Appointment of Auditor, Qualification, Disqualifications, Rotation, Removal, Duties and Responsibilities

An auditor is an independent professional or firm appointed to examine and evaluate the financial records, statements, and practices of an organization. The role of an auditor is crucial in ensuring the accuracy, reliability, and transparency of financial information.

Appointment of Auditor

The appointment of an auditor is governed by the Companies Act, 2013, and the rules prescribed thereunder. The following are the key provisions regarding the appointment of auditors in India:

First Auditor

For newly incorporated companies, the first auditor is appointed by the Board of Directors within 30 days from the date of incorporation. The first auditor holds office until the conclusion of the first Annual General Meeting (AGM) of the company.

Subsequent Appointment

After the first AGM, the appointment of an auditor is made by the shareholders of the company. The appointment is done through an ordinary resolution passed at the AGM.

Term of Appointment

The appointment of auditors is typically for a period of five consecutive years. However, the Companies Act allows for the reappointment of the same auditor for two more terms of five years each, subject to certain conditions and compliance with rotation requirements.

Rotation of Auditors

Certain companies are required to rotate their auditors to ensure independence and fresh perspective. As per the Companies Act, the following companies are required to rotate their auditors:

1. Listed Companies: Listed companies and their subsidiaries are required to rotate auditors after the completion of two consecutive terms of five years each.
2. Other Companies: Certain classes of companies, based on their paid-up share capital or borrowing limits, are also required to rotate auditors as per the prescribed thresholds.

Eligibility Criteria

The Companies Act specifies the eligibility criteria for appointment as an auditor. Only a person or a firm of chartered accountants (CA) or a limited liability partnership (LLP) of CAs can be appointed as an auditor of a company. The auditor must hold a valid certificate of practice issued by the Institute of Chartered Accountants of India (ICAI).

Consent and Eligibility Certificate

Before appointment, the proposed auditor must provide his/her consent and submit an eligibility certificate to the company. The eligibility certificate confirms that the auditor is eligible for appointment as per the prescribed criteria.

Disqualifications

The Companies Act lays down certain disqualifications that may prevent a person or a firm from being appointed as an auditor. These disqualifications include reasons such as holding an office or employment with the company, being indebted to the company, or having a business relationship with the company.

Removal and Resignation

The removal or resignation of an auditor before the completion of the term requires compliance with the procedures prescribed under the Companies Act. These procedures include obtaining approval from the Central Government or the National Financial Reporting Authority (NFRA), as applicable.

Qualification of Auditor

To qualify as an auditor in India, certain qualifications and criteria must be met. The qualifications for becoming an auditor are primarily governed by the Institute of Chartered Accountants of India (ICAI), which is the regulatory body for the accounting profession in India. Here are the key qualifications required to become an auditor in India:

Chartered Accountant (CA) Qualification:

The most common and recognized qualification for auditors in India is the Chartered Accountant (CA) qualification awarded by the ICAI. To become a Chartered Accountant, individuals must complete the following steps:

1. CA Foundation Course: After completing 10+2 education, aspiring Chartered Accountants can register for the CA Foundation course. The Foundation course includes subjects such as Accounting, Economics, Business Law, and Mathematics.
2. CA Intermediate Course: Upon successfully clearing the Foundation course or holding a relevant academic qualification, candidates can enroll for the CA Intermediate course. The Intermediate course consists of a comprehensive study of various subjects related to accounting, finance, taxation, and law.
3. Practical Training: Alongside the CA Intermediate course, candidates must complete a mandatory practical training period of three years, called Articleship. During Articleship, candidates work under the guidance of a practicing Chartered Accountant to gain practical experience in auditing, accounting, taxation, and other related areas.
4. CA Final Examination: After completing the Intermediate course and the prescribed period of practical training, candidates become eligible to appear for the CA Final examination. The CA Final examination is the last stage of the CA qualification and covers advanced topics in accounting, auditing, financial management, and law.
5. Membership: After clearing the CA Final examination and completing other requirements, candidates become eligible for membership of the ICAI, which allows them to practice as Chartered Accountants and undertake audit assignments.

