ELIGIBILITY & QUALIFICATIONS OF AUDITOR
Following are eligibility and qualifications of auditor:-
- Only a Chartered Accountant (individual) or a firm where majority of partners practicing in India are Chartered Accountants can be appointed as auditor.
- Where a firm including a limited liability partnership (LLP) is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorized to act and sign on behalf of the firm.
DISQUALIFICATIONS OF AUDITOR
Following persons shall not be eligible for appointment as an auditor of a company:
- A body corporate, except LLP;
- An officer or employee of the company;
- Any partner/employee of officer or employee of company;
- A person who himself or his relative/partner is holding any security or interest in the company, or any company which is its holding, subsidiary, associate;
- A person whose relative is holding security or interest not exceeding Rs.1,00,000 face value in companies. In the event of acquiring any security or interest by a relative, above the threshold limit i.e. Rs.1,00,000 the corrective action to maintain the limits (Rs.1,00,000) shall be taken by the auditor within 60 days of such acquisition or interest;
- A person who or whose relative or partner is indebted to the company or its subsidiary or its holding or associate company or a subsidiary of such holding company, in excess of Rs.5,00,000 shall not be eligible for appointment;
- A person who or whose relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of Rs.1,00,000 shall not be eligible for appointment;
- A person or a firm who, whether directly or indirectly, has “business relationship” with the company, or its subsidiary, or its holding or associate company;
The term “business relationship” shall mean as any transaction entered into for a commercial purpose, except –
(i) commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;
(ii) commercial transactions which are in the ordinary course of business of the company at arm’s length price – like sale of products or services to the auditor, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.
- A person whose relative is a director or is in the employment of the company as a director or key managerial personnel;
- A person who is in full time employment elsewhere;
- Person who is auditor of more than 20 companies;
- A person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction;
- Any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as.
Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned as above after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.
TERM OF AUDITOR
Following are the term of auditor:
- Listed company or all unlisted public companies having paid up share capital of Rs. 10 crore or more,
- all private limited companies having paid up share capital of Rs. 20 crore or more,
- all companies having public borrowings from financial institutions, banks or public deposits of Rs. 50 crores or more
shall not appoint or re-appoint an individual as auditor for more than one term of 5 consecutive Years; and an audit firm as auditor for more than two terms of 5 consecutive years. These auditors (either individual/audit firm) can be re-appointed after cooling off period of 5 years. Three years transition period will be given to comply this requirement.
No audit firm shall be appointed as auditor of the company for a period of five years, if same firm presently having a common partner(s) to the previous audit firm, whose tenure has expired in a company immediately preceding the financial year.
The right of the company to remove the auditor or the right of the auditor to resign from such office of the company is not affected. Thus, an auditor can resign or be removed by the shareholders before completion of his term. The firm shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008.
RE-APPOINTMENT OF RETIRING AUDITOR
At any annual general meeting, a retiring auditor shall be reappointed as auditor of the company except under the following circumstances:
- he is not qualified for re-appointment.
- he has given the company a notice in writing of his unwillingness to be re-appointed.
- a special resolution has been passed at that meeting appointing somebody else instead of him or providing expressly that retiring auditor shall not be re-appointed.
Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.
ROTATION OF AUDITORS
Members of a company can provide for following by passing a resolution:
- In the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or
- The audit shall be conducted by more than one auditor.
ROTATION OF AUDITORS ON EXPIRY OF THEIR TERM
For rotation of auditors on expiry of auditor’s term, same procedure will be followed as required for appointment of auditors.
The procedure is as under:-
- The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent.
- Where a company is required to constitute an Audit Committee, the Board shall consider the recommendation of such committee, and in other cases, the Board shall itself consider the matter of rotation of auditors and make its recommendation for appointment of the next auditor by the members in annual general meeting.
For the purpose of rotation, the period for which the auditor is holding office prior to the commencement of this act will also be counted in calculating the period of 5 years or 10 years as the case may be. The incoming auditor/audit firm shall not be eligible if such auditor/audit firm is associated with the outgoing auditor/audit firm under the same network of audit firms i.e. includes the firms operating/ functioning under the same brand name, trade name or common control, hitherto or in future. 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.
Where a company has appointed two or more persons as joint auditors, the company may follow the rotation of auditors in such a manner that both or all of the joint auditors, as the case may be, do not complete their term in the same year.
CASUAL VACANCY IN THE OFFICE OF AUDITOR
Any casual vacancy in the office of an auditor shall—
- in the case of a company other than a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting;
- in the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within thirty days. It may be noted that in case the Comptroller and Auditor- General of India does not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next thirty days.
REMOVAL OF AUDITOR
The auditor appointed under section 139 may be removed from his office before the expiry of the term only by –
- Obtaining the prior approval of the Central Government by filling an application in form ADT-2 within 30 days of resolution passed by the Board
- The company shall hold the general meeting within sixty days of receipt of approval of the Central Government for passing the special resolution.
- The auditor concerned shall be given a reasonable opportunity of being heard.
RESIGNATION OF AUDITOR
The auditor who has resigned from the company shall file a statement in Form ADT-3 indicating the reasons and other facts as may be relevant with regard to his resignation as follows:
- In case of other than Government Company, the auditor shall within 30 days from the date of resignation, file such statement to the company and the registrar.
- In case of Government Company or government controlled company, auditor shall within 30 days from the resignation, file such statement to the company and the Registrar and also file the statement with the Comptroller and Auditor General of India (CAG).