Auditors Appointment (Part - 1) - Dividends & Audit, Company Law B Com Notes | EduRev

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Appointment of auditors [Section 139]

Section 139 of the Companies Act, 2013 provides for appointment of auditors. This provision came into force from 1st April, 2014. This Section provides:

Appointment of auditor [Section 139 (1)]

(a) Every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor of the company.

(b) The auditor shall hold office from the conclusion of 1st annual general meeting (AGM) till the conclusion of its 6th AGM and thereafter till the conclusion of every sixth meeting and the manner and procedure of selection of auditors by the members of the company at AGM has been prescribed under the Companies (Audit and Auditors) Rules, 2014. According to the Rules:

(c) Manner and Procedure of selection and appointment of auditors [Rule 3 of Companies (Audit and Auditors) Rules, 2014]:

  1. In case of a company that is required to constitute an Audit Committee under Section 177, the committee and in case where such a committee is not required to be constituted, the Board shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company.
  2. Audit Committee or the board, as the case may be, shall have regard to any order or pending proceeding relating to professional matters of conduct against the proposed auditor before the Institute of Chartered Accountants of India or any competent authority or any Court.
  3. It may call for such other information from the proposed auditor as it may deem fit.
  4. If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the appointment of an individual or a firm as auditor to the members in the AGM.
  5. If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the recommendation to the committee for reconsideration citing reasons for such disagreement.
  6. If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its original recommendation, the Board shall record reasons for its disagreement with the committee and send its own recommendation for consideration of the members in the annual general meeting; and if the Board agrees with the recommendations of the Audit Committee, it shall place the matter for consideration by members in the AGM.

(d) The company shall place the matter relating to such appointment for ratification by members at every AGM. According to the Companies (Audit and Auditors) Rules, 2014, the appointment shall be subject to ratification in every annual general meeting till the 6th meeting by way of passing of an ordinary resolution.

If the appointment is not ratified by the members of the company, the Board of Directors shall appoint another individual or firm as its auditor or auditors after following the procedure laid down in this behalf under the Act.

(e) Before the appointment is made, the written consent of the auditor to such appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the conditions as may be prescribed, shall be obtained from the auditor.

(f) Certificate by Auditor: The Companies (Audit and Auditors) Rules, 2014 provides the content of the Certificate. According to this, the auditor appointed shall submit a certificate that:

  1. The individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made there under.
  2. The proposed appointment is as per the term provided under the Act.
  3. The proposed appointment is within the limits laid down by or under the authority of the Act. (4) the list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.

(g) The certificate shall also indicate whether the auditor satisfies the criteria provided in Section 141 [Section 141 provides provisions on eligibility, qualification and disqualification of Auditor which will be discussed later].

(h) Further, the company shall inform the auditor concerned of his or its appointment, and also file a notice (in the Form ADT-1) of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.

Note : It may kindly be noted that appointment includes reappointment also.

Term of Auditor [Section 139 (2)]

(a) Section 139 (2) provides that listed companies and other prescribed class or classes of companies (except one person companies and small companies) shall not appoint or re-appoint:

  1. An individual as auditor for more than one term of five consecutive years, and
  2. An audit firm as auditor for more than two terms of five consecutive years.

(b) Rule 5 of the Companies (Audit and Auditors) Rules, 2014 has prescribed the following classes of companies for the purposes of Section 139 (2): 

  1. All unlisted public companies having paid up share capital of ` 10 crore or more.
  2. All private limited companies having paid up share capital of ` 20 crore or more.
  3. All companies having paid up share capital of below threshold limit mentioned in (1) and (2) above, but having public borrowings from financial institutions, banks or public deposits of ` 50 crores or more.

(c) Cooling off Period: 

  1. An individual auditor who has completed his term (i.e., one term of five consecutive years) shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term.
  2. An audit firm which has completed its term (i.e., two terms of five consecutive years) shall not be eligible for re- appointment as auditor in the same company for five years from the completion of such term.

(d) Further, as on the date of appointment no audit firm having a common partner or partners 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.

(e) Every company, existing on or before the commencement of this Act which is required to comply with provisions of Section 139 (2), shall comply with the requirements of this Sub-Section within three years from the date of commencement of this provision.

(f) It is also provided that nothing contained in this Sub-Section shall prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company. 

Rotation of auditor [Section 139 (3) and (4)]

(a) Members of a company may resolve to provide that:

  1. In the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members, or
  2. Audit shall be conducted by more than one auditor.

(b) The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors.

(c) Manner of rotation of auditors by the companies on expiry of their term as provided under the Companies (Audit and Auditors) Rules, 2014: 

  1. The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent.
  2. Where a company is required to constitute an Audit Committee, the Board shall consider the recommendation of such committee, and in other cases, the Board shall itself consider the matter of rotation of auditors and make its recommendation for appointment of the next auditor by the members in annual general meeting.
  3. For the purpose of the rotation of auditors:

(a) in case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period of five consecutive years or ten consecutive years, as the case may be.

(b) the incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms. The term: same network includes the firms operating or functioning, hitherto or in future, under the same brand name, trade name or common control.

