Compliances

Appointment of Auditor: Procedure for Appointing First, Internal, and Cost Auditor

Appointment of Auditors in a company is a necessary compliance for all types of companies. An auditor is a person appointed by a company to execute audits. Only a person who is certified by a regulatory body of accounting and auditing or have relevant qualifications can only be appointed as an auditor.

What is the need of the Appointment of Auditor?

As per Section 139 of the Companies Act, 2013 it is mandatory for every company after incorporation to appoint an auditor. The auditor is appointed at the first Annual General Meeting and it can either be an individual or a firm.

Term of an Auditor

Typically, an auditor holds term until the conclusion of the company’s 6^th Annual General Meeting or for a period of five years.

Who is a First Auditor?

The auditor which is appointed just after incorporation of a company is called a First Auditor. Such auditor audits or examines the reliability of the first financial statements of the entity or firm.

Procedure for the Appointment of First Auditor

First, the company must ensure that the First Auditor is appointed within 30 days from the date of the company’s incorporation other than Government Companies. Also, such an auditor must be appointed by the company’s Board of Directors.

• However, if there is an exception and the Board does not appoint such auditor, it must inform the members within 90 days and appoint the auditor at an Extra-Ordinary General Meeting
• For appointing an auditor, the company should intimate the proposed auditor regarding their intention to appoint them as an auditor.
• Then the company needs to prepare a notice of conducting the board meeting along with the draft resolutions that need to be passed in the meeting. Furthermore, the company requires sending a notice of board meeting to all the directors before 7 days or as per the format prescribed in Section 173(3) of the Companies Act and Clause I of the Secretarial Standard 1.
• Then the company convenes a board meeting for passing the following resolutions;
• Considering the documents and information provided by the proposed auditor
• Appointing the First Auditor of the company
• Then the company drafts the minutes of the meeting and circulates it to all the directors within 15 days from the date of conclusion of the meeting for getting their comments if any.  This can be sent by hand, speed post, registered post, courier, e-mail or any other recognized electronic means.
• All the directors need to provide their comments on the draft within 7 days from the date of circulation of the draft.
• Then the company needs to include all the comments in the draft and finalize the minutes.
• Then the company is responsible for mentioning the finalized minutes in the Minutes Book of the company within 30 days after the conclusion of the board meeting.
• Also, the minutes must be signed and dated by the Chairman of that meeting or by the Chairman of the next meeting. 

Documents Required for Appointment of First Auditor

• Original and certified copy of members’ resolution
• Notice of board meeting
• Auditor’s consent letter
• Auditor’s no-disqualification certificate
• Intimation letter to the proposed auditor

Information Required for Appointment of First Auditor

• Category of auditor
• PAN of auditor or auditor’s firm
• Auditor or auditor’s firm Name
• Auditor or auditor’s firm membership number
• Address
• Date of appointment of auditor
• Date of board’s resolution
• Name of directors, who signed the board meeting notice
• Period of appointment

Who is an Internal Auditor?

An Internal Auditor is a professional appointed by the company to access the efficiency of a company’s internal control structure.  In other words, the internal Auditor provides an independent and objective evaluation of financial and operational business activities, including the corporate governance of a firm.

They ensure that the company complies with all the rules and regulations and compels the company to follow the procedures and functions as efficiently as possible.

Procedure for Appointment of Internal Auditor

First, ensure that your company falls in any of these categories;

• Listed company
• An Un- Listed company
  • Having paid-up capital => Rs.50 crore
  • Turnover of => Rs. 200 crore
  • Outstanding loans/borrowings from banks/public financial institutions > Rs. 100 crore
  • Outstanding deposits > Rs. 25 crore
• Private limited company
  • Having turnover => Rs.200 crore
  • Outstanding loans/borrowings from banks/public financial institutions > Rs. 100 crore

Also, ensure if your company falls under the above-specified categories, it should comply with the requirements of Section 138, Companies {Accounts} Rules, 2014.

• Then send the intimation to the proposed auditor
• Then prepare a notice for conducting the board meeting along with the draft resolutions that need to be passed in the meeting. Furthermore, the company requires sending a notice of board meeting to all the directors before 7 days or as per the format prescribed in Section 173(3) of the Companies Act and Clause I of the Secretarial Standard 1.
• Then convene a board meeting to pass the resolution regarding the appointment of the internal auditor.
• Then the company drafts the minutes of the meeting and circulates it to all the directors within 15 days from the date of conclusion of the meeting for getting their comments if any.  This can be sent by hand, speed post, registered post, courier, e-mail or any other recognized electronic means.
• All the directors need to provide their comments on the draft within 7 days from the date of circulation of the draft.
• Then the company needs to include all the comments in the draft and finalize the minutes.
• Then the company is responsible for mentioning the finalized minutes in the Minutes Book of the company within 30 days after the conclusion of the board meeting.
• Also, the minutes must be signed and dated by the Chairman of that meeting or by the Chairman in the next meeting. 
• There is a need to file the e-form MGT-14 with the Registrar of Companies within 30 days after passing the board resolution for public companies. However, private limited companies are exempted from filing the e-form MGT-14 if they commit any default related to its financial statements and annual returns.

Documents Required for Appointing the Internal Auditor

• Original and certified copy of members’ resolution regarding the appointment of the internal auditor
• Internal auditor’s consent letter
• Letter of engagement provided by the company
• Internal auditor’s profile

Information Required for Appointing the Internal Auditor

• Date of dispatch of the notice for passing the board resolution
• Board resolution’s passing date
• Name of the person authorized to sign the form

Who is a Cost Auditor?

