisions performed by the Board of Directors. Here comes the role of Auditor of the Company. To protect the interest of Company and its stakeholders, the Companies Act, 2013 mandates the appointment of a Practicing Chartered Accountant as Statutory Auditor of the Company.
Thus, members appoint auditor to look into the true and fair view of the financial affairs of the company. Auditors are the industry experts who are independent from the management of the Company. Hence, they can express an unbiased opinion on the financial aspects of the Company.
Let us discuss and comprehend the aspects for Appointment of Auditor of the Company
The Requirement and procedure for appointment of Auditor of the Company is prescribed under Section 139 of the Companies Act, 2013 read with The Companies (Audit and Auditors) Rules, 2014.
Appointment of First Auditor:
- Who will appoint and to whom: First Auditor of the Company shall be appointed by the Board of Directors of the Company. First Auditor shall be either a Practicing Chartered Accountant or a firm of Practicing Chartered Accountants in which the maximum partners are practicing members of ICAI
- When to Appoint: The First Auditor of the Company shall be appointed within 30 days from the date of registration of the Company.
- Term of Appointment: Till the Conclusion of first AGM.
Appointment of Subsequent Auditor:
- Who will appoint and to whom: Subsequent Auditor of the Company shall be appointed by the Members of the Company after taking into consideration the recommendation of the Board of Directors, if any. Subsequent Auditor shall be either a Practicing Chartered Accountant or a firm of Practicing Chartered Accountants in which the maximum partners are practicing members of ICAI
- When to Appoint: Subsequent Auditor of the Company shall be appointed in the First AGM of the Company, and thereafter in every 6th AGM from its appointment.
- Term of Appointment: The listed companies and other prescribed class or classes of companies* (except one person companies and small companies) shall not appoint or re-appoint—
- an individual as auditor for more than one term of five consecutive years; and
- an audit firm as auditor for more than two terms of five consecutive years.
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* Rule 5 of the Companies (Audit and Auditors) Rules, 2014 has prescribed the following classes of companies for the purposes of section 139(2):
(1) all unlisted public companies having paid up share capital of rupees 10 crores or more;
(2) all private limited companies having paid up share capital of rupees 50 crore or more;
(3) all companies having paid up share capital of below threshold limit mentioned in (2) and (3) above, but having public borrowings from financial institutions, banks or public deposits of rupees 50 crores or more.
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- An individual auditor who has completed his term (i.e., one term of five consecutive years) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term;
- An audit firm which has completed its term (i.e., two terms of five consecutive years) shall not be eligible for re- appointment as auditor in the same company for five years from the completion of such term.
Documents Required for the Appointment of Auditor
The following documents are required for appointment of Auditor in the Company:
- Board Resolution: Company shall conduct a Board meeting and pass Board Resolutions for recommendation of Auditor, if any and for authorizing a person for filing Form ADT-1 to ROC.
- Notice of AGM: After the Board Resolution has passed, company shall draft a Notice, finalize, and dispatch it for calling for AGM to the members of the Company. Notice shall be given 21 clear days before the date of AGM.
- Resolution passed by Members of the Company: At AGM, Members of the Company shall pass an ordinary resolution for appointment of Auditor in the Company.
- Consent Letter from the auditor of the Company: Before appointing a person as Auditor, Company has to obtain a Consent letter from such person to act as an Auditor of the Company.
- Certificate from the auditor claiming his eligibility: Before the appointment of auditor in a Company, he shall submit a certificate that –
- He is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder;
- the proposed appointment is as per the term provided under the Act;
- the proposed appointment is within the limits laid down by or under the authority of the Act;
- the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
- The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141 of the Companies Act, 2013.
- PAN card of Auditor: Self Attested copy of PAN card is required for filing form ADT-1 to ROC
Procedure for the Appointment of Auditor
Procedure for Appointment of First Auditor:
- Company Incorporated;
- Conduct a Board meeting within 30 days;
- Obtain written Consent & Certification from Auditor;
- Pass Board Resolution for Appointment of Auditor;
- Grant Letter of Appointment to Auditor;
- File Form ADT-1 (Optional)
What if Board of Directors fails to appoint First Auditor of the Company within 30 days from the date of Registration of the Company?
Where the Board of directors fails to appoint the First Auditor of the Company within 30 days from the date of incorporation of the Company, the BOD shall inform the same to the members of the company, who shall within 90 days from the date of incorporation appoint the first auditor of the Company at an extraordinary general meeting.
Note: Submission of ADT-1 to ROC is not mandatory in case of Appointment of First Auditor
Procedure for Appointment of Subsequent Auditor:
Step 1: Recommendation by Competent Authority** - Audit Committee after taken into consideration the qualifications and experience of the proposed Auditor with the requirement of the Company, recommend the name of such proposed Auditor to Board of Directors for consideration.
** Competent Authority shall be Audit Committee. However, where there is no Audit Committee in the Company, Board of Director shall act as Competent Authority.
Step 2: Recommendation by Board of Directors - After considering the recommendations of Audit Committee, Board of Directors recommends the name of such proposed Auditor to the members of the Company.
Step 3: Obtain written Consent and a certificate from Auditor - Before appointment of Auditor, company has to obtain a consent from Auditor in writing to act as Auditor of such Company. Also, a certificate shall be obtained from the auditor that the appointment, if made, shall be accordance with the condition as may be prescribed.
Step 4: Conduct AGM - The company shall conduct an AGM and pass a resolution for appointment of Auditor at AGM.
Step 5: Letter of Appointment - Company has to provide a notice/letter to appointed Auditor to inform him about his appointment.
Step 6: File ADT-1 - The company has to submit Form ADT-1 along with required documents to ROC within 15 days from the appointment of Auditor.
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