Auditor’s Appointment, Re-appointment, Removal, Rights & Duties

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Auditors Appointment, Re-appointment,
Removal, Rights Duties

• CA. Atul Seksaria
• Sr. Partner
• S. S. Kothari Mehta Co.
• E mail mis_at_sskmin.com

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Company Audit

• Table of Content
• Basic Provisions relating to authentication,
  circulation, Adoption and filing of annual
  Accounts
• Appointment of Auditor
• Re-Appointment of Auditor
• Ceiling on Number of Audit
• Qualifications and Disqualifications of Auditor
• Removal Of Auditor
• Rights of Auditor
• Duties of Auditor

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Basic Provisions relating to authentication,
circulation, Adoption and filing of annual
Accounts of Company

• Authentication of Annual Accounts -The Balance
  Sheet (BS) and Profit Loss account (P L A/c)
  duly considered, approved and signed should be
  handed over to the Companys Auditors for their
  report thereon Sec 215(3)
• Profit Loss A/c must be annexed to the Balance
  Sheet and the Auditors report must be attached
  thereto Sec 216
• Circulation of Annual accounts- A copy of BS, P
  L A/c, Director Report every other documents
  required to be annexed or attached there to shall
  be sent to every member of the company , not less
  than 21 days before the meeting. Sec 219
• Adoption of Account (including Balance Sheet,
  Profit Loss A/c and directors report thereon)
  in AGM Sec 210
• BS P L A/c shall be filed with the Registrar
  of the Companies together with all documents
  which are required by the Companies to be
  attached/annexed thereto within 30 days of AGM.
  Sec 220

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Appointment of Auditor
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Appointment of Auditor
First Auditor
Subsequent Auditor
Section 224(1)
Section 224(5)
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First Auditor is appointed by BOD
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Sec. 224(5) Appointment Removal of First Auditor

• Appointed by BOD within 1 month of registration
  of the company.
  Sec 224(5)
• If BOD fails to appoint, the company may appoint
  at a General Meeting.
• Holds office until the conclusion of first AGM.
  Thus, he will continue in office until the next
  annual general meeting is actually held and
  concluded.
• Members at any GM may remove such auditor and
  appoint another one in his place, of whose
  nomination special notice has been given to the
  members of the company not less than fourteen
  days before the date of the meeting.
• 
  Proviso to section 224(5)
• Appointment of first auditors through the MOA
  AOA -not a valid appointment.
• The first auditors are under no obligation to
  inform the Registrar.

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Subsequent Auditor in AGM
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S. 224(1)Appt. of Subsequent Auditor

• Appointed at each AGM to hold office until the
  conclusion of next AGM.
  Sec 224(1)
• Intimation to the auditor within 7 days.
• Auditor to file form 23B to ROC within 30 days,
  whether he has accepted or refused to accept the
  appointment. Sec
  224(1A)
• Appointment of auditor is mandatory in the AGM
  for the ensuing year.
• Before any appointment or re-appointment of
  auditor or auditors written certificate shall be
  obtained by the company from the auditor or
  auditors proposed to be so appointed to the
  effect that the appointment or re-appointment, if
  made, will be in accordance with the limits
  specified in sub-section (1B).
• Requirement of a valid peer review certificate
  for appointment of statutory auditors- Clause
  41(1) (h) of Listing Agreement CIR/CFD/DIL/1/2010
  

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What if Company Fails to appoint Auditor in AGM?

• Where at an annual general meeting no auditors
  are appointed or re-appointed, the Central
  Government may appoint a person to fill the
  vacancy.
• Sec 224(3)
• Company to give notice to Central Govt within 7
  days after AGM that no auditor has been
  appointed.
• 
  Sec 224(4)
• Delay in giving such notice does not affect the
  jurisdiction of the Central Govt.
• Powers of Central Govt. - Delegated to Regional
  Director.

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Casual Vacancy in the office of the Auditor
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Section 224(6) Casual Vacancy

• BOD may fill any casual vacancy. Sec 224(6)(a)
• Vacancy caused by resignation - filled by the
  company in GM.
• Such Auditor holds office till conclusion of next
  AGM.
  Sec 224(6)(b)
• Where an auditor refuses to accept appointment or
  re-appointment- Deemed to be no appointment - CG
• If one of the two joint Auditors resigns before
  the completion of the tenure - Casual Vacancy by
  resignation - GM
• If there is a complete change in the constitution
  of the firm of Auditors i.e. all the earlier
  partners retire and new partners joins - Casual
  Vacancy.- By Board

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Appointment by Special Resolution
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Appointment by Special ResolutionSection 224A