(c) For the purpose of rotation of auditors: 

  1. A break in the term for a continuous period of five years shall be considered as fulfilling the requirement of rotation.
  2. 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 ineligible to be appointed for a period of five years.

First auditors [Section 139 (6)] 

(a) Notwithstanding anything contained in Sub-Section (1), the first auditor of a company, other than a Government Company, shall be appointed by the Board of directors within 30 days of the date of registration of the company and the auditor so appointed shall hold office until the conclusion of the first annual general meeting.

(b) If the Board fails to exercise its powers i.e. appointment of first auditor, it shall inform the members of the company and the company in general meeting may appoint the first auditor within 90 days at an extra ordinary general meeting and such auditor shall hold office till the conclusion of the first annual general meeting.

Filling up casual vacancy [Section 139 (8)]

(a) The Board may fill any casual vacancy in the office of an auditor within 30 days but where such vacancy is caused by the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board.

(b) Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting.

Appointment of auditors in case of Government Company or any other company having controlled by State Government or Central Government [Sections 139 (5), 139 (7) and 139 (8)]

(a) As per Section 139 (5), the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor of companies under this Act in the case of:

  1. A Government company, or
  2. Any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments.

(b) The auditor shall be appointed within a period of 180 days from the commencement of the financial year. The auditor appointed shall hold office till the conclusion of the annual general meeting. 

(1) First auditor [Section 139 (7)]

  • In the case of a Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor General of India within 60 days from the date of registration of the company.
  • In case the Comptroller and Auditor General of India does not appoint first auditor within the said period, the Board of Directors of the company shall appoint such auditor within the next 30 days.
  • Further, in the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the members of the company who shall appoint such auditor within the 60 days at an extraordinary general meeting, who shall hold office till the conclusion of the first annual general meeting.

(2) Casual vacancy [Section 139 (8)]

a. In the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor General of India, casual vacancy of an auditor be filled by the Comptroller and Auditor General of India within 30 days.

b. In case the Comptroller and Auditor-General of India do not fill the vacancy within the said period, the Board of Directors shall fill the vacancy within next 30 days.

(3) Clarification with regard to applicability of Sections 139 (5) and 139 (7) by MCA

Deemed government Company (as per Section 619B of the Companies Act, 1956):

The following companies shall be deemed to be a Government company, if not less than 51% (impliedly, may be more) of the paid up share capital is held by one or more of the following or any combination thereof:

  1. The Central Government and one or more Government companies.
  2. Any State Government or Governments and one or more Government companies.
  3. The Central Government, one or more State Governments and one or more Government companies.
  4. The Central Government and one or more corporations owned or controlled by the Central Government.
  5. The Central Government, one or more State Governments and one or more corporations owned and controlled by the Central Government.
  6. One or more corporations owned or controlled by the Central Government or the State Government.
  7. More than one Government company.

Re-appointment of retiring auditor [Sections 139 (9), (10) and (11)]

(a) At any annual general meeting, a retiring auditor may be re-appointed at an AGM, if:

  1. He is not disqualified for re-appointment;
  2. He has not given the company a notice in writing of his unwillingness to be reappointed, and
  3. A special resolution has not been passed at that meeting appointing some other auditor or providing expressly that he shall not be re-appointed.

(b) Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company.

Audit committee’s recommendation [Section 139 (11)]

Where a company is required to constitute an Audit Committee under Section 177, all appointments, including the filling of a casual vacancy of an auditor under this Section shall be made after taking into account the recommendations of such committee.

Removal, resignation of auditor and giving of special notice (Section 140)

Section 140 of the Companies Act, 2013 came into force partially from 1st April, 2014 which provides for removal, resignation of auditor and giving of special notice. According to this Section:

(a) The auditor appointed under Section 139 may be removed from his office before the expiry of his term only by a special resolution of the company and after obtaining the previous approval of the Central Government by making an application in E-Form ADT-2 and shall be accompanied with the prescribed fees.

(b) The application shall be made to the Central Government within 30 days of the resolution passed by the Board.

(c) The Company shall hold the general meeting within 60 days of receipt of approval of the Central Government for passing the special resolution. [Every special resolution is required to be filed in E-Form MGT-14 as per Section 117(3)(a )].

(d) Giving opportunity of being heard (Audi Alteram Partem) i.e., before taking any action for removal of auditor before the expiry of his term, the auditor concerned shall be given a reasonable opportunity of being heard.

Resignation by Auditor [Sections 140 (2) & (3)]

(a) If the Auditor has resigned from the company, he shall file within a period of 30 days from the date of resignation, a statement in the form ADT-3 with the company and the Registrar.

(b) In case of government companies or company controlled by Central Government or State Government, the auditor shall also file such statement with the Comptroller and Auditor General of India also along with company and the Registrar.

(c) The auditor shall indicate the reasons and other facts as may be relevant with regard to his resignation, in the statement

(d) If the auditor does not comply with aforesaid provision, he or it shall be punishable with fine which shall not be less than ` 50,000 but which may extend to ` 5 Lacs.

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