Chapter 1
Appointment of an auditor
Qualification of an Auditor
[section 226 (1) & (2)]
Following persons are qualified to act as Auditor of a company :
•
A CA within the meaning of CA Act 1949, Holding COP
(certificate of practice).
•
A Firm where off all the partners are practicing in India, any
partner may act as Auditor on behalf of firm.
•
A holder of Certificate of Part B State.
Disqualification of an Auditor
[section 226 (3) & (4)]
Following persons are not eligible for appointment as an Auditor :
•
Body Corporate
•
An Officer or Employee of a Company.
•
A person who is in partnership or who is in employment of an
officer on employee of the company.
•
A person who is indebted to the company for an amount
exceeding Rs. 1000/•
A person who has given Guarantee of any person to the
company for an amount exceeding Rs. 1000/•
A person holding Security of the company carrying Voting
Power.
Section 226 (4)
Considering Section 226(4) if Mr. X is disqualified in any of the
above companies i.e. whether A,B,C or D he will be automatically
disqualified in all the remaining companies.
Section 226 (5)
If the Auditor of a company after being appointed as Auditor of the
company is subject to any of the provisions contained under
section 226 (3) & (4) he shall deemed to have vacade his office.
Appointment of First Auditor
[section 224(5)]
•
Manner of Appointment :The first auditor of the company shall be appointed by BOD within 1
month of registration of company. If BOD fails to appoint the first
auditor within said period of 1 month, the first auditor may be
appointed by company in General meeting by passing OR.
•
Tenure of first Auditor :The first auditor will hold office untill the conclusion of first AGM.
•
Removal of first Auditor before expiry of tenure :The first auditor can be remover by the company before expiry of
tenure by passing OR in General meeting. No special notice is
required for removal. However the company should follow the
procedures prescribed under section 225(2)&(3).
Note:- 1. Where some other person is to be appointed as auditor by
members of company, members should give 14 days
notice to the company.
2. The first auditor so removed has right of representation
under section 225(3).
•
Notice of Appointment :No notice of appointment is required.
Appointment of Subsequent Auditor
[section 224(1)]
•
Manner of Appointment :At Every AGM auditor/auditors
company by passing OR.
•
Tenure of first Auditor :The auditor so appointed holds the office from conclusion of AGM in
which he is appointed till the conclusion on next AGM.
•
Removal of first Auditor before expiry of tenure :After obtaining previous approval of CG, the auditor can be removed
by company by passing OR. No special Notice is required for removal.
However the company should follow the procedure prescribed under
section 225(2)&(3).
•
Notice of Appointment :After appointing the auditor, the company should intimate the auditor
of his appointment within 7 days of appointment. In term, auditor
shall give notice to ROC in form no. 23B within 30 days, as to whether
he has accepted the appointment or not.
is/are
appointed/reappointed by
Appointment by CG
•
[section 224(3)]
Where at any AGM no auditor is appointed or reappointed by the
company, the company shall give notice of the facts to CG within 7
days. On receipt of notice auditor shall be appointed by CG.
NOTE:- Since power has been delegated to regional director notice
shall be given to regional director.
DEFAULT:- If default is made by the company in giving notice, than
company & every officer who is in default shall be punishable with fine
which may extent to Rs. 5000/NOTE:- Circumstances when no auditor is appointed.
1. Where appointment is void ab initio.
2. Where SR is required but OR is passed.
Appointment in Casual Vacancy
[section 224(6)]
•
Meaning of casual vacancy:The term casual vacancy has not been defined in companies act.
However it means vacancy caused by an auditor ceasing to act as such
after accepting valid appointment. Casual vacancy may arise due to
death, resignation, disqualification etc.
•
Manner of appointment:Generally vacancy in the office of auditor is filled by BOD. However in
case of resignation, casual vacancy is filled by shareholders in general
meeting by passing OR.
•
Tenure of auditor appointed in casual vacancy:The auditor appointed in casual vacancy will hold office till the
conclusion of next AGM.
NOTE:- Generally casual vacancy will not Arise due to Fault of company.
Appointment by SR
[section 224A]
Auditor shall be appointed or reappointed by passing SR, if not less than
25% subscribed share capital is held singly or jointly by following
institutions.
1.
PFI:- Public Financial Institution.
2.
CG:- Central Government.
3.
SG:- State Government.
4.
GC:- A Government Company.
5.
NB:- A National Bank.
6.
IC:- A Insurance Company carrying on general insurance business.
7.
FI:- Any Financial or other Institution stabilized under provisional or
state act & in which state government holds not less than 51% of
subscribed share capital.
NOTE:- As per section 224A subscribed share capital means equity as well
as preference share capital.
Remuneration of an Auditor
[section 224(8)]
•
•
•
•
General Rule :Authority appointing the auditor fixes the remuneration of the auditor.
If Auditor is appointed by Shareholders :Remuneration shall be fixed by shareholders in general meeting
alternatively they may determine he manner in which remuneration
shall be fixed.
