Sunday, January 4

Companies Act 2013: Auditors


Eligibility for an individual

An individual shall be eligible for appointment as an auditor of a company only if he is a chartered accountant (C.A).

Eligibility for a firm
*  A firm shall be eligible for appointment as an auditor of a company only if majority of its partners practicing in India are qualified for appointment i.e. they are C.A’s.
*  Where a firm including a limited liability partnership (LLP) is appointed as an auditor of a company, only the partners who are C.A’s shall be authorized to act and sign on behalf of the firm.

Disqualifications of Auditor [Section 141(3)]
a) A body corporate other than a LLP.
b) An officer or employee of the company. 
c) A person who is partner or who in the employment, of an officer or employee of the company.
d) A person who or his relative or partner
*  is holding any security in the company or its subsidiary or of its holding or associate company or subsidiary of such holding company. It has been further provided that a relative may hold security or interest in the company of face value not exceeding Rs. 1 lakh.

*   is indebted to the company or its subsidiary, or its holding or associate company or subsidiary of such holding company, in excess of Rs. 5 lakh.

*  has given guarantee or provide any security in connection with the indebtedness of any third person to the company or its subsidiary, or its holding or associate company or a subsidiary of such holding company for value in excess of Rs. 1 lakh.

e) A person or a firm who (whether directly or indirectly) has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company.

Here the term ‘business relationship’ shall be construed as any transactions enter into for a commercial purpose except:

*  Commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm by the professional bodies regulated such members.
*   Commercial transactions which are in ordinary course of business of the company at arm’s length price as customer.

f) A person whose relative is a director or is in the employment of the company as a director or key managerial personnel.


g) A person

*  who is in full time employment elsewhere or
*  a person or a partner holding appointment as its auditor is at the date of such appointment or reappointment holding appointment as auditor for more than 20 companies.


h) A person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction. 

i) Any person whose subsidiary or associate company or any other form of entity is engaged as on the date of appointment in consulting or specialized services in reference to provision of Section 144 of the Companies Act, 2013.

Vacation of office [Section 141(4)]

*  If, after appointment, an auditor incurs any of the disqualification mentioned in section 141(3), he shall vacate his office as such auditor.
*  Such vacation shall be deemed to be a casual vacancy in the office of auditor.

Definition of ‘relative’ [Section 2(77) of the Companies Act, 2013]
‘Relative’, with reference to any person, means any one who is related to another, if-

i) they are members of a Hindu Undivided Family;
ii) they are husband and wife; or
iii) one person is related to the other in such manner as may be prescribed.

As per Rule 4 of the Companies Rules, 2014, a person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely:
1) Father (including step-father)
2) Mother (including step-mother)
3) Son (including step-son)
4) Son’s wife
5) Daughter
6) Daughter’s husband
7) Brother (including step-brother)
8) Sister (including step-sister)


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