APPOINTMENT OF AUDITOR

Section 139 deals with the Appointment of Auditor.

Every company appoints :

a) 1st auditor of the company.
b) Subsequent auditor
c) casual vacancy auditor

Appointment of 1st Auditor

a) Non-government company section 139(6):
Appointment of 1st Auditor of a non-government must be made by
1) BOD within 30 days of incorporation.
2) If BOD fail to appoint then shareholder will have to appoint 1st Auditor within 90
days from the expiry of 30 days in EGM by passing ordinary resolution.
3) if shareholder fail to appoint 1st Auditor then Central Government(RD) will appoint
Auditor within reasonable time.
4) Such Auditor shall be holding office till the conclusion of first AGM
Government Company Section 139(7)

Appointment of 1st Auditor of a government company must be made by

a) Comptroller and Auditor General of India within 60 days.

Notes:- CAG is a constitutional post.

b) If not appointed within 60 days then BOD will appoint within 30 days.
c) If BOD fails to appoint share holder will appoint within 60 days.
d) They will hold office till the conclusion of first AGM.

Appointment of Subsequent Auditor

1) Subsequent Auditor of Non-government Company – Section 139(1)
Appointed in first AGM for next 5 years till the conclusion of 6th AGM and thereafter till the
conclusion of every 6th AGM.

Notes :-Before appointment of Auditor we need to take two things:

a) His willingness to be appointed as Auditor.
b) certificate that he is not disqualified under section 141
intimation about appointment of auditor must be submit to within 15 days from
appointment in form no ADT1
company will also inform ROC of his appointment.

2) Subsequent Auditor of Government company

Must be appointed by CAG within 180 days from the start of final year and will hold office till
conclusion of AGM

ROTATION OF AUDITOR- Section 139(2)

a) Applicable on listed company
b) Applicable on unlisted public company whose paid up share capital minimum 10cr
c) Unlisted private company PUSC- 50cr
d) Any company loan blowing from finance institution/bank public deposit minimum
50cr
The above mentioned company shall appoint auditor (individual) for 1 term i.e. for 5 years and
there will be no reappointment for another 5 years{ cooling period}
If the company has appointed firm as an Auditor then maximum 2 term.

The object of Rotation of Auditor as to ensure independence.

Points to remember
1) Any other firm having common partner is also disqualified.
2) Even if the term is less than 5 years it is still a term
3) Tenure of 1st Auditor and casual vacancy Auditor is not regarded as term.
Rotation of auditor is not compulsory in 2 types of company

CASUAL VACANCY of an Auditor

When the Auditor vacate his office before the normal tenure due to
1) Death
2) Insanity
3) Insolvent
 4) Suspended

Is said that there is casual vacancy.

If there is any casual vacancy of an auditor in Non-government company then BOD must file
the vacancy within 30 days.
If there is resignation the BOD will only recommend and shareholder will appoint within 3
months

In case of Government company

CAG will filled CV within 30 days if CAG failed to do so then BOD will appoint within 30 days.

Section 140 – Removal & Resignation of Auditor

Section 140(1) deals with removal of auditor.

1) BOD should pass BR at BM for removal of auditors.

2) Approval from central government( RD) is also required. Application should be made to
CG in form no ADT 2 within 30 days from passing of BR.
3) On the receipt of approval general meeting should be held within 60 days from the date
of approval and SR IN GM must be passed.
4) Auditor must be given reasonable opportunity of being heard ( audi alteram partem)

Provision relating to removal of auditor In case of IFSC company

1) BR at BM
2) Approval from central government.
Case 1 ;- if within 60 days CG doesn’t give approval then it will be deemed that it has been
approved and within 3 month from the expiry of 60 days pass SR in GM and auditor will be
removed.
Case 2 : if CG reply then within 60 days pass SR in GM and remove.

Section 140 (2) deals with the resignation of auditor

Within 30 days of resignation auditor must inform the reason of resignation in form ADT 3 to
a) Company
b) ROC
c) CAG- in case of government company
If auditor doesn’t submit the form ADT 3 within 30 days then penalty will be imposed that is
50,000 or auditor remuneration whichever is less and 500 per day till the default continue
subject to maximum 5 lakh.
Section 141 – Qualification & Disqualification of Auditor
Who can be Auditor in the company

1) An individual
2) Firm
3) Indian LLP

1) Person is eligible to be appointed as Auditor of a company only if he is a qualified

chartered accountant.
2) Firm can be appointed as auditor only when majority of the partner are practicing in
india and are qualified to become an auditor of the company.
Partners who are CA shall be authorized to sign on behalf of the firm.

