Audit and Auditors [Ch. X]

Appointment of Auditor [Co other than a govt co]

[S.139(6), (1), (7), (5), (8)]

Particulars

a Govt co / a Co owned or controlled, directly or indirectly, by CG/ SG/ Govts / partly by CG & one or more SGs

Other Co

1st Auditor: to hold office till conclusion of 1st AGM
[S.139 (7), (5)]

By CAG, within 60 days of registration

If CAG fails by → BoD, within next 30 days
If BoD also fails → by members at EGM within 60 days

By BoD, within 30 days of incorporation

If BoD fails → by members at EGM, within 90 days

Subsequent Auditor:

[S.139(6), (1)]

for a FY to hold the office till the conclusion of the AGM

By CAG → within 180 days from the commencement of FY

To hold the office from conclusion of 1st AGM till the conclusion of 6th AGM and thereafter till the conclusion of every 6th meeting

By Co at 1st GM

Written consent, and a certificate that the appointment, if made, shall be in accordance with the prescribed conditions and he / it satisfies criteria provided in S. 141, shall be obtained from the auditor before such appointment.

Co shall inform the concerned auditor and RoC within 15 days of the meeting in which the auditor is appointed.

To fill up Casual vacancy

[S.139 (8)]

• By CAG → within 30 days

• If CAG fails → by BoD within next 30 days

• If vacancy created by resignation → by Co at GM convened within 3 months of the recommendation of the BoD

• In other cases → by BoD within 30 days

Rotation of Auditor [S.139(2), R. 5]

Applicability:
- Listed Co, and
- Unlisted Public Co having paid up share capital > ₹ 10 crore
- Private Co having paid up share capital > ₹ 50 crore
- A Co having public borrowings from FIs, banks or public deposits > ₹ 50 crore
Maximum tenure making rotation is compulsory

If auditor is -	he / she / it can be the auditor of a company for
an individual	1 term of 5 consecutive years
A firm / LLP	2 terms of 5 consecutive years i.e. 10 consecutive years

Cooling off period: After the completion of the term/s as mentioned above, such auditor shall not be eligible for re-appointment as auditor in the same Co for 5 years
On expiry of the term of auditors, the new firm which gets appointed shall not have a partner in common with the retiring firm.
Cos existing on or before 1 April 2014 should have complied with this provision, where applicable, by the AGM held in 2017 (i.e. 1st AGM held after 3 years from the date of commencement on 1 April 2014)
Members of a Co may resolve for the rotation of audit partner and his team, joint auditors.

Re-appointment at AGM

[S.139 (9), (10)]

Retiring auditor may be re-appointed at an AGM, if—

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

Where at any AGM, no auditor is appointed or re-appointed → the existing auditor shall continueto be the auditor of the Co

Eligibility, Qualifications and Disqualification of Auditors

[S.141, R.10]

Eligibility, qualification: should be a CA

a firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a Co
In case of multi-disciplinary firm incl. LLP appointed as an auditor of a Co, only partners who are CAs are authorised to act and sign on behalf of the firm.

Ineligibility / disqualification: Following persons are not eligible for appointment as an auditor of a Co:

A body corporate other than LLP

A person who is

an officer or employee of the Co
a partner
in the employment of an officer / employee of the Co
in full time employment elsewhere
a person or a partner of a firm holding appointment as its auditor of > 20 Cos on the date of appointment / reappointment
has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction;
⁹* “directly or indirectly”, renders any proscribed service (S.144) to the Co / its Hold Co / Sub Co

a person who, or his relative or partner

is holding any security of or interest in the Co / its Hold Co / Sub Co/ Asct Co / a subsidiary of Hold Co (i.e. sister concern)
- Exemption: relative holding security / interest NOT > ₹ 1 lac.
- If relative acquires security / interest exceeding threshold →corrective action should be taken by auditor within 60 days to bring it down within threshold limit
is indebted to the Co / its Hold Co / Sub Co/ Asct Co / a subsidiary of Hold Co (i.e. sister concern),
- Exemption: indebted NOT > ₹ 5 lac
has given a guarantee/ provided any security in connection with the indebtedness of any third person to the Co / its Hold Co / Sub Co/ Asct Co / a subsidiary of Hold Co (i.e. sister concern)
- Exemption: amount NOT > ₹ 1 lac

a person or a firm who,

whether ¹⁰* “directly or indirectly” ,has business relationship with the Co / its Hold Co / Sub Co/ Asct Co / a subsidiary of Hold Co (i.e. sister concern) i.e. any transaction entered into for a commercial purpose Exceptions:

professional services permitted to be rendered by an auditor / audit firm under Co Act 2013, CA Act 1949 and the rules / regulations made thereunder;
in the ordinary course of business of the Co at arm’s length price - like sale of products / services to the auditor, as customer, in the ordinary course of business, by Cos engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses

a person whose relative

is a director / is in the employment of the Co as a director or KMP

If an auditor of a Co incurs any of the disqualifications mentioned above after his appointment → he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.