The Cost Auditor aims at inspecting and ensuring that the company does not have any undue wastage or losses. Such inspection brings out the correct and realistic cost of production and processing.

Procedure for the Appointment of Cost Auditor

The procedure for appointment of a Cost Auditor is as follows;

• The category of company should be as per Rule 3 of Companies {Cost Records and Audit} Rules, 2014.
• The company should not be one
  • Where revenue from exports, in foreign exchange is more than 75% of total revenue,
  • Which is operating from a special economic zone
  • Which generates for captive consumption through captive generation plants
  • Is a foreign company and is listed in Sr. No. 33 of Rule 3(B) of Companies {Cost Records and Audit} Rules, 2014
  • Or is classified as small or micro as per the turnover criteria under Section 7(a) of MSMED Act, 2006
• Obtain a written consent from the proposed cost auditor.
• Also, ensure that the audit committee recommends the name of the cost auditor to the board if the committee is constituted under section 177
• Then prepare a notice for conducting the board meeting along with the draft resolutions that need to be passed in the meeting. Furthermore, the company requires sending a notice of board meeting to all the directors before 7 days or as per the format prescribed in Section 173(3) of the Companies Act and Clause I of the Secretarial Standard 1.
• Then hold a board meeting to pass the resolution regarding appointment of the cost auditor.
• Then the company drafts the minutes of the meeting and circulates it to all the directors within 15 days from the date of the conclusion of the meeting for getting their comments if any.  This can be sent by hand, speed post, registered post, courier, e-mail or any other recognized electronic means.
• All the directors need to provide their comments on the draft within 7 days from the date of circulation of the draft.
• Then the company needs to include all the comments in the draft and finalize the minutes.
• Then the company is responsible for mentioning the finalized minutes in the Minutes Book of the company within 30 days after the conclusion of the board meeting.
• Also, the minutes must be signed and dated by the Chairman of that meeting or by the Chairman of the next meeting. 
• Send information to the cost auditor regarding his appointment.
• File e-form CRA-2, within 30 days from the date of board meeting or 180 days of the commencement of the financial year, whichever is earlier.

Recommended Post:Roles and Responsibilities of Statutory Auditor.

Documents Required for the Appointment of Cost Auditor

• Original and certified copy of members’ resolution regarding the appointment of the cost auditor
• Cost auditor’s consent letter
• A copy of cost auditor’s report
• Cost auditor’s appointment letter
• Profile of the cost accountant appointed as the cost auditor

Information Required for the Appointment of Cost Auditor

• The nature of appointment of Cost auditor
• Products or services to which the auditor relates
• Cost auditor’s firm’s Email ID
• Service request number of the E-form CRA-2
• The date on which the copy of the cost audit report was made

Who is a Secretarial Auditor?

Subsequent to appointment of first auditor whenever an auditor is appointed is known as a subsequent auditor. Subsequent auditors are professionals appointed in the Annual General Meeting for the audit of the financial statements from the following years.

Procedure for the Appointment of Secretarial Auditor

The company must fall under the following categories to be able to appoint a Secretarial auditor;

• Listed company
• A public limited company having paid-up capital Rs. 50 crore or more
• A public limited company having a turnover of Rs. 250 crore or more
• Private company which is a subsidiary of a public company

Ensure that the audit committee, if the committee is constituted under section 177 recommends the name of the Secretarial auditor to the board.

• Then prepare a notice for conducting the board meeting along with the draft resolutions that need to be passed in the meeting. Furthermore, the company requires sending a notice of board meeting to all the directors before 7 days or as per the format prescribed in Section 173(3) of the Companies Act and Clause I of the Secretarial Standard 1.
• Then hold a board meeting to pass the resolution regarding appointment of the Secretarial auditor.
• Then the company drafts the minutes of the meeting and circulate it to all the directors within 15 days from the date of conclusion of the meeting for getting their comments if any.  This can be sent by hand, speed post, registered post, courier, e-mail or any other recognized electronic means.
• All the directors need to provide their comments on the draft within 7 days from the date of circulation of the draft.
• Then the company needs to include all the comments in the draft and finalize the minutes.
• Then the company is responsible for mentioning the finalized minutes in the Minutes Book of the company within 30 days after conclusion of the board meeting.
• Also, the minutes must be signed and dated by the Chairman of that meeting or by the Chairman of the next meeting. 
• Intimate the Secretarial auditor regarding his appointment as an auditor.
• File the e-form MGT-14 with the Registrar of Companies within 30 days of passing of the board meeting’s resolutions.

Documents Required for the Appointment of Secretarial Auditor

• Original and certified copy of members’ resolution regarding the appointment of the Secretarial auditor
• Consent letter by the Secretarial Auditor
• Letter of engagement provided by the company
• Copy of agreement letter with the Secretarial auditor if any
• Copy of Secretarial audit report in Form MR-3

Information Required for the Appointment of Secretarial Auditor

• Date of the passing of board resolutions
• Date of dispatch of notice for passing the board resolutions
• Details of the agreement are any
• Name of the person authorized to sign the form

Takeaway

Appointing an Auditor in a company is an important part of running a business. You can appoint an auditor as per the applicability and the type of company you own. The basic function of an auditor is to ensure the company’s compliance with all the prescribed rules and regulations specified for each type of company or business by the government.

Read Also:An Internal Auditor: Why are they important in a Company?.