KEY ANSWER TEST 2

26/05/2023

1. State the procedure for the following, explaining the relevant provisions
of the Companies Act, 2013. Appointment of First Auditor, when the
Board of Directors did not appoint the First Auditor within one month
from the date of registration of the company.

Procedure for appointment of First Auditor:

Sec. 139(6) of the Companies Act, 2013 deals with the provisions relating to
appointment of first auditor. Accordingly:
(i) First auditor of a company shall be appointed by the Board of Directors
within 30 days of the registration of the company.
(ii) If the Board of Directors fails to appoint such auditor, it shall inform the
members of the company, who shall within 90 days at an EGM appoint
such auditor and such auditor shall hold office till the conclusion of the
first AGM.
From the above provisions of law if the Board of Directors fails to appoint the
first auditors within the stipulated 30 days, it shall take the following steps:
a) Inform the members of the Company.
b) Immediately take steps to convene an EGM not later than 90 days.
c) Members shall at that EGM meeting appoint the first auditors of the
company.
d) First auditors so appointed shall hold office upto the conclusion of the first
AGM of the company.
2. Shiv Limited is incorporated on 3.10.2022. The company I having a paid-
up share capital of Rs. 5 crores. Following are key shareholders of the
company:
Name of the Party holding shares Amount (in Rs.)
Central Government 1.50
Punjab Government 1.23
Others 2.27
The first auditor of the company has been appointed by the Board of
Directors on 31.10.2021. The members of the company have objected to
such an appointment by the Board of Directors. According to the
members, only the members can appoint the first auditor. Advise the
company on the validity of such appointment as per the provisions of
the Companies Act, 2013. Also, advice whether the contention of
members of the company is correct.
 Appointment of First Auditor of Government company:
a) As per Sec. 2(45) of the Companies Act, 2013, "Government company"
means any company in which not less than 51% of the paid-up share
capital is held by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or
more State Governments, and includes a company which is a subsidiary
company of such a Government company.
b) As per Sec. 139(7) of the Companies Act, 2013, in the case of a Government
company, the first auditor shall be appointed by the C&AG of India within
60 days from the date of registration of the company and in case the C&AG
does not appoint such auditor within the said period, the Board of
Directors of the company shall appoint such auditor within the next 30
days; and in the case of failure of the Board to appoint such auditor within
the next 30 days, it shall inform the members of the company who shall
appoint such auditor within next 60 days at an EGM, who shall hold office
till the conclusion of the first annual general meeting.
c) In the given question, Shiv Limited is a government company as 54.6%
[(1.5+1.23)/5= 54.6%] of the share capital is held by Central government
and State Government (Punjab Government).
d) Thus, the first auditor of Shiv Limited shall be appointed by the C&AG of
India within 60 days from the date of registration. Thus, the appointment
of first auditor by Board of Directors on 31.10.2021 is not valid. The Board
of Directors can appoint the first auditor in case the C&AG does not
appoint such auditor within the said period of period 60 days. The Board
of Directors of the company shall appoint such auditor within the next 30
days. In the case of failure of the Board to appoint such auditor within the
next 30 days, it shall inform the members of the company who shall
appoint such auditor within the 60 days at an EGM, who shall hold office
till the conclusion of the first annual general meeting.
Conclusion: Contention of members that its only the members who can
appoint the first auditor of the Government company, is not correct.
3. Maya Limited is a public company. Maharashtra Bank (a nationalized
bank) is a shareholder holding 18% of the subscribed capital of the
company. Explain how the following shall be appointed: (i) First auditor
(ii) Subsequent auditor.

Appointment of Auditor:
As per Sec. 2(45) of the Companies Act, 2013, ‘Government company’ means
any company in which not less than 51% of the paid-up share capital is held
by the Central Government, or by any State Government or Governments, or
 partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of
such a Government company. In the given case, the total shareholding of the
Maharashtra Bank in Maya Limited, is just 18% of the subscribed capital of
the company. Hence, Maya Limited is not a government company. Hence, the
provisions applicable to non-government companies in relation to the
appointment of auditors shall apply.

The auditor shall be appointed as follows:

(i) First Auditor: As per Sec. 139(6) of the Companies Act, 2013, the first
auditor of a company, other than a Government company, shall be
appointed by the Board of Directors within 30 days from the date of
registration of the company and in the case of failure of the Board to
appoint such auditor, it shall inform the members of the company, who
shall within 90 days at an EGM appoint such auditor and such auditor
shall hold office till the conclusion of the first AGM.
(ii) Subsequent Auditor: Company shall, at the first AGM, appoint an
individual or a firm as an auditor who shall hold office from the conclusion
of that meeting till the conclusion of its 6th AGM and thereafter till the
conclusion of every 6th AGM.
Before such appointment of auditor is made, the written consent of the
auditor to such appointment, and a certificate from him or firm of auditors
that the appointment, if made, shall be obtained from the auditor: Further,
the company shall inform the auditor concerned of his or its appointment,
and also file a notice of such appointment with the Registrar within 15
days of the meeting in which the auditor is appointed.
4. Mr. Yash is a partner and in charge of PQR firm. The firm is appointed
as an auditor firm of A.K. Company Limited (Listed company). Mr. Yash
retires from PQR firm and after some time Gupta & Gupta firm as a
partner, on 20.05.22. In the general meeting of the company held on
15.06.22, the company appointed Gupta & Gupta firm as next auditor of
the company. Do you think the company has adhered to the provision
of appointing Gupta & Gupta as auditor for the company under the
Company Act, 2013? Explain?

