Demystifying Chapter X of Companies Act 2013: Audit & Appointment of Auditor

In the complex and ever-evolving landscape of corporate governance, Chapter X of the Companies Act 2013 holds a significant place. This chapter, spanning from Section 139 to Section 148, is dedicated to everything related to audit and auditors in Indian companies. To gain a comprehensive understanding of the provisions and implications of this chapter, it’s essential to delve deep into its various sections and associated rules. In this detailed exploration, we aim to elucidate every critical aspect covered by these sections, providing you with a thorough insight into the world of auditing in India.

Section 139(1): Appointment of Auditor

At the heart of any audit process lies the crucial step of appointing an auditor. According to Section 139(1) of the Companies Act 2013, every company must appoint an individual or a firm as an auditor at its first annual general meeting. The auditor appointed at this juncture will serve in this capacity until the conclusion of the sixth annual general meeting.

However, this appointment process involves several essential steps:

• Consent and Eligibility: Before the appointment is finalized, the auditor must submit written consent for their appointment and provide a certificate affirming their eligibility for the role.
• Filing with ROC: The company must file the relevant form, known as ADT-1, with the Registrar of Companies (ROC) within 15 days from the date of the meeting in which the auditor is appointed. This filing is a critical regulatory requirement.

Section 139(2): Term of Appointment

The duration of an auditor’s appointment is a critical consideration in ensuring independence and accountability in the audit process. Section 139(2) lays down the following provisions:

• For a listed company or a company specified in Rule 5 of Companies (Audit & Auditors) Rules, 2014, an individual can be appointed as an auditor for one term of five consecutive years.
• In the case of an audit firm, the appointment can be for two terms of five consecutive years.
• Importantly, an individual auditor or an audit firm that has completed its term cannot be re-appointed as an auditor in the same company for five years from the completion of such term.
• Additionally, as on the date of appointment, no audit firm having a common partner or partners with another audit firm, whose term has expired in the immediately preceding financial year, can be appointed as the auditor of the same company for a period of five years.

Section 139(3): Rotation of Auditor

The rotation of auditors is a key element in maintaining the integrity of the audit process. This section empowers members of a company to decide the rotation of auditors. Rule 6 of Companies (Audit and Auditors) Rules, 2014, prescribes the specific manner in which companies shall implement the rotation.

It’s important to note that both the Companies Act, 1956, and the Listing Agreement were silent on the issue of auditor rotation. The existing guidelines, although non-binding, were issued by the Ministry of Corporate Affairs (MCA). However, these guidelines were often disregarded by most private sector companies. The present section changes this dynamic by granting members the authority to determine auditor rotation, bringing more accountability to the process.

Section 139(8): Casual Vacancy

In the event of a casual vacancy in the position of an auditor, Section 139(8) provides specific procedures for different types of companies:

• For a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India (CAG), CAG is responsible for filling the casual vacancy within 30 days. Failing to do so, the Board of Directors shall fill the vacancy within the next 30 days.
• In the case of any other company, the Board of Directors is tasked with filling the casual vacancy within 30 days. However, if such a vacancy arises due to the resignation of the existing auditor, the new appointment must also be approved by the company at a general meeting convened within three months of the board’s recommendation. The newly appointed auditor will hold the office until the conclusion of the next Annual General Meeting (AGM).

Section 139(9): Re-appointment of Auditor

Re-appointment of an auditor is contingent upon several conditions outlined in Section 139(9). A retiring auditor may be re-appointed at an AGM if:

• The auditor is not disqualified for re-appointment.
• The auditor has not given any notice to the company expressing unwillingness to be re-appointed.
• A special resolution has not been passed appointing some other auditor.

This provision ensures that re-appointment is subject to stringent criteria, emphasizing the need for a fresh evaluation of the auditor’s qualifications and performance.

Section 140: Removal & Resignation of Auditor

Section 140 of the Companies Act 2013 deals with the removal and resignation of auditors. It outlines the procedures for both scenarios:

Removal of Auditor

• An appointed auditor may only be removed from their office before the expiration of their term by passing a special resolution.
• Importantly, this resolution must be approved after obtaining the Central Government’s approval, as specified in Rule 7 of Companies (Audit and Auditors) Rules, 2014.

Resignation of Auditor

• In the case of an auditor’s resignation, the auditor is required to file Form ADT-3 within 30 days from the date of resignation with the company and the ROC.
• A special notice is required for a resolution at an AGM to appoint an auditor other than a retiring auditor, ensuring transparency in the process.

Section 141: Eligibility, Qualifications & Disqualifications of Auditors

Section 141 is pivotal in defining the eligibility, qualifications, and disqualifications of auditors:

• Only a Chartered Accountant can be appointed as an auditor of a company, emphasizing the importance of specialized expertise in financial auditing.
• Sub-section (3) of Section 141 enumerates the individuals who are disqualified from being appointed as auditors, underlining the need for integrity and accountability in the profession.
• If an individual appointed as an auditor of a company incurs any of the disqualifications mentioned in Section 141(3) after their appointment, they must immediately vacate their office, and this vacation is deemed a casual vacancy in the office of an auditor.

Section 142: Remuneration of Auditors

The remuneration of auditors is a critical aspect of their appointment. Section 142 stipulates the following:

• The remuneration of the auditor must be fixed in the general meeting, ensuring transparency and accountability in the determination of their fees.
• This remuneration includes the expenses incurred by the auditor in relation to the audit of the company, as well as any facilities extended to them. However, it does not encompass remuneration paid for any other services rendered by the auditor at the company’s request.

Section 145: Auditor to Sign Audit Reports

Section 145 emphasizes the importance of the auditor’s role in signing audit reports and disclosing critical information:

• The auditor is mandated to sign the auditor’s report, reinforcing their responsibility for the accuracy and reliability of the audit findings.
• Qualifications, observations, or adverse comments on financial transactions or matters that have an adverse effect on the functioning of the company, as mentioned in the report, shall be presented before the company in the AGM. These disclosures are also open to inspection by any member of the company, fostering transparency and accountability.

Section 146: Auditor to Attend General Meeting

In the spirit of transparency and accountability, Section 146 ensures that auditors are closely connected to the general meeting process:

• All notices and other communications related to any general meeting must be forwarded to the auditor of the company.
• If not exempted, the auditor can attend the general meeting either in person or through their authorized representative, and they have the right to be heard at such meetings.

In conclusion, Chapter X of the Companies Act 2013, which encompasses Sections 139 to 148, forms the backbone of audit and auditor regulations in India. These provisions and associated rules play a pivotal role in upholding the integrity, transparency, and accountability of financial reporting in companies. By understanding the intricacies of this chapter, stakeholders can navigate the complex world of auditing with precision and adherence to regulatory standards, ultimately enhancing trust and confidence in the corporate sector.

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Disclaimer: This article serves the purpose of disseminating knowledge and information and should not be construed as solicitation or legal advice. For further clarification, please contact the author at 9953808432 or via email at [email protected]. The author is the founder of SINGHANIA & ASSOCIATES, a Practicing Company Secretaries Firm based in Delhi.