3) The following person are not eligible for appointment as an auditor of the company.
a) Body corporate
b) An officer or employee of the company.
c) A person who is a partner of an officer or employee of the company.
d) A person who is the employee of an officer or employee of the company.
e) A person who or his relative or his partner
1) Is holding any security or interest in the company or its holding, subsidiary ,
associate or subsidiary of such holding company.
Provided that relative may hold security in company of the face value not
exceeding 1 lakh rupees. If relative is holding more than that then 6o days are
given to dispose them.
2) Is indebted to CASH and subsidiary of such holding company in excess of 5 lakh
rupees.
3) Has given guarantee or provided any security in connection with indebtedness of
any third person to CASH and subsidiary of such holding company exceeding 1
lakh rupees.
f) A person or firm having business relationship with the CASH & subsidiary of such
holding company.
g) A person whose relative is in employment of the company as a director or KMP.
h) Person is not eligible if he is already an auditor in more than 20 companies.
i) A person who has been convicted by a court for an offence involving fraud and 10
years has not been elapsed.
j) Person giving service under section 144 to company or its holding or subsidiary
cannot be appointed as auditor.
Note- if disqualification is incurred after his appointment then he shall vacate his office as such
vacation will be deemed to be casual vacancy.

Section 142 – Auditor’s Remuneration

Remuneration of auditor of a company shall be fixed in general meeting. Board may fix
remuneration of first auditor appointed by it.

Section 143 – Power and Duties of Auditor

Powers of auditor
1) Right to access books of accounts.
2) Right to obtain information and explanation from officers.
3) Right to receive notices and attend general meetings.
4) Right to report to the members of the company on accounts examined by him.
5) Right to lien.

Auditor’s duty to inquire.

it is the duty of auditor to inquire into following matters
1) Whether Loan and advances made by the company are properly secured and the terms
of loans and advances are prejudicial to the interest of the company or its members.

2) Whether Transaction of the company represented merely by book entries are

prejudicial to the interest of the companies.

3) Whether company not being investment company and banking company, whether the
asset of the company as consist of shares debentures or securities are sold at less price
then that at which they were purchased by the company.

4) Whether loan and advances made by the company shown as deposits.

5) Whether personal expenses has been charged to revenue account

6) If company has issue share in cash whether cash has been actually received or not.
Auditor should make a report to the members in case he finds answer to any of these matters.
Auditor’s duty to report- 143(3)

The auditor report shall also state that

1) Whether information and explanation which was necessary for the conduct of audit has
been received or not. If not received then detail of such and its impact on financial
statement.

2) Whether proper books of accounts are maintained as required by law & have been kept
by the company. Proper detail which is necessary for the purpose of his audit have been
received from the branches not visited by him.

3) Whether profit & loss account & balance sheet are in accordance with the books of
accounts.

4) Whether the financial statement comply with the accounting statement

5) Branch audit report has been received by the auditor of the company from those
branches not audited by company’s auditor.

6) The observation or comment of the auditor on transaction which have adverse effect on
functioning of the company.

7) Whether any director has been disqualified under section 164(2)

8) Any qualification , reservation or adverse remark relating to the maintenance of

accounts.

9) Whether the company has adequate internal financial control related to financial
system

10) Any other matters may be prescribed – rule 11 of companies audit and auditors rules
2014.

a) Whether the company has disclosed the impact of pending litigation on its financial
position in financial statement.
b) Whether company has made provision as required by law for material foreseeable
losses.
c) Whether there has been delay in transferring amount which is due to the investor
education and protection fund
Section 143(5) to (7) - Applicable to Government company.
if any direction is issued by CAG. Then audit report shall include the direction given by CAG,
action taken and the impact on company accounts and financial statement.
The CAG have right to conduct a supplementary audit which can be done by the company’s
auditor or any other person qualified to do. Such audit must be done within 60 days from the
date of receipt of audit report.

Section 143(8)
Branch office audit can be done by

a) Company’s auditor
b) Any other person qualified

In case of foreign branch audit can be done by

a) Company’s auditor
b) By an accountant or competent person appointed in accordance with the law of foreign
country.

