AUDIT OF LIMITED COMPANIES

Qualifications of Company Auditor

Qualifications of Company Auditor u/s 226

Qualifications

Chartered Accountant A firm of Chartered accountants A certified Auditor

Disqualifications u/s 226

Company

Body corporate

Officer/Employee

Partner/In employment of

Indebted for more than Rs. 1000

Guarantee/ Security

Director/ Member of Private Co.

Qualifications of Company Auditor u/s 226

1. A Chartered Accountant:- A person should be a Practising Chartered Accountant within the meaning of the Chartered Accountants Act, 1949

2. A Firm of Chartered Accountants:- A firm whereof all the partners are Chartered Accountants practising in India may be appointed as an auditor by its firm name. In such a case any partner so practising may act in the name of the firm

3. A Certified Auditor:- The holder of a certificate under the Restricted Auditors Certificates Rules can be appointed as an auditor of companies.

Disqualifications u/s 226

According to Section 226 (3) of the Companies Act, 1956 none of the following persons shall be qualified for appointment as an auditor of a company:

1. A body corporate,

2. An officer or employee of the company,

3. A person who is a partner, or who is in the employment, of an officer or employee of the company,

4. A person who is indebted to the company for an amount exceeding one thousand rupees,

5. A person who has given any guarantee or provided any security in connection with the indebtedness of any third persons to the company for an amount exceeding one thousand rupees

6. A person who is a director or a member of the private company,

7. A firm which already holds the specified number of company audits cannot accept any more company audits,

8. A person holding any security (i.e. an instrument with voting rights) of that company

An auditor, who after his appointment, becomes subject to any of the above disqualifications, shall be deemed to have vacated his office as an auditor.

Appointment of First Auditors The first Auditors are appointed by the Board of Directors Within 30 days of Incorporation, If Directors Fail to do so, Shareholders can appoint the first auditors in a General Meeting. Such auditors hold the office till the conclusion of the first annual general meeting.

Appointments and Reappointments by Shareholder

At each AGM an auditor appointed will hold the office until the Next AGM A retiring auditor shall be reappointed unless: he is not qualified for reappointment; he has given the company a notice in writing of his unwillingness to be reappointed; a resolution has been passed at the meeting appointing somebody else instead of him.

Appointment by Central Government

Where no Auditors appointed at an AGM or

Appointed by ordinary resolution even though a Special resolution is necessary

Within 7 days of such a meeting company shall intimate this information to the Central government which may appoint a person to fill the vacancy.

Appointment by Special ResolutionIn case of a company in which not less than 25% of the subscribed share capital is held by:

a public financial institution, or a Government company or the Central Government, or any State Government;

Any institution in which State Government holds not less than 51% of the subscribed share capital;

A nationalised bank or an insurance company carrying on general insurance business;

The appointment or reappointment shall be made by Special Resolution (which must be approved by 75% of members present.

If the company fails to pass such a Special resolution, the Central Government may appoint the auditor of the company.

Casual Vacancy

• Where a vacancy is caused by the resignation of an auditor, the vacancy shall be filled by the company in a general meeting.

• The Board of Directors may fill any other casual vacancy (e.g. arising due to death, disqualification etc.) in the office of an auditor.

• Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting.

Appointment of Auditor

Which By Whom When & How

First Auditor

Re-appointment

Casual Vacancy

• Shareholders fail to re-appoint• Special Resolution not passed

Government Company

Board of Directors Within 30 days of incorporation

Shareholders at AGM

• Shareholders at GM

Central Government

C & AG

• Normally by Ordinary Resolution• Special Resolution if 25% of shares held

by specified entities

• If Vacancy due to Resignation

• Company to inform Central Govt. within 7 days of failure

• Board of Directors • Other vacancy e.g. by death

Removal of Auditors u/s 225

In order to provide a check against the removal of independent and honest auditors, the Companies Act prescribes strict rules in this regard.

Removal

After Expiry of the Term Before Expiry of the Term

By Members at AGM First Auditors Other Auditors

Removal of First Auditors Before Expiry of the Term

The first auditor, appointed by the board of directors, can be removed by shareholders at a general meeting before expiry of the term;

without obtaining the prior approval of the central government; provided 14 days notice is given.

Other AuditorsBy shareholders at a general meeting After obtaining prior approval.

Remuneration of Auditors

First Auditors

Casual Vacancy

Board of Directors appoint auditors

Remuneration shall be fixed by BOD

Board of Directors Fail

Casual vacancy due to

Resignation

Shareholders appoint auditors in

the general meeting

Remuneration shall be fixed by Shareholders at

the general meeting

Remuneration of Auditors

Subsequent auditors

Shareholders appoint auditors at

the AGM

Remuneration shall be fixed by shareholders at

the AGM

No Auditors are appointed

Special Resolution not

passed

Central government appoints the

auditor

Remuneration shall be fixed by central

government

Remuneration of Auditors

Government company

Comptroller & Auditor General of

India

Remuneration shall be fixed by shareholders

Retiring Auditor

Shareholders appoint the

auditors at the AGM

The amount fixed for the previous period

shall be considered as remuneration for the

current year.