Profit is the core outcome of the company’s operations, and maintaining & continuously obtaining it requires a consistency in verifying the financial records and statements of a company. To verify and correctly evaluate the financial statements, the company needs to appoint the auditors, who will make sure about the company’s accuracy, reliability, and compliance with applicable laws, rules, and accounting standards.
In this article, we will discuss about the Auditors Appointment under Companies Act, 2013 and its key points to remember by the company for very well establishment and continuous development.
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What do you mean by Auditors?
Auditors are professionals who are appointed to evaluate and verify the financial reports and statement of an organization to ensure their accuracy, reliability, and compliance with applicable laws, regulations, and accounting standards.
Auditors provide an independent and objective assessment of a company’s financial performance, internal controls, and financial reporting practices to provide assurance to stakeholders, including shareholders, investors, lenders, and regulatory authorities.
Auditors examine financial statements, documents, reports, and other relevant information to express an opinion on whether the financial statements are presented fairly, in all material respects, and are free from material misstatement. Auditors may also give additional services likewise risk assessment, internal audit, and consulting on financial and operational matters.
Short Notes on Auditors Appointment
The Appointment of an Auditor is required for all companies incorporated in India under the Companies Act, 2013. The initial auditor of a company, other than a government firm, must be chosen by the Board of Directors within 30 days after the company’s registration.
If the Board of Directors fails to designate such an auditor, it shall notify the company’s members, who shall choose such an auditor at an extraordinary general meeting within 90 days, and such auditor shall hold office until the end of the first annual general meeting. The auditor shall serve from the end of the first annual general meeting until the end of the sixth annual general meeting. An auditor must be appointed.
The auditor is appointed for a five-year term and is eligible for reappointment. The auditor must be a chartered accountant and must meet the qualifications and disqualifications outlined in the Companies Act, 2013. In addition, the auditor must adhere to the auditing standards established by the Institute of Chartered Accountants of India (ICAI).
To summarize, the appointment of an auditor is required for all companies registered in India, and the auditor must be chosen by the Board of Directors within 30 days of the company’s registration.
The auditor is appointed for a five-year term and must meet the qualifications and disqualifications outlined in the Companies Act of 2013, as well as the auditing criteria outlined by the ICAI.
Qualifications of a Person to be appointed as an Auditor
Under the Companies Act, 2013, the following qualifications are required for a person to be appointed as an auditor of a company:
- The individual must be a practicing-chartered accountant.
- A firm may also be appointed as a company’s auditor, but only the partners who are chartered accountants in practice are entitled to act and sign on the firm’s behalf.
None of the following persons shall be eligible for appointment as an auditor of a company:
- An officer or employee of the company.
- A person who is a partner, or who is in the employment, of an officer or employee of the company.
- A body corporate other than a Limited Liability Partnership registered under the Limited Liability Partnership Act, 2008.
- A person who’s relative is a director or is in the employment of the company as director or key managerial personnel.
- A person who is in full-time employment elsewhere or a person or a partner of a firm holding appointment as its auditor if such persons or partner is at the date of such appointment or reappointment holding appointment as an auditor of more than twenty companies.
If a person appointed as an auditor of a corporation suffers any of the disqualifications listed in sub-section (3) after his appointment, he must leave his office as such auditor, and the vacation is treated as a casual vacancy in the auditor’s office.
Eligibility of Auditor
The Eligibility of Auditor is:
- The Auditor must provide formal approval for the appointment.
- The Auditor must certify appointment eligibility.
- The Auditor must confirm that the appointment is within the time frame specified.
- The Auditor must additionally confirm that the appointment is within the specified time frame.
Filing of Form ADT-1
Form ADT-1 is a form that must be filed with the Registrar of Companies (ROC) within 15 days after the auditor’s appointment. The form is used to appoint the company’s first auditor in accordance with Section 139(1) of the Companies Act, 2013. Form ADT-1 must be filed within 15 days of the meeting following the appointment of the auditor.
If the company’s AGM (Annual General Meeting) was held prior to the auditor’s appointment, Form ADT-1 must be filed within 15 days after the AGM1. Form ADT-1 must be filed within 15 days of the business’s first board meeting in the event of a newly created company. The form requests information such as the applicant’s name and address, the date of appointment, the period of appointment, and the consent of the auditor to act as an auditor of the company.
There is no clarification on the filing of form ADT-1 in cases when the appointment is made by the Board of Directors (initial Auditor appointment).
There is a loophole in this Section that firms and professionals use by failing to file Form ADT-1 (First Auditor Appointment) at the time of appointment of Auditor by Board of Directors in Board Meeting.
Companies are now completing form ADT-1 only when an auditor is appointed / re-appointed in a general meeting rather than in a board meeting (appointment of the first auditor).
It is best practice to file Form ADT-1 every time an auditor is appointed, whether in a Board Meeting (First Auditor Appointment) or in a General Meeting.
Penalty in Case of Delayed Filing of ADT-1
In the case that Form ADT-1 is not filed within the statutory time frame, a penalty will be levied on the company and charged based on the number of days delayed as shown below:
- If delay in filing is up to 30 days, then the penalty leviable us twice the normal fees.
- If delay in filing is more than 30 days but less than 60 days, then the penalty leviable is four times the normal fees.
- If delay in filing is more than 60 days but less than 60 days, then the penalty leviable is six times the normal fees.
- If delay in filing is more than 30 days but less than 180 days, then the penalty leviable is ten times the normal fees.
- If delay in filing is more than 180 days, then the penalty leviable are twelve times the normal fees.
Tenure of First Auditor
The first auditor appointed by the Board of Directors under Section 139(6) of the Companies Act, 2013, will serve until the end of the first Annual General Meeting. The auditor shall be appointed for a term of five years following the end of the first Annual General Meeting and shall be eligible for reappointment. Company may also appoint New Auditor in Annual General Meeting.
Remuneration of Auditor
The compensation of a company’s auditor shall be decided in its general meeting or in such manner as may be determined therein, according to Section 142 of the Companies Act, 2013. The Board of Directors has the authority to set the salary of the first auditor it appoints.
The auditor’s remuneration includes the auditor’s fees as well as the expenditures incurred by the auditor in connection with the company’s audit. The auditor’s salary will be paid by the company. When the Board of Directors appoints an auditor, the salary is set by the Board of Directors.
Takeaway
The Auditors Appointment under Companies Act, 2013 is a vital aspect of corporate governance and financial reporting in India. The Act lays down specific provisions and regulations pertaining to the appointment, qualifications, tenure and remuneration of auditors for companies registered under it.