Section 143(9) & (10)

Auditor will follow auditing standard. Central government prescribes the auditing standard in
consultation with ICAI and national financing reporting authority.

Section 143(12) to (15)

In case of a fraud involving lesser than 1 crore the auditor shall report the matter to Audit
Committee constituted under section 177

or to the Board within 2 days of his knowledge of the fraud and he shall report the matter
specifying the following:-

(a) Nature of Fraud with description;

(b) Approximate amount involved; and

(c) Parties involved.

 The following details of each of the fraud reported to the Audit Committee or the Board under
sub-rule (3) during the year shall be disclosed in the Board’s Report:-

(a) Nature of Fraud with description;

(b) Approximate Amount involved;

(c) Parties involved, if remedial action not taken; and

(d) Remedial actions taken.

In case of a fraud involving more than 1 crore then auditor within 2 days of knowledge of fraud
shall report to AC if there is no AC then to BOD seeking there reply within 45 days. Once the
reply received within 15 days of reply auditor shall inform CG in form ADT 4 containing

a) Nature of fraud
b) Amount involved
c) Parties involved
d) Replied received from BOD
e) Auditors observation on reply.
In case where no reply was received then auditor will only transfer the detail which he
previously transferred to BOD.

Section 144- Prohibited service

an auditor appointed under this Act shall provide to the company only such other services as
are approved by the Board of Directors or the audit committee, as the case may be, but which
shall not include any of the following services (whether such services are rendered directly or
indirectly to the company or its holding company or subsidiary company, namely:—

(a) accounting and book keeping services;

(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed:
Section 145- Signing of audit reports
Auditor must sign the auditor’s report of the company. Any qualification, observation and
comment on financial transaction which have adverse effect on functioning of company shall be
read in general meeting and shall be open for inspection by any member of the company.

Section 146 – right to attend general meeting

Auditors right to attend general meeting- company shall send notice of every general meeting
to the auditor. Auditor shall attend the general meeting either himself or through his
authorized representative. Such authorized representative shall also be qualified to become an
auditor. Auditor shall have a right to be heard in the matter related to audit which are
discussed in general meeting.

Section 147 – Punishment for Contravention

Company
If section 139-146 not followed then
a) Company will be punishable with fine min 25,000 and maximum 5 lakh
b) Officer in default will be punishable with min 10,000 and maximum 1,00,000 or upto 1
year jail or both.

Auditor
If auditor has done anything intentionally then minimum 50,000 maximum 25 lakh or 8 times of
auditor’s remuneration whichever is lower and up to 1 year imprisonment
If auditor has not done intentionally the minimum 25,000 maximum 5 lakh or 4 times of
auditor’s remuneration whichever is lower.

Section 138- internal Audit

Internal audit is an audit which is done to check whether the day to day affairs of the
companies are working properly or not. internal control is operating effectively or not.
Internal audit is applicable on
a) Listed company
b) Unlisted public company whose
1) Public deposit is min 25 cr
 2) Pusc is min 50 cr
3) Loan, debenture, borrowing exceeds 100 cr
4) Turnover is min 200 cr

c) Private company whose

1) Loan, debenture, borrowing exceeds 100 cr
2) T
urnover is
min 200 cr
Points to
remember

1) Internal audit is done by CA , CS or any other professional.

2) Appointed by BOD.
3) Remuneration is fixed by BOD.

Section 177 – Audit committee

Audit committee consist of at least 3 director of which majority shall be
independent director.The majority of the director including chairperson
shall have the ability to be read and understand the financial statement
Role of audit committee
A) the recommendation for appointment, remuneration and terms of appointment of
auditors of the company
b) review and monitor the auditor’s independence and performance, and
effectiveness of audit process
c) examination of the financial statement and the auditors’ report thereon
d) approval or any subsequent modification of transactions of the company with
related parties
e) scrutiny of inter-corporate loans and investments;
f) valuation of undertakings or assets of the company, wherever it is necessary;
g) evaluation of internal financial controls and risk management systems;
h) Monitoring the end use of funds raised through public offers and related matters.

1) Listed public co
2) Unlisted public company whose
a) Pusc is min 10 cr
b) Loan, debenture, deposit, borrowing is more than 50 cr
c) Turnover min 100 cr