Important Points to note on Appointment of Auditors

Who can be appointed as an Auditor?

Only a qualified Chartered Accountant within the meaning of the Chartered Accountants Act, 1949 can be appointed as an auditor. However, the following points should also be considered for the appointment of auditor.

1. If the Chartered Accountant is holding a Certificate of Practice, and practicing in his individual capacity, he may be appointed as an auditor only as an individual.

2. If the Chartered Accountant is holding a Certificate of Practice and is a partner of a firm of chartered accountants, the firm may be appointed as auditor. Any partner of the firm may perform his duties in the name of the Firm.

3. If any person is holding a certificate authorizing him to act as an auditor, even though he is not a chartered accountant, he may be appointed as auditor. Such Certificates are not being issued since November 1, 1956.

Who cannot become Auditors of a Company?

The following persons are not qualified to be appointed as auditors of a company:

1. The auditing service is considered to be personal, therefore a body corporate cannot be appointed as auditor. This also ensures that the liability of the auditor does not become limited. A person holding any security of the company, carrying a voting right cannot be appointed as auditor. This provision came into effect since December 2001.

2. A person who is indebted to the company in excess of Rs. 1000/-.

3. A person who has given guarantee or security to the company in relation to the indebtedness of any third person for a sum exceeding Rs.1000/-.

4. An officer or employee of the company.

We can say that the points (2), (3) and (4) mentioned above are laid down to ensure the independence of the service of an auditor.

5. If a person is disqualified to be appointed as auditor of any one company, he shall be disqualified to be appointed as auditor of

  1. its subsidiary company.
  2. its holding company.
  3. subsidiary company of its holding company.

The above disqualification avoids any financial relationship between the auditor and the company.

Additional disqualification as per Companies (Amendment) Bill 2003

An auditor who

1. has any direct financial interest in the company.

2. receives any loan or guarantee from or on behalf of the company.

3. has any business relationship (other than as an auditor) in the company.

4. has been in the employment in the company.

5. whose relative is in the employment of the company.

Appointment of Auditors

1. Section 224 (1B), prescribes limits for the chartered Accountants for holding company audits. A Chartered Accountant should ensure that his audits are within the limits prescribed before accepting the appointment as an auditor of the company.

2. There is no prohibition in appointing a relative of a director as auditor. However, under the Chartered Accountants Act 1949, he should disclose his interests/relationship in his audit report.

3. If the remuneration fixed for the auditor exceeds the prescribed limit, (as per Chartered Accountants Act), the auditor may be appointed by passing a special resolution. In some cases, approval of central Government is also required.

Other Points to be noted regarding appointment of auditors

1. If an employee of the Chartered Accountant in practice is director of a company, the chartered Accountant is not disqualified from being appointed as auditor.

2. A statutory auditor of a company cannot be appointed as an internal auditor.

3. An auditor of a company can however accept any other assignment with that company, as long as he she does not become the employee of the company.

4. IF a chartered accountant is indebted to a company, the firm( in which he is a partner) cannot be appointed as auditor. Similarly, if the firm is indebted to the company, the partner of the firm cannot be appointed as an auditor of the company.

5. After his appointment as an auditor to a company, if an auditor becomes disqualified due to any of the reasons stated above, his office will be deemed to be vacated.

Section 226 of the Companies Act, lays down the rules for qualification and disqualification of appointment of auditors, which will be discussed in detail later. The Companies (Amendment) Bill 2003 requires, a written certificate from the auditors, that appointment complies with prescribed conditions.