The Companies Act of 2013 has mandated the auditing of a company’s accounts. The legitimacy of firms and the reliability of choices regarding investments by investors rely on company’s compliance with standardized and easily understandable production and publication of final statements, in addition to their audit under the Companies Act 2013. The profit and loss account are utilized for monitoring the financial gains and losses of a firm, whilst non-profit organizations employ an income and expenditure account to oversee their income and costs. Comprehensive financial report encompassing every corporation must record a statement related to the cash flows and documenting any changes in the distribution of shares, if applicable.
Overview of Audit under the Companies Act 2013
The rationale behind mandating auditing for companies is in the enforcement of stringent regulations governing the formulation, disclosure, and audit of financial statements. These regulations aim to ensure that firms adhere to high standards of open disclosure and corporate governance. The primary objective of auditors within the organization is to safeguard the interests of the shareholders. The auditor is legally required to thoroughly scrutinize the director’s financial records and accurately communicate the company’s financial status to them. The auditor performs an impartial assessment on behalf of the company’s owners or shareholders in order to safeguard and maintain the financial integrity of the firm. Sections 139 to 148 of the Corporations Act, 2013 outline the criteria, restrictions, selection, dismissal, privileges, and obligations of the auditor of corporations.
Types of Audit Under the Companies Act 2013
Some different types of audit under the Companies Act 2013 are given below:
- Internal audit under the Companies Act 2013 is an internal auditing for the internal functions of the companies
- Secretarial Audit is related with the company’s compliances
- Statutory Audit is with respect to the financial details of the company
- Branch Audit is done of the different branches and final report is send to the companies auditors to do audit under the Companies Act 2013
- Cost Audit is for verifying the cost of the products and services
Qualification of the Auditor Under the Companies Act of 2013
Section 141(1) and 141(2) talks about the eligibility criteria for an individual or a firm to be appointed as an auditor to do audit under the Companies Act 2013. To qualify as an auditor for a firm, an individual must be a chartered accountant as defined by section 2 (17) of the Chartered Accountants Act of 1949. A firm whose majority of partners practicing in India are eligible for appointment as mentioned above can be appointed as the auditor of a company using its firm name. When it comes to a partnership firm, the company appoints the rather than the individual partner. When a firm is designated as its auditor by the company, only its chartered accountant partners, such as an LLP, are permitted to act and sign on behalf of the firm.
Disqualification of Auditors Under the Companies Act 2013
According to Section 141(3) and Rule 10 of Companies (Audit and Auditors) Rules, 2014 the individuals who are disqualified from being appointed as an auditor to do audit under the Companies Act 2013 of a corporation are as follows:
- Legal entity, excluding a firm which is a Limited Liability Partnership Firm registration (LLP)
- A body corporate, as defined by section 2(11),
- The individuals who are ineligible to be appointed as auditors of a firm
- The term ‘Officer’ includes any director, manager, key managerial personnel (KMP), any person in accordance with whose directions or instructions the BOD or any one or more of the directors is or are accustomed to act. Therefore, they cannot be appointed as an auditor of the company.
- An individual who serves as a partner or is employed by an official or employee of the organization. The reasoning behind not appointing them as an auditor is that these individuals have an indirect relationship, so they lack autonomy and cannot be selected as auditors
Appointment of an Auditor to do Audit Under the Companies Act 2013
Section 139(1) of the said legislation pertains to the selection and procedure for appointing a new auditor. As per this provision, it is mandatory for every company to designate an auditorduring its initial Annual General Meeting (AGM). The appointed auditor will serve from the end of that meeting until the end of the sixth AGM. Subsequently, the firm will designate an auditor for a continuous period of five years, contingent upon approval by the members at each Annual General Meeting. The procedure for appointing an auditor is as follows:
- The initial auditor shall be appointed by the Board of Directors within 30 days of the company’s registration.
- The appointment of the subsequent auditors at every Annual General Meeting (AGM) shall be made by the members of the corporation.
- The company’s designated auditor must be a practicing Chartered Accountant.
- The firm is required to notify the Registrar of Companies (ROC) of the appointment of the auditor within 15 days AGM.
- The auditor may only be removed from their position before their term expires through a special resolution passed by the corporation, subject to getting prior consent from the Central Government.
- The legislation has also implemented the practice of auditor rotation. According to this, an auditor is allowed to serve in a corporation for a maximum of 5 consecutive years. Subsequently, he must undergo a rotation with a different auditor who is unaffiliated with the same company.
Appointment of First Auditor for the Companies
Mainly there are two types of companies under the company law and for both of them the first auditor needs to be appointed in order to do an audit under the Companies Act 2013.
First Auditor for Private Companies
As per section 139(6) of the specified legislation, in the event that a non-government corporation fails to select an initial auditor, the company’s members are required to appoint one within ninety days at an EGM. The procedure for selecting the initial auditor in a non-governmental corporation comprises the subsequent stages:
- The Board of Directors will propose a candidate to be designated as the first auditor of the company.
- The potential auditor must provide their consent and eligibility certificate in compliance with the terms of the Act.
- The corporation must call an Extraordinary General Meeting (EGM) within ninety days if the Board of Directors fails to name the original auditor.
- The initial auditor is selected by the company’s members through the approval of an ordinary resolution, and their term extends until the conclusion of the first Annual General Meeting (AGM).
- The assigned auditor must also provide their endorsement and certification of eligibility to the company.
Appointing the first auditor to do audit under the Companies Act of 2013 of the company within the specified timeframe is crucial to guarantee the effective operation and adherence of the firm to the regulations outlined in the Companies Act, 2013. The Act mandates the appointment of an auditor during the first Annual General Meeting (AGM) of the company. Failure to promptly appoint an auditor may lead to penalties and non-compliance consequences for the company.
First Auditor for Government Companies
The legislation specifically handles the initial auditor appointment for government-owned enterprises under Section 139(7). The designated auditor will stay on the job until the first Annual General Meeting is over. The process for hiring an auditor for a non-governmental organization is not the same as the process for choosing an auditor for a government firm. As part of the jurisdiction of a government agency, choosing the chief auditor is the responsibility of the Comptroller and Auditor General (CAG). On the other hand, when it comes to a private company, the appointment of the auditor is recommended by the Board of Directors, and it is formally confirmed by the shareholders at the first Annual General Meeting (AGM).
Conclusion
Companies Act of 2013 mandates the audit of company accounts to ensure standardized financial reporting, fostering investor trust, and maintaining corporate governance. The audit under the Companies Act 2013, governed by Sections 139 to 148, emphasizes the auditor’s role in scrutinizing financial records to protect shareholders’ interests. Qualification criteria, outlined in Section 141, require auditors to be chartered accountants, while disqualification criteria aim to maintain auditor independence. The appointment process involves initial selection by the Board of Directors and subsequent approval by company members. Auditor rotation is enforced, limiting consecutive service to five years. The first auditor’s appointment for private and government companies follows specific procedures. Various audit types, including internal, secretarial, statutory, branch, and cost audits, ensure comprehensive scrutiny under the Companies Act 2013, promoting financial transparency and regulatory compliance.
