Appointment of Auditor 

Introduction

The appointment of an auditor is a critical process for any company, ensuring that financial statements are accurate, reliable, and comply with statutory requirements. At ComplyQuick, we offer comprehensive services to facilitate the appointment of auditors in compliance with the regulations set forth by the Ministry of Corporate Affairs (MCA). This detailed service description outlines the steps, requirements, and compliance measures associated with the appointment of auditor, reflecting the guidelines and provisions specified under the Companies Act, 2013.

Importance of Auditor Appointment

Auditors play a vital role in providing an independent assessment of a company’s financial health. Their appointment is not merely a statutory requirement but a cornerstone of corporate governance. An auditor’s unbiased evaluation of financial statements helps build trust with stakeholders, including shareholders, creditors, and regulatory authorities. By ensuring transparency and accountability, auditors contribute significantly to the credibility and stability of a business.

Legal Framework and Compliance

The Companies Act, 2013, along with the rules and regulations issued by the MCA, governs the appointment of auditors in India.  The Act stipulates specific procedures and timelines for appointing auditors, ensuring that companies adhere to a structured and transparent process. Key sections of the Act relevant to the appointment of auditors include:

• Section 139: Deals with the appointment and rotation of auditors.
• Section 140: Covers the removal, resignation, and giving of special notice.
• Section 141: Lays down the eligibility, qualifications, and disqualifications of auditors.
• Section 142: Pertains to the remuneration of auditors.
• Section 143: Enumerates the powers and duties of auditors.

Appointment Process

The process of appointing an auditor involves several steps, from identifying a suitable candidate to obtaining approval from the shareholders. Below is a detailed overview of each step involved in this process:

1. Initial Identification and Shortlisting

The board of directors begins the process by identifying and shortlisting potential auditors who meet the eligibility criteria as defined under Section 141 of the Companies Act, 2013. This includes considering the auditor’s qualifications, experience, and reputation.The shortlisted candidates should not have any disqualifications mentioned in the Act, such as holding an interest in the company’s share capital or having a business relationship with the company.

2. Consent and Certificate from Auditor

Once the company shortlists a potential auditor, it must obtain written consent from the auditor, confirming their willingness to be appointed. Additionally, the auditor must provide a certificate stating that the appointment, if made, would comply with the conditions prescribed under the Act and that they meet the criteria in Section 141.

3. Board Meeting and Recommendation

The board of directors convenes a meeting to discuss and approve the appointment of the auditor. During this meeting, the board passes a resolution recommending the appointment of the auditor to the shareholders. The recommendation is based on the auditor’s qualifications, experience, and the assurance that they meet all statutory requirements.

4. Shareholders’ Approval

The shareholders must approve the appointment of the auditor at the Annual General Meeting (AGM) or an Extraordinary General Meeting (EGM). The board presents its recommendation to the shareholders, who then vote on the resolution to appoint the auditor. A simple majority vote is required to pass the resolution.

5. Filing with the Registrar of Companies (RoC)

After the shareholders approve the appointment, the company must file a notice of the auditor’s appointment with the Registrar of Companies (RoC).The company files this using Form ADT-1, which it must submit within 15 days of the AGM or EGM where the auditor was appointed. The form includes details of the auditor’s appointment and a copy of the resolution passed by the shareholders.

Tenure and Rotation of Auditors

The Companies Act, 2013 mandates guidelines for auditor tenure and rotation to maintain independence and objectivity. Key provisions include:

• Tenure: An individual auditor or an audit firm can be appointed for a term of five consecutive years. They may be reappointed for another term of five years, subject to shareholder approval.
• Rotation: The Act mandates the rotation of auditors in listed companies and certain other classes of companies. After serving two terms of five consecutive years, an individual auditor must take a break of five years before being eligible for reappointment in the same company. For audit firms, the break period is the same.

Eligibility, Qualifications, and Disqualifications

Ensuring the eligibility and qualifications of the auditor is crucial for maintaining the integrity of the audit process. The Companies Act, 2013 outlines specific eligibility criteria and disqualifications:

Eligibility and Qualifications

• The auditor must be a chartered accountant as defined under the Chartered Accountants Act, 1949.
• Audit firms are eligible if the majority of partners practicing in India are qualified chartered accountants.

Disqualifications

An individual or firm is disqualified from being appointed as an auditor if they:

• Hold any security or interest in the company or its subsidiaries.
• Are indebted to the company or have provided a guarantee or security in connection with the indebtedness of any third person to the company.
• Have a business relationship with the company, its holding, subsidiary, or associate companies.
• Are relatives of directors or key managerial personnel of the company.
• Have been convicted by a court of an offense involving fraud and ten years have not elapsed since the conviction.

Remuneration of Auditors

The company determines the auditor’s remuneration based on the audit’s scope, the complexity of the financial statements, and the auditor’s expertise. The Companies Act, 2013 states that the company must fix the auditor’s remuneration during a general meeting or in a manner determined in that meeting. This includes:

• Audit Fees: The primary fee for conducting the audit.
• Reimbursement of Expenses: Covering out-of-pocket expenses incurred during the audit process.
• Additional Services: Fees for any other services rendered by the auditor, provided they are not prohibited services under the Act.

Powers and Duties of Auditors

The Companies Act, 2013 bestows certain powers and duties upon auditors to ensure they can effectively perform their roles. These include:

Powers

• Access to Records: The auditor has the right to access the company’s books of account and other records at all times.
• Information and Explanations: The auditor can seek information and explanations from the company’s officers as necessary for the audit.

Duties

• Audit Report: Auditors must prepare an audit report on the company’s financial statements, expressing their opinion on whether these statements present a true and fair view.
• Fraud Reporting: If an auditor suspects fraud involving an amount of Rs. 1 crore or more, they must report the matter to the Central Government.
• Compliance Reporting: Auditors must verify and report on compliance with various statutory requirements, including adherence to accounting standards.

Our expertise in navigating the complexities of the Companies Act, 2013, coupled with our commitment to integrity and transparency, ensures that your company meets all legal obligations while maintaining high standards of financial reporting. Contact us today to learn more about our auditor appointment services and how we can support your business in achieving compliance and fostering stakeholder trust.