UNIVERSITY INSTITUTE OF LEGAL STUDIES PANJAB

UNIVERSITY, CHANDIGARH

The project report on the topic

AUDITOR- APPOINTMENT, REMOVAL, QUALIFICATIONS

AND DISQUALIFICATIONS

Is submitted in fulfillment of the requirement of the syllabus

of B.com LL.B.(Hons.) 6th semester

Submitted to: Submitted by:

Dr. Abha Sethi Neeraj Kaundal
Assistant professor B.com. LL.B (Hons.)
159/18
(2018- 2023)

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 ACKNOWLEDGEMENT
I hereby acknowledge to all those who helped me to draft this project directly
and indirectly.
It would have not been possible for me to complete the task without their help
and guidance.
First of all I would like to thank our teacher Dr. Abha Sethi who gave me this
golden opportunity to do this project.

And last but not the least I am thankful to the Panjab University for offering
this project report in our syllabus. I must mention my hearty gratitude towards
my family, other faculties and friends who supported me to go ahead with the
project.

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 CONTENTS
Sr. no. Title Pg. no.
1 Introduction 1
2 Auditor 2-3
3 Appointment of Auditor 4
4 Qualifications of Auditor 5
5 Disqualifications of Auditor 6-7

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INTRODUCTION

Audit is the examination or inspection of various books of accounts by an

auditor followed by physical checking of inventory to make sure that all
departments are following documented system of recording transactions. It is
done to ascertain the accuracy of financial statements provided by the
organisation.

Description: Audit can be done internally by employees or heads of a particular

department and externally by an outside firm or an independent auditor. The
idea is to check and verify the accounts by an independent authority to ensure
that all books of accounts are done in a fair manner and there is no
misrepresentation or fraud that is being conducted.

All the public listed firms have to get their accounts audited by an independent
auditor before they declare their results for any quarter.

Who can perform an audit? In India, chartered accountants from ICAI or The
Institute of Chartered Accountants of India can do independent audits of any
organisation. CPA or Certified Public Accountant conducts audits in USA.

There are four main steps in the auditing process. The first one is to define the
auditor’s role and the terms of engagement which is usually in the form of a
letter which is duly signed by the client.

The second step is to plan the audit which would include details of deadlines
and the departments the auditor would cover. Is it a single department or whole
organisation which the auditor would be covering. The audit could last a day or
even a week depending upon the nature of the audit.

The next important step is compiling the information from the audit. When an
auditor audits the accounts or inspects key financial statements of a company,
the findings are usually put out in a report or compiled in a systematic manner.

The last and most important element of an audit is reporting the result. The
results are documented in the auditor’s report.

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 AUDITOR
An auditor is a person or a firm appointed by a company to execute
an audit.[1] To act as an auditor, a person should be certified by the regulatory
authority of accounting and auditing or possess certain specified qualifications.
Generally, to act as an external auditor of the company, a person should have a
certificate of practice from the regulatory authority.

TYPES OF AUDITORS

• External auditor/ Statutory auditor is an independent firm engaged by

the client subject to the audit, to express an opinion on whether the
company's financial statements are free of material misstatements,
whether due to fraud or error. For publicly traded companies, external
auditors may also be required to express an opinion over the
effectiveness of internal controls over financial reporting. External
auditors may also be engaged to perform other agreed-upon
procedures, related or unrelated to financial statements. Most
importantly, external auditors, though engaged and paid by the
company being audited, should be regarded as independent.
• Internal Auditors are employed by the organizations they audit. They
work for government agencies (federal, state and local); for publicly
traded companies; and for non-profit companies across all industries.
The internationally recognised standard setting body for the
profession is the Institute of Internal Auditors - IIA (www.theiia.org).
The IIA has defined internal auditing as follows: "Internal auditing is
an independent, objective assurance and consulting activity designed
to add value and improve an organization's operations. It helps an
organization accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes".

SECOND AUDITOR
Most internal audits do not require a second (or third or more) auditor.
These are more common in larger audits with a wide scope. Company size
also plays an important part. In this Guide package, you will find a
document named Audit_Man-days.doc which gives guidelines for Man-
Days.
Recently a client was told by a registrar that the requirement for a company
their size (registration audit) was 6 man-days. He said they may send 1

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auditor for 6 days, 3 for 2 days or 2 for 3 days. This assumed 1 man per
team.
Sometimes it is nice to have a second auditor, but typically it s a luxury
unless it’s a training audit.

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 APPOINTMENT OF AUDITOR
After incorporation of a company in the first annual general meeting, an Auditor
must be appointed by the Board of Directors. The Auditor will typically hold
term till the conclusion of 6th AGM or 5 years. The appointment of an Auditor
can also be made for a period of 1 year, renewable at each annual general
meeting.

Before the appointment of the Auditor, a written consent along with Certificate
must be obtained from the CA, that he/she is eligible for appointment as Auditor
of a company and that the proposed appointment is in accordance with the
Companies Act.