Eligibility Certificate

Before being appointed as an auditor of a company, a Chartered Accountant must obtain an eligibility certificate from the ICAI. The eligibility certificate confirms that the Chartered Accountant is eligible for appointment as an auditor as per the prescribed criteria, including the specified number of years of post-qualification experience.

Continuing Professional Development (CPD)

Once qualified, auditors in India are required to participate in Continuing Professional Development programs offered by the ICAI. CPD ensures that auditors stay updated with the latest developments, regulations, and best practices in auditing and accounting.

Regulatory Compliance

Auditors must comply with the regulations and guidelines issued by the ICAI and other regulatory bodies, such as the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the Ministry of Corporate Affairs (MCA).

Disqualifications of Auditor

In India, there are certain disqualifications that can prevent a person or a firm from being appointed or continuing as an auditor of a company. These disqualifications are specified under the Companies Act, 2013, and are designed to ensure independence, integrity, and professional conduct of auditors. The key disqualifications of an auditor in India are as follows:

Relationship with the Company

An individual or a firm is disqualified from being appointed as an auditor if they have any of the following relationships with the company:

1. Officer or Employee: The person is an officer or employee of the company or its subsidiary, or has been in the past three years. This disqualification aims to maintain independence and prevent conflicts of interest.
2. Relative: The person is a relative of a director or a key managerial personnel of the company. Relatives include spouses, parents, siblings, children, and their spouses.
3. Business Relationship: The person has a business relationship with the company, directly or indirectly, in any manner that may compromise their independence or impartiality.
4. Indebtedness: The person or their relative has any outstanding loan, guarantee, or security provided by the company or its subsidiary, or has given any such financial assistance to the company.

Professional Relationship

Certain professional relationships can disqualify an individual or a firm from being appointed as an auditor. These include:

1. Statutory Auditor: A person who is already serving as a statutory auditor of more than the specified number of companies cannot be appointed as an auditor of any additional companies.
2. Internal Auditor: A person who is an internal auditor of the company or its subsidiary cannot be appointed as the statutory auditor of the same company.
3. Concurrent Auditor: A person who is a concurrent auditor or a branch auditor of the company or its subsidiary cannot be appointed as the statutory auditor of the same company.

Non-Compliance and Misconduct

An individual or a firm can be disqualified from being an auditor if they have been found guilty of certain offenses or misconduct, including:

1. Conviction: The person has been convicted of an offense involving fraud, dishonesty, or moral turpitude.
2. Removal by the Government: The person has been removed from the office of an auditor by the Central Government, the National Financial Reporting Authority (NFRA), or any other regulatory body.
3. Professional Misconduct: The person has been found guilty of professional misconduct by the Institute of Chartered Accountants of India (ICAI) or any other regulatory authority.

It’s important to note that these disqualifications are applicable not only during the appointment of auditors but also throughout their tenure. If an auditor becomes disqualified during their term, they are required to vacate the office and inform the company and the concerned regulatory authorities about the disqualification.

Rotation, Removal, Duties and Responsibilities of Auditor

Rotation of Auditor:

According to the Companies Act, 2013, certain companies are required to rotate their auditors to ensure independence and fresh perspectives in the audit process. The provisions related to the rotation of auditors are as follows:

• Mandatory Rotation: Listed companies and certain classes of companies, based on their paid-up share capital or borrowing limits, are required to rotate their auditors. Listed companies and their subsidiaries must compulsorily rotate their auditors after the completion of two consecutive terms of five years each. Other companies, as prescribed by the government, are also required to rotate their auditors as per the thresholds specified.
• Cooling-off Period: After the completion of the maximum term, an outgoing auditor is required to observe a cooling-off period before being eligible for reappointment. The cooling-off period for individual auditors is five years, and for audit firms, it is three years. This ensures that auditors maintain their independence and are not excessively associated with a company.

Removal of Auditor:

The removal of an auditor before the completion of their term requires compliance with certain procedures and legal provisions. The removal can be initiated by the company or by the regulatory authorities. The key aspects related to the removal of an auditor are as follows:

• Ordinary Resolution: The removal of an auditor by the company can be done through an ordinary resolution passed at a general meeting of the shareholders. The auditor must be given a reasonable opportunity to be heard and present their case before the resolution is passed.
• Special Notice: A special notice of the resolution for the removal of the auditor must be given to the company at least 14 days before the general meeting where the resolution will be considered. The notice should comply with the requirements specified under the Companies Act.
• Central Government’s Power: In certain circumstances, such as when an auditor has contravened provisions of the Companies Act, the Central Government has the power to remove the auditor and take appropriate action.

