FACULTY OF LAW

CORPORATE LAW- II
ASSIGNMENT ON

APPOINTMENT AND POSITION OF AUDITORS

Submitted to:
PROF. QAZI USMAN

Submitted by:
NIDA KHAN
BA.LL.B. (Hons.) – Regular
Roll no.- 39

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 ACKNOWLEDGEMENT

I would like to express special thanks of gratitude to my respected teacher Dr.

Qazi Mohd. Usman who gave me the opportunity to work on this assignment,
on the topic Position and Appointment of Auditor(s) under Companies Act,
2013.
His guidance and support throughout my work has been very valuable in the
completion of this project, and also helped me gain an insight into this topic.

-Nida Khan

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 TABLE OF CONTENTS

 Introduction
 Who is an auditor
 Need of the auditor
 Qualification and disqualification of the Auditor
 Appointment of an Auditor
 Term of Appointment
 Rotation of audit team of firm
 Auditor of Government Company
 Casual vacancy
 Appointment of Retiring Auditor
 Audit Committee
 Removal of an Auditor
 Legal position of an Auditor
 Conclusion

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 INTRODUCTION
The object of the book of accounts of the company including financial statement (profit and
loss account and balance sheet) is to disclose the relevant information for the protection of
shareholders and investors. Therefore, there should obviously be some authenticity about
these documents. It is for this reason that it is necessary that the account so prepared or
caused to be prepared by the company through its directors must be subject to some check
and scrutiny by some independent authority so that they can be relied upon by those who are
concerned with the company’s affairs and business. This function is performed by Auditors
who are independent professional experts who themselves have no interest in these
accounting records.

In any private limited company, an auditor plays a significant role. Every company is
required to present its audit reports as the financial year approaches. The financial statements
of your company should be thoroughly checked and assessed before submission. If any
anomalies are found in the reports of the company, the auditor is held responsible.

Who is an Auditor?

All the government and non-government organizations have to keep track of their accounts
and audit reports as the financial year approaches. The financial statements of these firms
need to be thoroughly analysed and assessed before submitting them to the authorized
departments. This assessment of financial documents is done by an Auditor. In case of any
discrepancy in the reports, the auditor is held responsible. Thus, the requirement of an auditor
is a must for every organization. 

Need of an Auditor: All the companies registered under the Companies Act, 2013 or any
previous Company law, whether public or private and whether having a share capital or not,
are required to maintain proper books of accounts under the provisions of section 128 of the
Companies Act, 2013. Companies have also to get their Books of accounts audited as
required under section 139 of the Act. Audit is an examination of accounting records
undertaken with a view to establish the correctness or otherwise of the transactions reflected
therein. It involves an intelligent scrutiny of the books of account of a Company with
reference to documents, vouchers and other relevant records to ensure that the entries made
therein give a true picture of business Therefore, there is need to appoint Statutory Auditor.

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Qualification and Disqualification of Auditor(s)- Section 141

Qualification: (Section141) A qualified Chartered Accountant is appointed as Auditor of the

Company. Where a firm 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.

Disqualification: A person will be disqualified from being appointed as an auditor if he is

falling under the following:

(i) An officer or employee of the company;

(ii) If the director is relative to that person or is in the employment of the company’s a
director;
(iii) A person who is a partner, or who is in employment, of an officer or an employee
of a Company.
(iv) A person who has been convicted by a court of an offense involving fraud and a
period of ten years has not elapsed from the date of such conviction;
(v) A person who is in full-time employment elsewhere or a person or a partner of the
firm holding an appointment as its auditor, if such a partner is holding an
appointment as auditor of more than 20 companies as on such date of
appointment.
(vi) Any person whose subsidiary or associate company or any other form of entity, is
engaged as on the date of appointment in consulting and specialized services etc.

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 APPOINTMENT OF AUDITOR
Section 139 of Companies Act 2013, governs the aspects of appointment of auditors. Section
139 of the Companies Act, 2013 deals with all the cases, circumstances with respect to
appointment of auditors and therefore, it is a complete code in itself with respect to
appointment of Auditors. Corresponding section of 139 was 224, 224A, 619 of CA-1956.
Audit is useful only if it is conducted by some independent and qualified authority. The
auditor must possess requisite qualifications and must act in an independent capacity.

