Importance of Appointing an Auditor

After incorporating a new company, it is mandatory for the Board of Directors to collectively appoint an auditor for the company who is responsible for reviewing and evaluating company’s financial statements for a term of five years.

Who is an Auditor?

An auditor prepares and examines a company’s financial records and makes sure that they comply with the law. Auditor plays a vital role in the stakeholder of the company. They audit the books of accounts of the company and report to the shareholders regarding the affairs of the Company carried out by the directors of the Company. Only a qualified Chartered Accountant within the Chartered Accountants Act, 1949 can be appointed as an auditor.

Rules for Appointing the Auditor

As per section 139(6), an auditor has to be appointed

Within 30 days of incorporating a company otherwise
An Extraordinary General Meeting (EGM) is summoned to appoint an auditor within 90 days

What is the tenure of the Auditor?

An auditor holds the office after termination of first general meeting till the conclusion of its sixth annual general meeting.

What is the status of the Auditor?

An auditor makes sure to check that the company’s financial records and accounts fully comply with the law. An auditor helps the company from adhering to any fraud by checking its counting methods and procedure to comply that all its finances are legally authentic. An audit by a licensed independent auditor lets a company and its creditors know where it stands concerning following standard accounting principles and guidelines.

What are the liabilities given to the Auditor?

Book of accounts: auditors have the liability to access the accounting journals of the company at any given time. There should be complete transparency between the auditor and finances of the company as he evaluates the quality of record and analyses all financial documents.
To obtain information: auditors have the right to ask questions from the directors and other members regarding the finances and can mention the same in their report.
Visit branches: whether it is the head office or the company, the auditor can pay visits to obtain information whenever he likes.
Right to attend the meeting: the auditor can visit all the general meetings and is considered equally important as other members. He also receives the same notices, received by the board members of the company.
Right to be indemnified: the company is responsible for any claim against the auditor incurred by him defending himself against any civil and criminal proceedings by the company if proved that the auditor has acted honestly or the judgment is in his favour.
Right to take legal advice: the auditor can take legal advice or ask for the opinions of the experts.

Who can be appointed as the Auditor?

Any CA holding certificate of practice or is practising can be appointed as an individual auditor of the company.
Any CA holding a certificate or is a partner of a specific firm; then the whole firm is appointed as the auditor

NOTE: in case of his absence anyone from his firm can perform his duties.

Points to be considered while appointing Auditors

Before accepting the post, the auditor should check that all his audits are within the prescribed limits.
If the auditor happens to be a relative of the director, then it mandatory for him to disclose his relationship.
If the prescribed remuneration for the auditor exceeds, then the auditor may be appointed by passing a special resolution.

NOTE: in some cases, government approval is required

A statutory auditor cannot be appointed as an internal auditor

Procedure to be followed for appointing Auditor

Appointment by Board of Directors

Appointment of the 1^st auditor of the company is governed through section 139(6) along with non-obstante clause and is appointed within thirty days of the company’s incorporation. ADT-1 to be filed with ROC along with documents like:

written consent from the auditor
Certificate from the auditor claiming his eligibility
Copy of board resolution

Appointment through a general meeting

In case BOD fails to appoint the auditor within the prescribed time limit, the annual general meeting is called to appoint the auditor within 90 days. Any member of the company can nominate a person for the role of auditor.

Note: 14 days prior, a notice is sent to the members for scheduling the meeting

Appointment of Auditors other than first Auditor

Appointment by shareholders

In every AGM, a shareholder appoints an auditor who holds the office until the conclusion of the subsequent general meeting. The auditor must be informed about the appointment within seven days of appointing. The auditor has to send in writing his acceptance or refusal to the ROC within 30 days.

Appointment by Central Government

If no auditor is appointed by BOD or by a special resolution or the auditor does not give his consent or is declared void then the auditor, then the company needs to apply to the Central Government. Along with the names of the auditors chosen by the company out of which the Central Board appoints one. If the company does not apply in the given time, then it is entitled to pay a fine to the extent of INR 500/-

Re-Appointment of the Auditor

If no special resolution is passed against the removal of the current auditor, then the auditor even after completing his tenure can be reappointed. At the AGM if the auditor willingly approves of his current position in the company and is not disqualified by any member, then he can be reappointed.

Rotation of Auditor

As per section 139(2), companies cannot appoint or re-appoint:-

An individual auditor who has been in company for more than one term of 5 consecutive years
An audit firm as the auditor who has been conducting business for the company for more than two terms of 5 consecutive years

Who is not eligible to be appointed as an Auditor?

As auditing service is considered personal, no corporate body can be appointed as the auditor. It also helps the auditor by not letting his liabilities becoming limited.
Any member who holds voting right in the company or holds any security in the company is not eligible
Individuals who are indebted to the company
A person who has given security or act as a granter to the company about any indebtedness of a third person.
Any employee of the company
If the person is disbarred from the role of the auditor of the company, then he cannot become the auditor of either its subsidiary or holding company.
A person having a direct financial investment in the company
A person has any business relationship or has a relative who is an employee in the company

Importance of Appointing An Auditor