• Where not less than 25 of subscribed share
  capital is held by
• -Public Financial Institution/ Govt.Company/
  Central Govt./ State Govt.
• -any institution established under State/
  Provincial Act in
• which State Govt.holds not less than 51 of
  subscribed
• share capital.
• -Nationalised bank/ Insurance company
• DCA through its circular has clarified that the
  above three clauses are not mutually exclusive.
  It would apply to all cases of shareholding
  in any combination.
• DCA-Circular No.14 of 2001 dated
  16-07-2001

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Appointment by Special ResolutionSection 224A

• Material date for 25 holding of subscribed share
  capital - date of AGM at which Special Resolution
  is to be passed and not the date of notice of
  meeting.
• DCA-Circular No.2/761/1/76-CL-V dated
  5-6-1976
• Irrespective of the circumstances in which a
  nationalized bank is holding shares, if the name
  of the bank is entered in the register of members
  of the company, such holding of shares will have
  to be taken into account for the purposes of sec
  224A.
• DCA-Circular No.18/74 dated
  12-12-1974

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Appointment by Special ResolutionSection 224A

• Certified copy of the special resolution so
  passed shall be filed with the Registrar within
  30 days of passing, in Form No. 23.
• If, after notice of the annual general meeting is
  issued in the usual course and before the holding
  of meeting, it happens that the holdings of the
  public financial institutions have reached 25 of
  the total subscribed share capital, then the
  meeting has to be adjourned and after issuing
  notice under this section, necessary special
  resolution is to be passed for appointing the
  auditor(s).
• If Company omits or fails to pass special
  resolution- it shall be deemed that no auditor or
  auditors had been appointed by the company at its
  annual general meeting and Central Govt. will
  appoint auditors to fill the vacancy in term of
  Section 224(3)

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ICAI Recommendations

• It would not be sufficient for the incoming
  Auditor to accept a certificate from the
  management of the Company that provisions of
  Companies Act with respect to Appointment has
  been complied with. If the Company is unwilling
  to allow the incoming Auditor to verify the
  relevant records, Auditors should not accept the
  Audit Assignment
• Incoming Auditor Should verify the following-
• (i) Whether a member of the Company has given
  special notice of the resolution as required u/s
  225(1) at least 14 days before the date of the
  GM. A True copy of the Certificate should be
  obtained
• (ii) Whether this special notice has been sent to
  the members of the company as required u/s 190(2)
  at least 7 days before the date of GM
• (iii) Whether this special notice has been sent
  to the retiring auditors forthwith as u/s 225(2)
• (iv) Whether representation received from the
  retiring Auditors, if any has been sent to the
  members of the company as required u/s 225(3)
• (v) Whether the representation received from the
  retiring Auditor has been considered at the GM
  and the resolution, proposed by the special
  notice, has been properly passed at the GM.
• Incoming Auditors should also communicate with
  the outgoing Auditor in writing before accepting
  the audit assignment.

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Appointment of Auditor of Govt. Companies (sec
619)

• Appointed or re-appointed by the CAG
• Submits a copy of report to CAG who have the
  right to comment on upon, or supplement the audit
  report in such manner as he may think fit.
• Any such comments or supplement to the audit
  report shall be placed before the AGM as audit
  report.

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Lets Summarize

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Branch Auditor- Section 228

• Where a company, whether a public or a
  private limited, has a branch office, its
  accounts should also be audited.
• Auditor may be the Companys Auditor or some
  other person qualified to be appointed as
  Auditor.
• If the branch is situated in a country outside
  India, a person who is duly qualified to act as
  auditor of the branch in accordance with the laws
  of that country.
• Where Branch Auditor is different from Companys
  Auditor, he is appointed by the Company in GM or
  BOD are authorised to appoint him in consultation
  with Companys Auditor.
• Same powers as Companys Auditor.
• Central Government may make rules providing for
  the exemption of any branch office from the
  provisions of this section to the extent
  specified in the rules.

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Central Govt. may either Appoint C.A. or
Companys Auditor
Special Auditor(Sec 233A)
Same powers as Companys Auditor
Makes his report to Central Govt.
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Qualifications of an Auditor Sec 226

• A Chartered Accountant who is a member of ICAI
  and holding certificate of practice and Should
  practice in India (Practicing C.A.)
• A Partnership firm of Practicing C.A.s
• Holder of Certificate under part B States Act,
  1956 Sec 226(2)
• It is to be noted that The Auditor's Certificate
  Rules were published in 1932 whereby government
  authorities sought to regulate the accountancy
  profession.