Duties and Responsibilities of Auditor:

The duties and responsibilities of an auditor are essential in ensuring the accuracy and reliability of financial statements and maintaining the trust of stakeholders. The key duties and responsibilities of an auditor include the following:

• Examination of Financial Statements: The primary responsibility of an auditor is to examine the financial statements of the company and express an opinion on their accuracy and fairness. This involves assessing the presentation of financial information, compliance with accounting standards, and adequacy of disclosures.
• Compliance with Applicable Laws and Regulations: Auditors are responsible for evaluating the company’s compliance with relevant laws, regulations, and accounting standards. They need to ensure that the financial statements reflect a true and fair view of the company’s financial position and results of operations.
• Evaluation of Internal Controls: Auditors assess the effectiveness of internal controls and accounting systems in place within the organization. They review the company’s internal control framework to identify weaknesses, assess risks, and make recommendations for improvement.
• Independence and Objectivity: Auditors must maintain independence and objectivity throughout the audit process. They should be free from any conflicts of interest that may impair their judgment or compromise the integrity of the audit. Independence is crucial to ensure an unbiased assessment of the financial statements.
• Reporting and Communication: After completing the audit, auditors issue an audit report that includes their opinion on the financial statements. They communicate their findings to the company’s management, board of directors, and shareholders. If any material misstatements or irregularities are identified, auditors may also have a duty to report them to the appropriate authorities.
• Professional Ethics and Standards: Auditors are bound by professional ethics and standards, including those prescribed by the Institute of Chartered Accountants of India (ICAI). They are expected to conduct themselves with integrity, objectivity, and professional competence.
• Auditors: Auditors are expected to perform their duties with due care, diligence, and professional skepticism. They should exercise professional judgment while conducting the audit and should follow the Generally Accepted Auditing Standards (GAAS) and other relevant auditing standards.
• Audit Planning: Auditors are responsible for planning the audit engagement effectively. This includes understanding the business and industry of the company, assessing the risks associated with the financial statements, and designing an appropriate audit approach.
• Audit Evidence: Auditors gather sufficient and appropriate audit evidence to support their opinion on the financial statements. They perform various audit procedures such as inspection, observation, inquiry, and analytical procedures to obtain the necessary evidence.
• Fraud Detection: Auditors have a responsibility to assess the risk of fraud within the company and design procedures to detect material misstatements due to fraud. They should maintain professional skepticism and exercise professional judgment to identify any indicators of fraud during the audit.
• Reporting Internal Control Weaknesses: If auditors identify significant weaknesses in the company’s internal controls during the audit, they should communicate those findings to the management and the audit committee. This helps the company to address control deficiencies and improve their internal control system.
• Going Concern Assessment: Auditors evaluate the company’s ability to continue as a going concern. They assess the appropriateness of the management’s use of the going concern assumption and determine whether there are any significant uncertainties that may cast doubt on the company’s ability to continue its operations.
• Compliance with Auditing Standards: Auditors are required to comply with the auditing standards issued by the ICAI, including the Standards on Auditing (SAs). These standards provide guidance on various aspects of the audit process, including risk assessment, audit documentation, communication with management and those charged with governance, and the form and content of the audit report.
• Professional Development: Auditors have a responsibility to maintain and enhance their professional competence. They should stay updated with changes in auditing standards, accounting regulations, and other relevant professional developments through continuous professional education programs and training.
• Confidentiality and Data Protection: Auditors are entrusted with sensitive and confidential information during the audit process. They have a duty to maintain the confidentiality of such information and should comply with the relevant provisions related to data protection and privacy.

• Ethical Conduct: Auditors must adhere to the Code of Ethics issued by the ICAI. This includes maintaining integrity, objectivity, professional behavior, and confidentiality. They should avoid any conflicts of interest that may impair their independence or objectivity.