A company is an entity formed for carrying out any lawful purpose and for the same, incorporated under the Companies Act, 2013. It is essential for every company to work efficiently and transparently in the interest of public and its stakeholders. In order to monitor the affairs of a company and to keep a check on its activities, an auditor is appointed.
An audit is an objective examination and evaluation of the financial statements of an organization to make sure that the records are a fair and accurate representation of the transactions they claim to represent.[i]
The term “Auditor” refers to a person who is responsible for the audit works of the company. In other words, the primary role of an Auditor is to carefully and critically inspect the accounts of the company. In order to successfully qualify to be appointed as an Auditor in a company, a person has to mandatorily fulfill certain conditions prescribed under the Chartered Accountants Act, 1949 and the person should also possess a valid certificate of practice as-
Every company at its very first Annual General Meeting (AGM) , carries the responsibility to appoint a person or an independent body such as a firm as an auditor. The person or the firm, as the case may be, will be eligible to hold office from the conclusion of the first AGM to the conclusion of its sixth AGM and afterwards till the conclusion of every sixth AGM.[ii] The manner and procedure of selection of auditors by the members of the company has to be according to what may be prescribed. The company has to place the matter relating to the appointment for acceptance or ratification by the members of the company on every annual general meeting. It is necessary that written consent of the said auditor needs to be taken before he is appointed as an auditor.
A certificate has also to be taken from him that his appointment is in accordance with the prescribed rules. The certificate also needs to indicate as to whether the auditor satisfies the criteria provided in Section 141 which mentions about the qualifications and disqualifications of auditors. The company has to inform the individual or the firm, as the case may be, of the said appointment. The notice of such appointment also needs to be sent to the Registrar of Companies within 15 days of the meeting in the prescribed manner.
Under the Companies act, 1956 the disqualifications of the auditors were dealt under section 226 having the heading “Qualifications and Disqualifications of auditors.”Under the Companies act, 2013, the provisions are incorporated under the section 141 of the act with the heading “Eligibility, Qualifications and Disqualifications of auditors.”
The 2013act lays down under section 141 (1) that a person is eligible for appointment as an auditor of a company only if he is a chartered accountant and in cases of firms, majority of partners are qualified for appointment whereas in the 1956 act, all the partners of the firm were to be qualified for appointment, for the appointment of firm as an auditor. In the 2013 act, an exception has been carved out that in cases of Limited liability Partnership, only the partners who are chartered accountants can act on behalf of the firm under section 141 (2).
Sub section (3) of Section 141 lays down the criteria which disqualifies a person from acting as an auditor of a company. It has total 9 clauses as compared to its older version which had only 5 clauses. The disqualifications can be categorized as absolute disqualification of Auditors, disqualification of Auditor pertaining to relationship and disqualification of Auditor pertaining to conflict of interest.
Illustration: Mr. X is appointed as an auditor for 20 th firm on 31/3/2018. Hence, he can’t be appointed as an auditor of a new firm on 1/4/2018 unless heceases to be an auditor of any of the existing firms.
Illustration: Mr. X, auditor of company “ABC Ltd” is convicted of an offence of fraud on 1/01/2010. He cannot be appointed as an auditor till 1/01/2020.
Illustration: Mr. A provides investment banking services to a company “XYZ Ltd” “XYZ Ltd” is a holding company of “ABC Ltd.” Therefore, Mr. A cannot be appointed as an auditor of “ABC Ltd” The original 2013 act didn’t bar Mr. A from being appointed as an auditor in this case. It only barred Mr. A is any of his related entity is rendering such services to the company, here “ABC Ltd.”
Illustration: Under Section 141 (3) (b), if Mr. A is an employee or officer of company B, then he can’t be an auditor and under Section 141 (3) (c), if Mr. C is either a partner or employee of Mr. A, he is again barred by virtue of indirect connection with the company.
The term “relative” is defined under section 2(77) of the companies act and it includes
1) Members of HUF and
2) Husband and Wife. Further, Companies (Specification of Definition Details) Rules 2014 have given another list to include relatives that if they are related to each other as either father, step father, mother, step mother, son, step son, son’s wife, daughter, daughter’s husband, Brother, Step Brother, Sister or Step Sister.[iv]
A) is holding any security or interest in the company or the subsidiary or the holding or its associate company. But holding of such security or interest is exempted to the extent of Rs. 1 Lakh.
B) is indebted to the company or its subsidiary or its holding or associate Company or subsidiary of such holding company above Rs. 5 Lakh.
C) Has provided the guarantee or any security in the connection with the indebtedness of any third person to the company or its subsidiary or its holding or associate company or subsidiary of such holding company above Rs. 1 Lakh.
The prescribed amounts have been inserted by the Companies (Audit and Auditors) Rules, 2014.[v]
Under the 1956 act, disqualification was with respect to holding security, being indebted or giving guarantee for indebtedness but only with respect to the company. But the 2013 act has brought all the entities namely subsidiary, holding and associate companies under this because dealing with any of the above entities may lead to a conflict of interest with the concerned company also. This is a new disqualification added in the companies act, 2013. It is important to note that the limits enshrined here seem to be very low and disqualifies auditors in toto. But an interest of Rs. 6 Lakh in a Rs. 10,000 Crore company does not seem to be much. But in the difficulty of laying down formula for a wide range of companies, it has been suggested that the present position of financial limits is workable.[vi]
The term “business relationship” has been defined under the Companies (Audit and Auditors) Rules, 2014.[vii] It says that a business relationship includes any transaction entered into for a commercial purpose except
1. Transactions at arm’s length price in the ordinary course of business.
2. in the nature of professional services that an auditor is capable of rendering.
Illustration: If a firm “XYZ” shares a commercial relationship with company “ABC ltd.” and buys goods from it at a price of Rs. 1000 which are generally sold in the market at the price of Rs. 2000 then this transaction doesn’t amount to transactions at arm’s length price in ordinary course and hence, the firm “XYZ” cannot be appointed as an auditor for the company “ABC ltd.”
We see that the grounds for disqualification of auditors are very elaborate and cover all such instances wherein the duties of the auditor are likely to be compromised owing to the nature of relation he shares with the company or financial interest in the company or possibility of any conflict of interest. This is rightly necessary in the era of corporate governance.
Yes. But subject to the limits given under the Companies (Audit and Auditors) Rules, 2014 which is Rs. 1 Lakh.
A debtor is eligible to be appointed as an auditor if he is indebted to the extent of only Rs. 5 Lakh as given in the Companies (Audit and Auditors) Rules, 2014. This is because of conflict of interest that may take place and he may end up compromising his auditing standards.
No. Only an individual, partnership firm or a limited liability partnership can be appointed as an auditor.
Yes. This is only after passing of 10 years from the date of conviction.
A person can simultaneously work as an auditor for not more than 20 companies at a time.
[References]
[ii] Section 139, The Companies Act 2013
[iii]The Companies (Amendment) Act, 2017, S. 42.
[v]Ministry of Corporate Affairs [2014] G.S.R. 246(E) Rule 10 (1) (2) (3)
[vi]Ministry of Corporate Affairs, Report Of The Expert Committee On Company Law: Disqualification of Auditors (para 10.7).
[vii]Ministry of Corporate Affairs (Companies (Audit and Auditors) Rules) [2014] G.S.R. 246(E) Rule 10 (4).
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