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Who can not be appointed as Auditor?Section
226(3)

• A Body Corporate
• An Officer or Employee of the Company
• A Person who is a Partner, or in the employment,
  of an Officer or Employee of the Company.
• A Person who is indebted / Guarantor to the
  Company for an amount exceeding Rs.1000.
• A Person holding any security of that Company
  after a period of one year from the date of
  commencement of the Companies Amendment Act 2000.
  (security means instrument carries voting right)
• Disqualified by subsidiary company, then
  disqualified by holding company also and vice
  versa

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Who can not be appointed as Auditor?Section
226(3)

• If an auditor, after his appointment, becomes
  subject to any disqualification mentioned above,
  he shall be deemed to have vacated as such.
• Statutory auditor can not be internal auditor.
• DCA-Circular No.5/771/1/76-CL-Vdated
  8-4-1977

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Ceiling on Number of Audit Section 224(IB)

• Should not be in FULL TIME EMPLOYMENT
• Auditor of max 20 Companies only 10 can be
  Large Companies
• Large Companies - paid up capital of or exceeding
  25 lacs
• In a Firm of Auditors, the limit of 20 Companies
  is per Partner.
• As per Companies(Amendment)Act,2000, Private
  Companies will not be taken into account for
  counting the limit of 20 Companies.
• However, as per ICAI notification, a person can
  carry out the audit of Max 30 companies including
  Private Companies.

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Ceiling on Number of Audit

• Joint audit assignments - to be counted as one
  company.
• Branch Audits not included
• DCA-Circular No.21 of 75 dated 24-9-1975
• Guarantee companies having no share capital
  also excluded
• DCA-Letter No.8/12/(224)/74-CL-V
  dated28-9-1974
• Foreign companies audit - not included
• DCA-Circular No.21 of 75 dated
  24-9-1975

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Removal of Auditor
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Removal of Auditor

• Special notice required from any member
  atleast14 days before the date of the GM -
  Section 225(1)
• Ordinary resolution at AGM required but notice
  would be special
• Days would be exclusive of the day on which the
  notice is served or deemed to be served and the
  day of the meeting.
• Auditor can be removed before expiry of his term
  by Company in GM after previous approval of
  Central Govt (powers delegated to Regional
  Director).
• Section 224(5)
• Prior approval of Central govt. require before
  actually removing an Auditor. Though resolution
  for removal can be passed before.

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Removal After Expiry of the term Section 224(1)

• Subject to the provisions of sub-section (1B) and
  section 224A at any annual general meeting, a
  retiring auditor, by whatsoever authority
  appointed, shall be re-appointed, unless-(a) he
  is not qualified for re-appointment (b) he has
  given the company notice in writing of his
  unwillingness to be re-appointed (c) a
  resolution has been passed at that meeting
  appointing somebody instead of him or providing
  expressly that he shall not be re-appointed
  or(d) where notice has been given of an
  intended resolution to appoint some person or
  persons in the place of a retiring auditor, and
  by reason of the death, incapacity or
  disqualification of that person or of all those
  persons, as the case may be, the resolution
  cannot be proceeded with.

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Rights of an Auditor Sec 227

• To access books of accounts of the
  company.227(1)
• To seek information and explanation from the
  officers of the company
• To visit branches where he is not satisfied with
  the details given by the branch auditor228
• To receive notice of AGM231
• To make any representation which the co. can send
  to all its shareholders or read out at the GM.
• To take advice from experts.
• To receive Branch Audit Report.
• To sign the audit report.
• To receive remuneration.
• To attend AGM.
• To speak at AGM.
• To be indemnified.
• Right of lien.

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Duties of an Auditor

• Report to the shareholders on-
• Whether proper Books of Accounts were kept and
  proper returns received from the Branches not
  visited by him.
• Whether necessary information was received during
  the course of audit .
• Whether BS P L A/c are in agreement with the
  Books of Accounts.
• Whether BS P L A/c are as per Co.s Act.
• Whether the BS P L A/c complied with
  Accounting Standards referred in Sec 211(3C)
• Whether Accounts show True Fair View.
• Report on CARO (if applicable)
• Qualifications in report.
• Directors disqualifications if any.

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Duties of an Auditor

• Duty to inquire into Certain Matters Sec 227(IA)
• Loan and advances made by the company.
• Book entries.
• Sale of investment below cost.
• Loan and Advances shown as deposit
• Personal expenses.
• Shares issued during the year.

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Duties of an Auditor

• Sign submit the Audit Report.
• Certify the Prospectus regarding
• Rate of Dividend paid for the last 5 years
• Profits Losses for the last 5 years
• Assets Liabilities of the company
• Certify Statutory report regarding
• Numbers of shares allotted
• Cash received on such allotment
• Receipt and Payment Account
• Comply with the Directives of the ICAI and that
  of Central Govt.

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• THANK YOU