The Companies Act states the statutory appointment of auditors. An audit has to be conducted in order to ensure the accountability of the firm, the integrity behind the documents, and the transparency of the fiscal regulations of the organization. The detailed procedure for the appointment and selection of the auditor is given in Chapter X of the Act under Sections139 to 148 and further explained by the Companies (Audit and Auditors) Rules, 2014.
Who is an Auditor?
- An auditor means both an individual or corporate body of the chartered accountants appointed by the company to perform independent and objective audits of its financial records.
- The auditor is an individual or a body of accountants, preferably LLP, duly appointed by a company for the planning and execution of an audit in accordance with the provisions of the Companies Act of 2013.
- An auditor provides the working report of the auditor and an opinion on the financial statements.
Purpose for Appointment of Auditor
- The auditor will spare himself trouble of all sorts to appease the shareholders of the company.
- An auditor has to see that the accounts written up by the director get audited, and the directors are informed about the actual financial health of the company.
- To safeguard and maintain the company's financial welfare and soundness, he issues an independent judgment to the owners or shareholders.
Documents Requiredfor Appointment of Auditor
The documents required for appointment of auditor are as follows:
- Form MGT-14 and documentation of the board meeting's resolution.
- A term ADT-1 is filed with the Registrar of Companies (ROC).
Besides the returns stated above, the ROC must be given information on the following:
- The new auditor company's name.
- The new auditor company's address.
- PAN number and email address.
- The company’s specific period of time of appointment.
- Information about the departing auditing company.
- Appointment date of the new auditor company.
- Form ADT-1, digitally signed (together with the company director's signature).
Process Involved in Appointment of Auditor
The appointment of a company auditor involves some elementary procedures per the 2013 Companies Act. The following is the overall process:
Qualifications for the Auditor
- Company auditors may be appointed by only chartered accountants practicing in India. This requirement is set forth in Section 141 of Companies Act 2013 concerning the qualifications and disqualifications for auditors.
Getting a Certificate and Consent
- The business needs to have the auditor's written approval before the appointment. A certificate from the auditor is also necessary. The certificate should attest that the auditor satisfies all requirements outlined in Section 141 and that the appointment, if made, will be made in compliance with the guidelines.
Submitting Form ADT-1
- For the first auditor, no Form ADT-1 is to be filed with the Registrar of Companies (ROC) despite recommendations of the Institute of Chartered Accountants of India.
Board Resolution for Appointment
- The Board of Directors may adopt a resolution designating a business auditor after receiving the required approval and certification from the auditor.
Making the Registrar Aware
- An auditor's appointment would have to be notified to the ROC within 15 days of their appointment to allow such notification to be made at once.
First Auditor's Tenure
- From the end of the meeting when they are appointed until the end of the company's sixth Annual General Meeting (AGM), the first auditor appointed may remain in office.
AGM Ratification
- Due to the amendment to the Company Act, the annual ratification of the appointment of auditors at the AGM is no longer required, so keeping abreast with its latest amendment becomes really important for compliance.
Appointment of First Auditor
- After reviewing the Audit Committee's suggestion, if any, the Board of Directors recommends to the company's members that an auditor be appointed.
- The recommendation is then sent back for further consideration. If the audit committee does not wish to reconsider its recommendations, it will communicate its disagreement, giving reasons, along with alternate recommendations to the members of the company.
- The first auditor of the government companies shall be appointed by the Comptroller and Auditor General of India within a period of sixty days from the date of the registration of the company.
- If they fail to do that within such prescribed time; the BOD shall appoint the auditor within next thirty days.
- An initial auditor shall hold office till the conclusion of the first annual general meeting.
Appointment of Other Auditors
- A general meeting of the company's members is required to nominate auditors, with the exception of the initial auditors.
- The meeting where the appointment was made is considered the first meeting, and the auditor appointed at the general meeting begins working as soon as the meeting ends.
- However, members' approval must be acquired within three months of the Board's recommendation date in cases where registration creates a casual vacancy in the auditor's office.
- An auditor of this type may continue to serve until the next annual general meeting is over. Within 15 days after the auditor's appointment, the company must file ADT-1 for the next auditor.
Power and Duties of Auditor
- An auditor is outside assured who knows the true and fair view of the state or condition of affairs of the company as expressed in statutory financial statements and as free from material misstatements, fraud, or errors in accordance with the general accounting principles.
- Though it is important to note that the keeping of books of accounts, preparation of financial statements, and audit vest in the shareholders of the company at large.
- The company's auditor's independence would be compromised if they prepared the financial statements or kept the book of accounts.
Removal, Resignation and Replacement of an Auditor
- The processes for firing, resigning, and replacing an auditor are outlined in Section 142 of the Companies Act 2013.
- By passing a special resolution and getting the Central Government's consent, the auditor can be fired. If the auditor resigns, they must notify the company and the ROC in writing.
- A new auditor should be appointed within 30 days from the date of the resignation or removal.
Conclusion
The appointment of auditors under the Companies Act is one domain of corporate governance, and the provisions almost guarantee interdependence, accountability, and transparency in the corporate world. This has indeed given confidence in the investors and allowed for the growth of a healthy corporate sector. The Act lays down a fairly robust framework under which all companies would need to work, in addition to the auditors, to resolve the practical implications of the law and maintain its spirit.
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