If Auditor is appointed by BOD :Remuneration shall be determined by BOD.
Extra Remuneration :1. Extra remuneration can be paid to the auditor for other services
rendered such as consultancy fee, tax audit fee, etc.
2. No sanction from shareholders would be required for making such
extra payments.
3. However profit & loss account shall disclose following information
in respect of amounts paid to the auditor.
a) As auditor
b) As advisor or in any other capacity in respect of company law
matters, taxation matters or management services.
c) In any other matter [clause 4B, part II, schedule VI]
Ceiling on No. of Audits
[section 224(1B)]
Section 224(1B) places a ceiling on number of audits, that a CA can
conduct. This ceiling is referred as specified numbers.
Specified No. is 20
Out of 20 an Auditor
Can accept Maximum
Of 10 companies having
Paid up share capital of
Rs. 25 Lacks & more.
Remaining 10 companies
should have paid up
share capital less than
25 Lacks.
Audits excluded
P
G
I
An audit of private company
Audit of guarantee company having no share capital
Internal audit
C
Cooperative society trust & cooperation that do not fall within the
purview of companies act 1956
F Audit of foreign companies
S Special audit & investigation
T Tax audit under income tax act 1961
B Branch audit
NOTE:- ICAI has issued notification dated 08/05/2001, As per this
notification a chartered accountant can accept maximum of 30 audit
including audit of private companies.
Special Audit
•
•
[section 233A]
Circumstances in which special audit is conducted :Special audit is ordered by CG if any of the following circumstances
Exist in the company.
1. Affairs of the company are not being conducted in accordance
with sound business principles & prudent commercial practices.
2. Affairs of the company are being conducted in a manner likely to
cause serious injury to the interest of trade, business or industry
to which company pertains.
3. Financial position of the company is such that there is a danger of
its solvency.
Can shareholders apply to CG :If shareholders are of the opinion that any of the above circumstances
exist in the company, they can make an application to CG.
The CG is of the opinion that circumstances do exist in the company,
it may order special audit.
However such an application is not binding on the CG even if
application is made by all shareholders.
•
•
•
•
Period of special audit :Special audit is conducted for such period as may be specified in the
notice.
Opportunity of being heard :When special audit is ordered no opportunity of being heard is given to
the company.
Appointment of special auditor :Special auditor is appointed by CG. He may be company auditor or any
other CA whether in practice or not.
Special auditor’s report :The special auditor shall submit its report to CG on receipt of report,
CG may take action as it may considered necessary in accordance with
provisions of companies act or any other law for the time being in
force.
•
•
However if no action is taken within 4 month from date of receipt of
report, CG may direct the company to circulate the report to
shareholders, or circulate its extract or to read the report before the
company in the next general meeting.
The expenses of special audit & remuneration of Special auditor shall
be determined by CG & such determination will be final.
If company makes default in payment. The same shall be recovered
from company as arrear of land revenue.
Cost Audit
•
[section 233B]
When required :Cost audit is required to be conducted if all the following reasons are
satisfied. i.e. company is engaged in 2P & 2M.
2P
Production
•
2M
Processing
Manufacturing
Mining
The company belongs to such class of company which are required by
CG to maintain cost records.
The CG has invade an order directing company to conduct cost audit.
Qualification of cost auditor :The cost auditor shall be cost accountant within the meaning of cost &
works accountant act 1959.
•
•
However a CA possessing prescribed qualification may also be
appointed as cost auditor if CG is of the opinion that sufficient Nos. of
cost account are not available and notification of this regard to be
issued.
Presently no such notification is in force.
Disqualification of cost auditor :The following persons are not qualified to act as cost auditor.
1. A person disqualifies under section 226 (3)&(4).
2. An internal auditor of company.
3. The statutory auditor of the company.
4. A person who is employee of any of the partners of CA firm
which is appointed as statutory auditor of the company.
Appointment of cost auditor :Cost auditor is appointed by BOD with the previous approval of CG.
•
1.
2.
3.
4.
Cost audit report :On receipt of an order of CG to conduct cost audit, company shall
provide all necessary facilities & assistant to the cost auditor so as to
conduct cost audit. The company should submit cost records to the
cost auditor within 30 days of the close of financial year. If records
are not so submitted, the cost auditor should intimate the fact to CG.
The cost auditor should submit the report to CG within 180 days of
the close of financial year. The report shall be submitted in Form no.
23C . One copy of report should also be forwarded to the company.
The company shall, within 30 days from the date of receipt of report,
furnish to CG with full information & explanations & every reservation
contained in report.
On receipt of report, CG may take such action as it may consider
necessary in accordance with provisions of companies act or any
other law for the time being in force.
•
Penalties :Non compliance of section 233B shall result into penalty of up to Rs.
50000, further every officer of the company who is in default shall be
punishable with impressments up to 3 years or fine up to Rs. 50000 or
both.