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 theabove companies i.e. whether A,B,C or D he will be automaticallydisqualified in all the remaining companies.

Section 226 (5)

If the Auditor of a company after being appointed as Auditor of thecompany is subject to any of the provisions contained undersection 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 is/are appointed/reappointed by

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.

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 than25% subscribed share capital is held singly or jointly by followinginstitutions.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 auditorb) 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 canconduct. This ceiling is referred as specified numbers.

Specified No. is 20

Out of 20 an Auditor Remaining 10 companiesCan accept Maximum should have paid upOf 10 companies having share capital less thanPaid up share capital of 25 Lacks.Rs. 25 Lacks & more.

Audits excluded

P An audit of private company G Audit of guarantee company having no share capitalI Internal audit

C Cooperative society trust & cooperation that do not fall within the purview of companies act 1956F Audit of foreign companiesS Special audit & investigation

T Tax audit under income tax act 1961B Branch auditNOTE:- 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 2M

Production 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.

• Cost audit report :-1. 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.

2. 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.

3. 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.

4. 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.