AUDITOR: APPOINTMENT, ROLE, AND REMOVAL UNDER COMPANIES ACT 2013

Kalpana Borjha| Kalinga University| 10th June 2020 

Introduction

Auditor is an authorized person who conducts a formal examination of accounts or financial situation of any individual or organization. An audit is necessary to maintain a company or organization’s internal control as it provides credibility to the financial statements.

Who is Auditor?

An auditor is a person authorized to access the financial operations, that is, examining books of accounts, documents, and vouchers, verifying the accuracy of financial records, reviewing them, and checking whether they follow generally accepted accounting principles (GAAP) or not. They play a major role in protecting the business firm frauds and also boost the operational efficiency of the organization.

Types of Auditor

• Internal Auditors: Internal auditors are employed by government agencies, publicly traded companies, and non-profit organizations. According to the Institute of Internal Auditors (IIA), “Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operation.”
• External Auditors: External auditors or statutory auditors, are generally independent auditors, are paid by companies being audited for their engagement for audit purposes.
• Government Auditors: Government auditors maintain the financial records of government agencies and regulate the subjects related to taxations. They ensure proper collection of revenue and its utilization following laws and regulations given by the government.
• Forensic Auditors: Forensic Auditors are specialized auditors in the field of crime and are generally hired by law enforcement organizations.

Appointment of Auditors

• Appointment of the first auditor of a Company under Companies Act, 2013: According to Section-139(6) of the Companies Act, the first auditor, for non-government companies, is to be appointed by the Board of Directors of the Company within 30 days of incorporation. If the Board fails to do so, then an EGM should be called within 90 days for the appointment of the first auditor. For Government Companies, the first auditor is appointed by Comptroller and Audit-General of India within 60 days from the date of the Company’s registration. If the Audit- General fails to do so then the Company’s Board of Directors shall appoint the auditor within the next 30 days. Even if the Board fails to appoint such an auditor, then it should appoint a member of the company to appoint the first auditor. The first auditor holds the office until the end of the 1^st Annual General Meeting.
• Appointment of Subsequent Auditor of a Company under Companies Act, 2013: During the 1^st Annual General Meeting, every company should appoint an individual or a group of individuals as an auditor who holds the office till the end of the 6^th Annual General Meeting.

Role of an Auditor

Section-143 of the Companies Act, 2013 states about the powers and duties of the auditors.

• Section-143 (1) – Duty to inquire: An auditor is required to inquire in following subject matters:-
• Loans and advances made by the company (deposits)
• Security of such loans and advances
• Terms and conditions of loans and advances made for the company’s interest.
• Section 143 (2) – Duty to Report: The auditor shall report to the company:-
• Accounts examined by him which are required to be laid in the company’s general meeting
• Such a report shall be given taking into consideration of the provisions of the act, accounting and auditing standards, etc.
• Section 143 (3) – Contents of Auditors Report: Auditors report shall contain all the information and explanations which are necessary for the audit purpose.
• Books of accounts have been maintained or not, proper returns for audit purpose have been received from branch auditor or not.
• The balance sheet and profit loss account of the company are in agreement with books of accounts and returns.
• The company’s financial statement complies with the accounting standard of ICAI.
• Whether there is an adequate internal financial control system in the company or not.
• Whether the company has made provisions concerning any foreseeable material losses as required by accounting standards (including derivative contracts).
• Whether any director is disqualified to be appointed as a director under Section 164(2).
• Section 143 (4) – The auditor is required to state the reason for any reservations and negative remarks of the audit report.
• Section 143 (5) – Government Company:
• The Company and Auditor General (CAG) if India appoints the auditor to conduct an audit if the Government companies.
• The CAG also directs the manner of auditing the accounts of the government companies.
• The audit report is issued by the auditor to the CAG.
• Section 143 (6) – On receipt of the audit report of the Government company:
• CAG shall carry out a supplementary audit within 60 days from the audit of receipt of the audit report and may comment upon the same.
• The audit report shall be sent to all those persons whom the audited financial statement is sent.
• Section 143 (7) – The CAG shall appoint a qualified auditor of the company within 180 days from commencement of the particular financial year. Such an auditor shall hold the office till the end of the annual general meeting.
• Section 143 (8) – Company Branch Audit, which has a branch in India,
• The audit of the branch is to be done by the Company auditor or any other person qualified to be appointed as auditor as per Section 139 of the Company’s Act.
• For Company Branch Audit, which has branches outside India, the audit shall be conducted by an accountant or any person eligible to be appointed as an auditor as per the law of that country. Such an auditor shall prepare a report on books of accounts and send a copy of the audit report to the Company auditor of India.
• Section 143 (9) – The auditor shall comply with Standards on Auditing (SA) during his course of office. He shall timely refer to the Guidance notes and materials released by ICAI and seek help from fellow members where he is unable to form an opinion.
• Section 143 (10) – The Central Government may prescribe standards of auditing, recommended by the Institute of Chartered Accountants of India (ICAI), in consultation with the National Financial Reporting Authority (NFRA).

If such standards are not prescribed by the Central Government then the standards issued by ICAI shall be deemed to be standards for auditing.

• Section 143 (11) – The Central Government may direct that the audit report shall include a statement in case of a specific class of companies specified therein in consultation with NFRA.
• Section 143 (12) – Reporting on Fraud:
• Auditor of a company during his course of office, if believe that any fraudulent offense has been committed by an officer or employee against the company then, he should immediately report such matters to the Central Government.
• The auditor shall report such matters to the Board or the audit committee within 45 days for observation of the Board.
• Section 143 (13) – Code of Professional Conduct: An auditor will not be considered guilty of professional misconduct if he does so in good faith.
• Section 143 (14) – Cost audit and Secretarial audit: This section applied to Cost auditor conducting cost audit and Company Secretary conducting Secretarial audit.
• A secretarial audit is a process to check a company’s compliance made under corporate law and other laws, procedures, regulations, etc.
• Section 143 (15) – Penalties for non-compliance: If any Chartered Accountant, Company Secretary, or an Auditor does not comply with any of the provisions of the Companies Act, 2013, he will be charged with a fine not less than Rs.1 Lakh up to Rs.25 lakh.

Removal of an Auditor

Section-140 of the Companies Act, 2013 lays provision for the removal of an auditor.

• Removal before the expiry of the term: An auditor if it is removed before the completion of his tenure is given a reasonable chance to lay down reasons for his inappropriate conduct. Approval by the Central Government is necessary before passing any such resolution by the company. A prescribed fee provided as in Section-12 of the Companies (Registration Offices and Fee) Rules, 2014 along with the application as prescribed in Rule 7 of the Companies (Audit and Auditors) Rules, 2014 has to be submitted and sent to the Central Government within 30 days of the resolution passed by the Board. On receiving the approval by the Central Government, the Company can hold a general meeting within 60 days to pass a special resolution.
• Removal after the expiry of the term: If an auditor has served for a term of 5 to 10 years, consecutively, the company may remove him as per Section 139 of the Act. A notice should be sent to the retiring auditor by the Company stating the same. The retiring officer may make a representation in writing to notify other members of the company.

Conclusion

Before hiring an auditor or announcing recruitment, companies must have an overview of the responsibilities of the auditor. Laws and rules of appointment and removal of the auditor should also be taken into consideration because the role of an auditor is of great responsibility.