Resignation and Removal of Auditors

[S.132, 133]

Resignation :

The resigning auditor shall, within 30 days from the date of resignation, file a statement indicating the reasons and other facts relevant to his resignation
- with the Co and RoC, and
- with CAG in case of companies u/s 139(5) i.e. Govt Cos

Non-compliance with the above → Auditor shall be punishable with:

— fine NOT < 50,000, but which may extend to → 5 lacs

Removal : removed from his office before the expiry of his term only by a special resolution of the Co , after obtaining previous approval of CG

• Co to receive a special notice for a resolution at AGM

— Appointing as auditor other than a retiring auditor; or

— Providing expressly that the retiring auditor shall not be re-appointed [except: retiring auditor has completed a consecutive tenure of 5/10 years u/s 139(2) i.e. liable for rotation]

The concerned auditor should be given a reasonable opportunity of being heard before such removal.

Requires previous approval of CG

Remuneration of Auditors

[S.142(5)]

Auditor	Remuneration to be fixed by -
1st Auditor	By BoD
In all other cases	By Co in GM / in such manner as may be determined therein

Reporting of Frauds

[S.143(12)]

If an auditor of a Co, in the course of the performance of his duties as auditor, has reason to believethat an offence of fraud is being or has been committed in the Co by its officers or employees, the auditor shall report the matter as under:

an offence of fraud which involves or is expected to involve individually ≥ ₹ 1 crore → the Auditor has to
- report the matter to AC / BoD immediately but not later than 2 days of his knowledge of the fraud seeking their reply within 45 days
- If reply is received from BoD / AC, then within 15 days of receipt thereof, the auditor shall forward to CG:
his report in Form ADT-4 and
the reply or observations of BoD / AC along with his comments thereon
If no reply is received from BoD / AC within 45 days, the auditor shall forward to CG:
his report in Form ADT-4 and
a note containing the details of his report that was earlier forwarded to the BoD / AC for which he has not received any reply or observations
Report shall be on the letter-head of the auditor containing postal address, e-mail address and contact telephone number or mobile number and be signed by the auditor with his seal and shall indicate his Membership Number; Report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation of the same
an offence of fraud which involves or is expected to involve individually < ₹ 1 crore → the Auditor has to
- report the matter to AC / BoD immediately but not later than 2 days of his knowledge of the fraud seeking their reply within 45 days
- If reply is received from BoD / AC, then within 15 days of receipt thereof, the auditor shall forward to CG:
Nature of Fraud with description
Approximate amount involved; and
Parties involved

Reporting of fraud by an auditor of a Co pursuant to S.143(12) in good faith shall not be regarded as contravention of his duty.

Other Services and Ineligible (Proscribed) Services [S.144]

Other services can be provided by Auditor to the Co as approved by BoD / AC, as the case may be
Any of the following services cannot be rendered *directly or indirectly to the Co / its Hold Co / Sub Co, viz:—
- accounting and book keeping services;
- internal audit;
- design and implementation of any financial information system;
- actuarial services;
- investment advisory services;
- investment banking services;
- rendering of outsourced financial services;

— management services; and

— any other kind of services as may be prescribed

* “directly or indirectly” shall include rendering of services by the auditor,—

in case of auditor being an individual	in case of auditor being a firm
himself	itself
through his relative	through any of its partners
any other person connected or associated with such individual	through its parent, subsidiary or associate entity
through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual	through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners

Auditor / audit firm performing any non audit services on or before 1 April 2014 was to comply with the provisions before the closure of the 1st FY after the date of such commencement i.e.
- For non-proscribed services → obtain approval of BoD / AC as the case may be
- For proscribed services → either do not provide proscribed services after 1 year or resign as auditor

Auditors to attend Annual General Meeting (AGM) [S.146]

Auditors:

entitled to receive all notices of, and other communications relating to, any GM, and
shall, unless otherwise exempted by the Co, attend either by himself or through his authorised representative, who shall also be qualified to be an auditor, any GM and
shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.

9 * “directly or indirectly” shall have the meaning assigned to it in the Explanation to S. 144, given at Sr. no. 8 of this table on page 31.

10 * “directly or indirectly” shall have the meaning assigned to it in the Explanation to S. 144, given at Sr. no. 8 of this table on page 31.