Section 139- Every company at its first Annual General Meeting, has to appoint an individual
or a firm, as an auditor. Such appointee can hold office from the conclusion of the first AGM
and afterwards, till the conclusion of every sixth AGM. The manner and procedure of
selection of the 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 ratification
by members, on every annual general meeting. It is necessary that written consent of the
auditor is to be taken before he is appointed as such. A certificate has also to be taken from
him that his appointment is in accordance with the prescribed rules. The certificate has to also
indicate that the auditor satisfies the criteria provided in Section 141(qualifications of
auditors).

The company has to inform the auditor or the firm of the auditor of the fact of appointment.
The notice of such appointment has also to be sent to the Registrar within 15 days of meeting
in the prescribed manner. The Explanation appended to the section says that “appointment” is
to include also reappointment.

TERM OF APPOINTMENT [SECTION-139(2)]: A listed company or any other class or

classes of companies as may be prescribed is not to appoint or reappoint an individual as an
auditor for more than one term of five consecutive years, or a firm of auditors for more than
for more than two terms of five consecutive years. An individual auditor who has completed
his one term of five consecutive years is not to be eligible for reappointment in the same
company for five years from the completion of his term. An audit firm which has a common
partner or partners to another audit firm whose tenure has expired is also under the same
disqualification. The requirement of this sub-section would have to be complied within three
years from the date of the commencement of the Act. The provisions of this sub-section are
not to prejudice the right of the company to remove an auditor or that of the auditor to resign.

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ROTATION OF AUDIT TEAM OF FIRM [SECTION-139(3)]: The members of a
company may resolve to provide that in the audit firm appointed by it, the auditing partner
and his team is to be rotated at such intervals as may be resolved by the members or that the
audit is to be conducted by more than one auditor. The Central Government may by rules
prescribe the manner in which the companies should rotate their auditors, under sub-section
(2). For the purposes of the Chapter on the auditors, the word ‘firm’ is to include “limited
liability partnership” under the Limited Liability Partnership Act, 2008.

The first auditors of a company have to be appointed by the Board of Directors within 30
days of the registration of the company. If it fails to do so, it has to inform the members
accordingly. The members will then, at an Extraordinary General Meeting within 90 days
appoint an auditor, who has to hold the office till conclusion of the first AGM [Sec.139(6)].

AUDITOR OF GOVERNMENT COMPANY [SECTION 139(5)]: In the case of a

Government company, the auditor is to be appointed by the Comptroller and Auditor General
of India. A duly qualified Auditor has to be appointed within 180 days of the commencement
of the financial year. He has to hold the office till the conclusion of the AGM. The first
Auditor is to be appointed by CAG within 60 days from the date of registration of the
company. If CAG fails in this respect, the Board is to appoint the Auditor within next 30 days
and if the board also fails to do so, it has to inform the members of the company who have to
make the appointment within 60 days at an extraordinary general meeting. He will hold the
office till the conclusion of the first AGM.

CASUAL VACANCY [SECTION 139(8)]: Any casual vacancy in the office of an auditor
is to be filled by the Board of Directors within 30 days. If such casual vacancy is caused by
resignation of an auditor, the appointment would have to be approved by the company in
general meeting within 3 months of the recommendation of the Board. He will hold office till
the conclusion of the next AGM. Where the company’s accounts have to be audited by CAG,
the vacancy has to be filled by CAG within thirty days. If he fails to do so, the Board will fill
the vacancy within the next 30 days.

APPOINTMENT OF RETIRING AUDITOR [SECTION 139(9)]: A retiring auditor may

be reappointed at an AGM if he has not become disqualified, he has not informed the
company of his unwillingness and a special resolution has not been passed at the meeting
appointing another auditor or providing expressly that he is not to be reappointed. Where at

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any AGM, no auditor is appointed or reappointed, the existing auditor is to continue to be the
auditor of the company.

AUDIT COMMITTEE [SECTION-139(11)]: where the company is required to constitute

an Audit Committee, under Section 177, all appointments, including filing of a casual
vacancy, are to be made after taking into account the recommendation of such committee.

