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Appointment of Auditor in Public Limited Company

Narendra Kumar

| Updated: Sep 13, 2017 | Category: Compliances

Appointment of Auditor

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. In this article, we will discuss the appointment of an auditor in a public limited company.

What is the role and requirement of the Statutory Auditors in a Public Limited Company?

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.

Appointment of First Auditor in a Public Limited Company

  • As per section 139(6), the first auditor of the company shall be appointed by the Board within 30 days of Incorporation.
  • In case if the Board does not appoint within the time period then, an EGM shall be called within 90 days to appoint the first auditor.
  • Tenure of the Auditors will be until the conclusion of 1st AGM.
  • Procedure for Appointment of First Auditor of the Company.
  • Intimate the proposed auditor(s) regarding the intention of appointing him/it as an auditor and ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.
  • Obtain consent & certificate from auditor.
  • Obtain a recommendation from the audit committee if it’s required to be constituted under section 177.
  • Constitution of Audit Committee in accordance with section 177 of the Act read with Companies (Meetings of Board and its Powers) Rules, 2014 is applicable to every listed company and the following classes of companies shall constitute an Audit Committee of the Board
    1. All public companies with a paid-up capital of ten crore rupees or more;
    2. All public companies having a turnover of one hundred crore rupees or more;
    3. Every public company having outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.
  • Where a company is required to constitute the Audit Committee, the committee shall recommend the name of an individual or a firm as auditor to the Board for consideration and in other cases.
  • Call for a Board meeting
  • Approve the appointment of auditor at the first Board Meeting.
  • Intimate the auditor and file with ROC form ADT-1 within 15 days.

Appointment of Auditor at First AGM

  • As per section 139(1), Every company shall appoint at its 1st annual general meeting an individual or a firm as an auditor of the company who shall hold office from the conclusion of that meeting till the conclusion of its sixth AGM and after that till the conclusion of every sixth meeting.
  • The tenure of 5 consecutive years is subject to ratification by shareholders at every AGM.
  • Remuneration of the auditor of a company as per section 142(1) shall be fixed in its general meeting or in such manner as may be determined therein.
  • Consideration of the appointment

The Board or the Audit Committee (where it is required to be constituted) shall consider the qualifications, experience of the auditor and whether the aforesaid attributes are proportionate with the scope and requirements of the company. Further regard should also be given to professional matters of conduct against the proposed auditor before the ICAI, Court or any competent authority.

  • Recommendation of name

The procedure depends upon whether the audit committee is required to be constituted or not.

  • Constitution of audit committee required

In this case, the committee shall recommend the name of the auditor to the Board which if agrees with the recommendation, will further recommend it to the members. If the Board doesn’t agree on the same, which shall then refer back the recommendation to the committee which may reconsider its recommendation, however, if the committee decides not to do so then the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members.

  • The Audit Committee shall recommend the name of the auditor to the members.
  • Auditor has to give written consent to become the auditor of the company & a certificate stating that appointment is in accordance with conditions prescribed as under;
  • The person so appointed is not disqualified for appointment under the Act and is eligible for appointment and, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder.
  • The proposed appointment is in accordance with the terms provided under the Act.
  • The proposed appointment is in accordance with the limits laid down by or under the authority of the Act.
  • The Certificate should also state that the auditor is eligible and not disqualified for appointment as per section 141.
  • The Board shall inform the auditor related to their appointment and also file a form ADT-1 to ROC within 15 days of the meeting in which the auditor is appointed.

Procedure for appointment is as under:

  • Intimate the proposed auditor(s) regarding the intention of appointing him/it as an auditor and ask for the following information and documents:-
    1. Qualification, experience, and matters of professional conduct pending before ICAI, Court or any other competent authority.
    2. Consent to become an auditor.
    3. Certificate
  • Call Board meeting for the purpose of the following:
    1. Considering information and documents received and considering that the qualification & experience are commensurate with the size & operations of the company.
    2. Recommending the name of the auditor to the members.
    3. Calling on AGM
  • Convene the AGM and get the Ordinary resolution appointing the auditor passed at the meeting.
  • Intimate the Auditor and file with ROC form ADT-1 within 15 days.

