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Audit and Appointment of Auditors – Companies Act

Audit and Appointment of Auditor

Audit and Appointment of Auditors – Companies Act

All companies registered in India are required to appoint an Auditor and have its book of accounts audited each year. In this article, we look at all aspects of audit and appointment of auditors under Companies Act in detail.

Appointment of Auditors

After incorporation of a company in the first annual general meeting, an Auditor must be appointed by the Board of Directors. The Auditor will typically hold term till the conclusion of 6th AGM or 5 years. The appointment of an Auditor can also be made for a period of 1 year, renewable at each annual general meeting.

Before the appointment of the Auditor, a written consent along with Certificate must be obtained from the CA, that he/she is eligible for appointment as Auditor of a company and that the proposed appointment is in accordance with the Companies Act.

The appointment of First Auditor of the Company must be completed by the Board of Directors within 30 days of incorporation. In case the Board of Directors fail to appoint an Auditor, the members of the company must be informed. The members will then be required to appoint an Auditor within 90 days at an Extra Ordinary General Meeting. An Auditor so appointed will hold office until the conclusion of 1st Annual General Meeting.

Rotation of Auditors

While re-appointing Auditors for a limited company or specified company, it is important to be aware of the regulations pertaining to rotation of auditors. Individuals as an Auditor cannot be appointed as an Auditor for a term of more than 5 years. A firm of Auditors cannot be appointed as Auditors for more than two terms of 5 years. An Auditor who has completed his/her term of 5 years will also not be eligible for re-appointment for 5 years from completion of his/her term.

While rotating Auditors of a company, the following points must be taken in to account by the Board of Directors:

  • In case of an auditor, the period for which he has held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as the case may be.
  • The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms
  • Break in the term for a continuous period of five years shall be considered as fulfilling the requirement of rotation.
  • 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, such other firm shall also be ineligible to be appointed for a period of five years.

Casual Vacancy of Auditor

Any casual vacancy of the auditor must be filled by the Board of Directors within 30 days. If the casual vacancy is on account of a resignation of an auditor, then the appointment of the auditor must be approved at an Extra-Ordinary General Meeting convened within 3 months of the recommendation of the Board.

Re-appointment of Retiring Auditor

Aa retiring auditor can be re-appointed at an Annual General Meeting if:

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

If at any Annual General Meeting, no auditor is appointed or re-appointed, the existing auditor will continue to be the auditor of the company.