Appointment of Auditor:
a) As per Sec. 139(2) of the Companies Act, 2013, no listed company or a
company belonging to such class or classes of companies as may be
prescribed, shall appoint or reappoint:
 i. an individual as auditor for more than one term of five consecutive
years; and
ii. An audit firm as auditor for more than two terms of five consecutive
years.
b) An individual auditor who has completed his term shall not be eligible for
reappointment as auditor in the same company for five years from the
completion of his term. An audit firm which has completed its two terms
shall not be eligible for reappointment as auditor in the same company for
five years from the completion of such terms.
c) It is also provided that as on the date of appointment n0 audit firm having
a common partner or partners to the other audit firm, whose tenure has
expired in a company immediately preceding the financial year, shall be
appointed as auditor of the same company for a period of five years.
d) As per Rule 6 of the Companies (Audit and Auditors) Rules, 2014. 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 of chartered accountants, such other firm shall also be ineligible to
be appointed for a period of five years.
e) In the given case, Mr Yash has retired from PQR firm and joined Gupta &
Gupta firm. Mr Yash was a partner in PQR firm, where he certifies the
financial statement of the company, and retires from the said firm and
joins Gupta & Gupta firm.
Conclusion: Gupta & Gupta firm will also be ineligible, to be appointed as
auditor firm for a period of 5 years.
5. Referring the provisions of the Companies Act, 2013, regarding
appointment of auditors, answer the following:
(i) XYZ Ltd. is a newly established company owned by the Central
Government. State the provisions regarding appointment of its first
auditor.
(ii) Mr Kamal is the Auditor of XYZ Limited, which is a government
company. He has resigned on 31st December, 2022 while the financial
year of the company ends on 31st March, 2023. Explain the
provisions regarding filling of such vacancy. Would your answer differ
if it is other than a government company?

(i) Appointment of first auditor of government company:

a) Sec. 139(7) of the Companies Act, 2013 lays down that in the case of a
Government company, the first auditor shall be appointed by the C&AG
of India within 60 days of registration of the company.
 b) In case the C&AG of India does not appoint such auditor within the
said period, the BOD of the company shall appoint such auditor within
the next 30 days.
c) In the case of failure of the Board to appoint such auditor within the
next 30 days, it shall inform the members of the company who shall
appoint such auditor within the 60 days at an EGM.

(ii) Filling of Casual Vacancy:

a) As per Sec. 139(8) of the Companies Act, 2013, any casual vacancy in
the office of an auditor of a government company be filled by the C&AG
of India within 30 days. But if the C&AG does not fill the vacancy within
the said period the Board of Directors shall fill the vacancy within next
30 days.
b) In case of a non-government company, any casual vacancy in the office
of an auditor may be filled by Board of Directors within 30 days.
However, if casual vacancy has been created by the resignation of the
auditor, such appointment shall also be approved by the company at a
general meeting convened within three months of the recommendation
of the board.
c) The auditor so appointed shall hold office till the conclusion of the next
annual general meeting.
6. Examine the validity 0f the following with reference to the provisions of
the companies Act 2013: Mr. Suresh, a Chartered Accountant, was
appointed by the Board of Directors of AB Limited as the First Auditor
The company in General Meeting removed Mr Suresh without seeking
the approval of the Central Government and appointed Mr Gupta as
Auditor in his place?

Removal of Statutory Auditor before the expiry of his term:

a) Sec. 140(1) of the Companies Act, 2013 prescribes procedure for removal
of auditors. Accordingly, the auditor appointed u/s 139 may be removed
from his office before the expiry of his term only by a special resolution of
the company, after obtaining the previous approval of the C.G. in that
behalf in the prescribed manner.
b) It is also provided that before taking any action u/s 140(1), the auditor
concerned shall be given a reasonable opportunity being heard.
Conclusion: Removal of Mr. Suresh without seeking the approval of the
Central Government and appointed Mr. Gupta as Auditor in his place is not
valid.
7. Mr. Honest, an auditor of MM Company Ltd. has colluded with the
company for a fraud The Central Government has applied to Tribunal
about the said fraud by Mr. Honest State the provisions of the Companies
Act, 2013 regarding the steps that can be taken by Tribunal when it finds
that the auditor of a company has acted in a fraudulent manner.

Steps to be taken by Tribunal when auditor acts in a fraudulent manner:

Sec. 140(5) of the Companies Act, 2013 deals with the Tribunal Power in case
an auditor acts in a fraudulent manner. Accordingly:
(i) The Tribunal either suo moto or on an application made to it by the C.G.
or by any person concerned, if it is satisfied that the auditor of a company
has, whether directly or indirectly, acted in a fraudulent manner or abetted
or colluded in any fraud by, or in relation to, the company or its directors
or officers, it may, by order, direct the company to change its auditors.
(ii) If the application is made by the Central Government and the Tribunal is
satisfied that any change of the auditor is required, it shall within 15 days
of receipt of such application, make an order that he shall not function as
an auditor and the Central Government may appoint another auditor in
his place.