Re-Appointment of Auditor

  • Once the tenure 5 consecutive years is completed, the auditor may be re-appointed by complying in accordance with the provisions of section 139(9) which provides that subject to the provisions of sub-section (1) & the rules made thereunder, a retiring auditor may be re-appointed at an annual general meeting, if-
  • He is not disqualified for re-appointment.
  • He has not given the company a notice in writing of his unwillingness to be re-appointed.
  • With respect to the appointment of some other auditor, a special resolution hasn’t been passed at that meeting or providing expressly that he shall not be re-appointed.

Rotation of Auditors

  • As per section 139(2) no listed company or companies as prescribed shall appoint or re-appoint;
  • An individual as an 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.

Other Persons Who Cannot be appointed as Auditor

  • A firm having a common partner to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years.
  • The new auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the resigning auditor or audit firm under the same system of audit firms.
  • 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 not eligible to be appointed for a period of 5 years.

The term of Auditor in a public limited company

Listed company or all unlisted public companies having paid up share capital of ₹ 10 crore or more, all private limited companies having paid up share capital of ₹ 20 crore or more, all companies having public borrowings from financial institutions, banks or public deposits of ₹ 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.

  • This auditor (either individual/audit firm) can be reappointed after the cooling period of 5 years. 3 years transition period will be given to fulfill the requirement.
  • No audit firm shall be appointed as auditor of the company for a period of 5 years if the same firm presently having a common partner(s) to the previous audit firm, whose tenure has expired in a company immediately preceding the FY.
  • 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 by this subsection. Thus, the shareholders and can remove the auditor or from a design of the auditor before completion of his term as discussed above.

Casual Vacancy of the auditors in a Public Limited Company

  • As per section 139(8), any casual vacancy shall be filled by the Board within 30 days. If the vacancy has been arisen due to the resignation of auditor then such kind of appointment shall be approved by the company at a general meeting convened within 3 months of the recommendation of the Board.
  • Instances of casual vacancy can be created because of Death, Resignation, and Disqualification – If an existing auditor gets disqualified under Section 141 then he shall inform the company and it shall be treated as a casual vacancy.
  • If the ratification resolution fails at the AGM of a company then this also equivalent to a casual vacancy.

Procedure for casual vacancy arises due to the resignation of an existing auditor

  • Intimate the proposed auditor(s) regarding the intention of appointing him/it as an auditor and ask whether he/ it is eligible and not disqualified to be appointed as auditor of the company.
  • Obtain consent & certificate from auditor.
  • If the Audit Committee required being constituted under section 177, then obtain its recommendation.
  • Call Board meeting for the purpose of following:-
  1. Appointment of an auditor in casual vacancy.
  2. Considering that the qualification & experience are commensurate with the size & operations of the company.
  3. Recommending the members to approve the appointment.
  4. Calling of EGM(to be held within 3 months from the date of Board meeting).
  5. Intimate the Auditor and file with ROC form ADT-1 within 15 days of EGM.

Resignation of Auditor

The Auditor who has resigned from the company will have to file form ADT-3 within a period of 30 days from the date of resignation, a statement in the prescribed form with the company and ROC indicating the reasons and other facts as may be relevant with regard to his resignation in Form ADT-3.

Roles & Responsibilities of Auditor in a Public Limited Company

  • Make sure that all the auditing standards are maintained and complied.
  • Exercise rights to access to all records in all subsidiaries, if required.
  • Make sure that you have all desired information, and have backups for the same, in certified copies.
  • Ensure you report qualifications, reservations, or adverse remark after auditing the records.
  • Report any fraud or disqualifications in the company records within 30 days of coming across such information and substantial evidence. If not reported, and found later by the authorities, the auditor will be fined up to ₹ 25 lakh for an error in judgment.
  • The auditor should not provide services such as internal audits, bookkeeping, investment advisory or banking services and so on, to the company wherein he holds the position of ‘Auditor’ of annual financial records.

The Act prescribes several such essential responsibilities for auditors and thereby giving enough liability and the role of the auditors to perform as per the rules set by the Act.

For more information please visit my site Enterslice.com or send us an email at info@enterslice.com. You can also call our customer support at +91 9069142028

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Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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