The appointment of First Auditor of the Company must be completed by the

Board of Directors within 30 days of incorporation. In case the Board of
Directors fail to appoint an Auditor, the members of the company must be
informed. The members will then be required to appoint an Auditor within 90
days at an Extra Ordinary General Meeting. An Auditor so appointed will hold
office until the conclusion of 1st Annual General Meeting.

PROCEDURE FOR APPOINTMENT OF AUDITOR

1. Intimate the proposed auditor(s) regarding the intention of appointing him/it as

auditor and ask whether he/ it is eligible and not disqualified to be appointed as
auditor of the company.
2. Obtain consent & certificate from auditor.
3. If audit committee required to be constituted under section 177, then obtain its
recommendation (Section 139(11)).
4. Call Board meeting.
5. Approve the appointment of auditor at the first Board Meeting.
6. Intimate the auditor and file with ROC form ADT-1(to be attached in form
GNL2 as per MCA circular 09/2014 dated 25th April, 2014) within 15 days.

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QUALIFICATIONS OF AN AUDITOR

A person is qualified for the appointment as the auditor of the company only if
he is a Chartered Accountant within the meaning of the chartered Accountants
Act 2013. Nationality is not important. A firm whereof all the partners
practicing in India are qualified for the appointment as auditor, it may be
appointed by its firm name to be auditor of the company.

ACCORDING TO PROVISIONS OF SECTION 141(1) OF THE COMPANIES ACT,

2013

“a person shall be eligible for appointment as an auditor of a company only if

he is a chartered accountant within the meaning of Chartered Accountants Act,
1949 and holds a valid Certificate of Practice.
It has been further provided that the firm shall also considered to appointed by
its firm name whereof majority of partners practicing in India are qualified for
appointment as auditor of a company.
According to Provisions of Section 141(2) of the Companies Act, 2013, a firm
including limited liability partnership who are chartered accountants shall be
authorized to act as auditor and sign on behalf of the such limited liability
partnership or firm.
A person shall appointed as an auditor if he is chartered accountant within the
meaning of Chartered Accountants Act, 1949 and holding valid certificate of
practice and acting in capacity as
a) Individual

b) Partnership Firm

c) Limited Liability partnership It has been further provided that only partners
who are Chartered Accountants will be authorised to sign on behalf of the
firm.

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 DISQUALIFICATIONS OF AN AUDITOR

The companies Act 2013 in Section 141 and subsection (3) lays down the
ground rules for disqualifying people from acting as the company’s auditor.
There are a total of 9 clauses, unlike the 1956th version that had only 5 clauses
only. The categories in which the disqualifications are divided are;

1. Absolute disqualification of Auditor

2. Disqualification of auditors based on a relationship

3. Disqualification of Auditors based on conflict of interest

ABSOLUTE DISQUALIFICATION OF AUDITORS

• As per Section 141(3) (a), if an entity is not LLP (LLP Act 2008) then an
individual or independent body can only act as an auditor for that
company. The Companies Act, 1956 completely disqualifies the body
corporate which is not the case with Companies Act, 2013 as LLPs are
allowed to act as Auditors here.
• As per 141(3) (g)- a person working full time somewhere else or is a firm
partner and holding a position of an auditor in the company, and has
reached the limit of 20 companies. This disqualification is newly added in
the Companies Act, 2013.
• For instance, if an auditor is appointed for a 20th firm on 31st March
2018 then he cannot be appointed as an auditor for another firm on 1st
April 2018 unless he resigns from being an auditor of any one of the
existing 20 companies.
• As per Section 141(3) (h), if the is a convicted for fraud by the court and
10 years have not elapsed since the conviction date. This is also a new
addition in the disqualification section of the Companies Act, 2013.

DISQUALIFICATIONS OF AUDITORS BASED ON A RELATIONSHIP

• As per Section 141(3) (b), any employee or officer of the company. This
clause remains unchanged in the 2013th version and is found under
Section 2(59) of the Companies Act. The word “officer” broaden to
include key managerial Personnel, director, manager or any other person
with authority to direct or instruct the Board of directors.

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 • As per Section 141(3) (c), any partner, officer or employee of the
company is disqualified. In the previous version of the Act only bar an
employee or the officer but in the latest version any person related to the
employee or an officer is also barred but the rest is retained as it is.

DISQUALIFICATIONS OF AUDITORS BASED ON A CONFLICT OF

INTEREST

As per section 141(3) (d), if a person’s partner or relative or person himself ;

• Is holding any interest or Security in the company or the holding or the

subsidiary or its associate Company and the interest or security is more
than Rs 1 lakh.
• Is in debt with the company or its holding or its subsidiary or associate
company and the debt is more than 5 lakh.
• Has taken guarantee or provided any security in connection to debt of any
third person and the debt is above 1 lakh towards the company or its
holding or it’s subsidiary or associate company.