Every company is required at its first annual general meeting (AGM) to appoint an individual or a firm as an auditor. The auditor shall hold office from the conclusion of that meeting till the conclusion of its 6th AGM and thereafter till the conclusion of every 6th meeting
The appointment of auditor is to be ratified at every AGM.
Individual Auditors are to be compulsorily rotated every 5 years and audit firm every 10 years in listed companies & certain other classes of companies, as may be prescribed.
Transition period of 3 years provided to the companies to comply with the mandatory rotation of auditor requirement
Listed company or all unlisted public companies having paid up share capital of Rs. 10 crore or more, all private limited companies having paid up share capital of Rs. 20 crore or more, all companies having public borrowings from financial institutions, banks or public deposits of Rs. 50 fifty crores or more shall not appoint or re-appoint an individual as auditor for more than one term of 5 consecutive Years; and an audit firm as auditor for more than two terms of 5 consecutive years.
These auditor (either individual/audit firm) can be re-appointed after cooling off period of 5 years. Three years transition period will be given to comply this requirement. No audit firm shall be appointed as auditor of the company for a period of five years, if same firm presently having a common partner(s) to the previous audit firm, whose tenure has expired in a company immediately preceding the financial year. The right of the company to remove the auditor or the right of the auditor to resign from such office of the company is not affected by this sub-section. Thus, an auditor can resign or be removed by the shareholders before completion of his term as discussed above. The firm shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008.
ROTATION OF AUDITORS– has to comply with in three years from the commencement of the Act
Section 139(3) Members of a company can provide for following by passing a resolution:
(a) 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
(b) The audit shall be conducted by more than one auditor. A transition period of 3 years from the commencement of the Act has been prescribed for the company existing on or before the commencement of the Act, to comply with the provisions of the rotation of auditor.
Illustration on the aforesaid section –Individual Auditor
| No of Audit Consecutive Year at Present | Max. no in which he/she can be appointed as Auditor |
| 5 | 3 |
| 4 | 3 |
| 2 | 3 |
| 1 | 4 |
b). Firm as a Auditor
| No of Audit Consecutive Year at Present | Max. no in which he/she can be appointed as Auditor |
| 10 | 3 |
| 8 | 3 |
| 6 | 4 |
| 4 | 6 |
| 5 | 5 |
| 2 | 8 |
Explanation: Three year transitional Period allowed to both individual & CA firm as auditor to comply with the same.
Note : An individual as auditor for more than one term of 5 consecutive Years; and an audit firm as auditor for more than two terms of 5 consecutive years.
Illustration
Q.1.For the purpose of rotation of auditors, whether 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 consideration for calculating the period of five consecutive years, in case of individual; or ten consecutive years for firm.
Ans. Yes, as per rule 6(3) of Companies (Audit and Auditors) Rules, 2014, 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 consideration for the purpose of rotation of auditors. For example, in case of listed and prescribed companies, if an individual has completed four years as an auditor on April 01, 2014, he can continue for one more year in the same company and not more than that. Further, if he wishes to again get appointed there, he may do so after the cooling period of five years from the completion of his term of five years.
Q.2. Please Clarify whether the appointment of Cost auditor shall be for a period of 5/ 10 years like that of the Statutory Auditor as prescribed under Section 139.
Ans: The Concepts of Cost auditor and statutory auditor are completely different from each other. No Order has been issued by the Central Government till date. Hence, old Orders, guidelines rules and regulation regarding the cost audit issued under Companies Act, 1956 will continue to be applicable to the Company for 2014-15.
(CA Deepak Rathore – For any clarification please contact at [email protected])
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Sir I want to ask
There is a firm XYZ in which tenure of Partner X & Y are expired immediately preceding the financial year and now the firm ABZ is wants to take that company audit which XYZ is having so firm ABZ is eligible or Not???
The provision will apply when the company reaching paid up share capital of Rs.50.00 crores or crossing borrowing of Rs.50.crores, which was assumed to happened during the year 2018-19. Here, my question is whether the existing auditor can continue as an Individual auditor for coming year as he was an auditor of the company for more than 5 years
Sir,
I have a doubt regarding the applicability of rotation of auditor. The query goes like :
A Company is incorporated in November 2012 and appointed an audit firm as the auditors for the period of 10 years on 31.03.2014, subject to ratification at every AGM. The company attracts the provision of rotation of auditors in the year 2016 upon crossing the prescribed limits. The audit firm has filed the ADT 1 for 3 consecutive years stating the period of appointment as 1 year each. Then for what period can the audit firm continue as the auditors of the company assuming that the provision of rotation of auditors is applicable for the company in all the subsequent years from 31.03.2016.
Can auditor of holding company become auditor of subsidiary company after completion tenure of transition (3 years) and during the cooling period of 5 years.
For ex. XYZ &Co. are the auditors of A Ltd since last 10 years as on 01.04.2014. A Ltd has subsidary B Ltd whose auditors are PQR &Co. Now after the transition period of 3 years, XYZ & Co. are not the auditos of A Ltd but they are the auditors of B Ltd. Is it allowed to do so.
Thank you
What are the compliance’s if the act is applicable on December, 2015, When the company takes public borrowing, whether prior period is taken into account for rotation of auditor or simply we can ratify the appointment of Auditor…??
In case of private company the limit for paid capital is increased from 20 crore to 50 crore for rotation of Auditors .
on which date borrowings of 50 cr should be determined in case of rotation of audiors?
and thereafter till the conclusion of every 6th meeting….
Can any one explain this through an example. It seems that the auditor will be holding his position for 6 years.
what is Transition period ? can u give clarification regarding disqualifications of auditors ? still confused about rotation of auditors
It is interesting to note that as per Sec 139 the appointment of auditor is for a period form conclusion of the AGM to conclusion of the sixth AGM, thus giving him a term of 5 AGMS.
However in the proviso to Sec 139, an individual cannot be appointed for a term of more than 5 years and a firm cannot be appointed for more than 10 years.
Does this mean that the an individual auditor will have to vacate his position after 5 years from his appointment even though the sixth AGM has not been concluded ?
Dear Vinayak,
As per Sec 139(2) an individual can be appointed as an auditer of a listed company and other specified companies for not more than 5 years.
Therefore in table 1, if he has completed 4 years as on 31/03/14 then he should be able to continue for only 1 year as you said.
However as per proviso to Sec 139(2) existing companies are given a transition period of 3 years from the commencement of this Act to comply with it.
Sec 139 has been notified to come into force since 1 april 2014. Therefore the provisions of this section must be complied from 1 april 2017.
Thus concluding that the existing auditor can continue for 3 more years before he needs to be rotated even though he has already completed 4 years as on 31 march 2014.
Sir,
In table 1 i.e. individual auditor’s period you have written that if he have completed 4 years as an auditor in a company as on 31/03/2014 then he shall have maximum period of 3 years to act as auditor. (Transition period)
But in Q. 1 you said that if an individual has completed four years as an auditor on April 01, 2014, he can continue for one more year in the same company and not more than that.
Please clarify.