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 REMOVAL OF AN AUDITOR (SECTION 140)

I) Special resolution: The auditor appointed may be removed from his office before
the expiry of his term only by a special resolution of the company, after obtaining
the previous approval of the Central Government in that behalf in the prescribed
manner.
Before removal, the auditor concerned shall be given a reasonable opportunity to
be heard.
II) Resignation: Sub-section (2) of Section 140 provides that an auditor may resign.
The auditor who wants to resign from the company, shall file within a period of
thirty days from the date of resignation, a statement in the prescribed form with
the company and the Registrar, and in case of Government company with the
Comptroller and Auditor-General of India, indicating the reasons and other facts
as may be relevant with regard to his resignation. In case of non-compliance he
shall be punishable with fine ranging between INR 50,000 to 5 lakh.
III) Tribunal: Sub-section (5) empowers the Tribunal that it can either suo motu or on
an application made to it by the Central Government or by any person concerned,
if it is satisfied that the auditor of a company has, whether directly or indirectly,
acted in a fraudulent manner in relation to the company or its directors or officers,
it may, by order, direct the company to change its auditors.
In the case of such an application by the Central Government for change of
Auditors, the Tribunal can, within 15 days, pass an order that the auditor shall not
function as such and the Central Government will be able to appoint another
auditor.
Such removed auditors shall not be appointed as an auditor of any company for
the period of five years from the date of the Tribunal’s order and they shall also be
liable under Section 447, of the Companies Act, 2013.

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 LEGAL POSITION OF AN AUDITOR
The Companies Act does not contain any comprehensive definition of the term ‘auditor’ in
relation to a company. Section 2(7) of the Companies Act, 2013 does provide for the
definition of ‘auditing standards’ which means auditing of any addendum thereto for
companies or class of companies referred to sub-section (10) of Section 143.The proviso to
sub-section (10) of Section 143 of the Act provides that, until any auditing standards are
notified, any standard or standards of auditing specified by the Institute of Chartered
Accountants of India (ICAI) shall be deemed to be the auditing standards.

However, in Re Transplanters (Holding) Co. Ltd.1, it was held that auditors are not agents of
shareholders and therefore constructive notice of facts coming to their knowledge during
audit cannot be imputed to the shareholders. They are also not agents of the company for the
purpose of acknowledge of debts.

It may be said that the auditor holds a statutory office under the company with which he also
a contractual relationship. His primary function is to report to members on the accounts
which the company is required to send them each year.

Pointing on the importance of audit and auditors, Chakravarti, C.J. of the Calcutta High Court
in Deputy Secretary, Government of India, Ministry of Finance v. S.N. Das Gupta2, inter
alia, observed:

“A joint stock company carries on business with capital furnished by persons who buy its
shares. The owners of the capital, however, not in direct control of the application which is
left to the executive of the company, composed of the directors and superior officers. The
Companies Act, therefore, provides for the employment of an Auditor who is the servant of
the shareholders and whose duty it is to examine the affairs of the company on their behalf, at
the end of the year and report to them what he has found. The examination of an independent
agency such as an Auditor is practically, the only safeguard which the shareholders have
against the enterprise being carried on in an unbusiness like way or their money being
misapplied or misappropriated without them knowing anything about it.”

1
(1985) 1 WLR 822 (826)
2
AIR 1956 Cal. 414 (419)

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 CONCLUSION

“A corporation is an artificial being, invisible, intangible and existing only in contemplation

of law.” “It has neither a mind nor a body of its own.” A corporation has none of these, it
must act through living persons.” This makes it necessary that the company’s business should
be entrusted to some human agents. company. The appointment of Auditor in a public limited
is one of the regulatory requirement which every company has to comply within the
prescribed time period. An auditor is responsible for assessing the validity and consistency of
a company’s financial statements. An auditor provides a report to the Company at the
conclusion of the audit which determines the level of accuracy and clarity that the
organization has accounted for. In accordance with section 139(1) of the Companies Act,
2013 read with Rule 3 of Companies (Audit and Auditors) Rules, 2014 every company shall
at the 1st Annual General Meeting (AGM), appoint an individual or a firm as an auditor who
shall hold office from the conclusion of that meeting till the conclusion of its sixth annual
general meeting (AGM) & after that until the conclusion of every sixth meeting and the
manner and procedure of selection of auditors by the members of the company at such
meeting shall be such as prescribed. The Companies Act, 2013 prescribes the specific
sections for appointment, removal, Qualification and disqualification, powers and duties
relating to the Auditors.

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 BIBLIOGRAPHY

 Company law – by Avtar Singh

 Company law – by Dr. N.V. Paranjape
 J.P. Sharma: Corporate Laws, Ane Books Pvt. Ltd.
 T. Ramappa: Competition Law in India- Policy Issues and Development, Oxford
University Press, New Delhi
 M S Blackman Commentary on the Companies Act (2002)

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