The appointment of auditor is a crucial compliance requirement for all companies operating in India under the Companies Act, 2013. Auditors play a pivotal role in ensuring financial transparency, validating statutory compliance, and upholding corporate governance standards. They serve as independent professionals who examine financial statements to provide stakeholders with reliable information about a company's financial health. This comprehensive guide covers everything you need to know about auditor appointments in India-from eligibility criteria and procedures to timelines, documentation requirements, and legal provisions-designed specifically for business owners, finance professionals, and compliance officers seeking clarity on this important corporate governance process.
Table of Contents
Understanding Auditor as Per Companies Act 2013
Under the Companies Act, 2013, an auditor is defined as a qualified professional appointed to examine and verify a company's financial statements and records. According to Section 139 of the Act, only an individual Chartered Accountant or a firm of Chartered Accountants registered under the Chartered Accountants Act, 1949, can be appointed as an auditor of a company. If the auditor is a firm, including a Limited Liability Partnership (LLP), the majority of its partners practicing in India must be qualified Chartered Accountants.
The Act emphasizes the importance of auditor independence to ensure unbiased examination of financial records. An auditor must remain free from any financial interest in the company being audited and cannot have business relationships that might compromise their objectivity. This independence requirement is fundamental to maintaining the integrity of the audit process and ensuring that stakeholders receive reliable financial information.
The qualification criteria are stringent to ensure that only professionals with appropriate expertise and ethical standards undertake this crucial responsibility. The Companies Act specifically disqualifies certain individuals from being appointed as auditors, including employees of the company, those indebted to the company beyond a specified limit, and those holding securities in the company or its subsidiaries.
Role of an Auditor under Companies Act
An auditor performs several vital functions within the corporate governance framework as prescribed by the Companies Act, 2013. Their primary role includes:
- Examining the company's financial statements to ensure they provide a true and fair view of the financial position and performance.
- Verifying that proper books of account have been maintained by the company as required by law
- Assessing the effectiveness of internal financial controls and reporting any weaknesses
- Reporting instances of fraud, non-compliance with laws and regulations, or other material weaknesses observed during the audit process
- Ensuring that financial statements comply with accounting standards and relevant statutory requirements
- Providing an independent opinion on the financial health of the company to protect shareholder interests
The auditor's role extends beyond mere number checking; they serve as watchdogs who safeguard stakeholder interests by providing an objective assessment of the company's financial reporting. This independent oversight is crucial for maintaining transparency and building trust among investors, creditors, and other stakeholders.
Appointment of Auditor According to Companies Act, 2013
Section 139 of the Companies Act, 2013 outlines the comprehensive framework for the appointment of auditors. The process begins with the first auditor appointment, which must be completed by the Board of Directors within 30 days from the date of registration of the company. If the Board fails to appoint the first auditor within this timeframe, company members must make the appointment at an Extraordinary General Meeting (EGM) within 90 days.
The first auditor holds office until the conclusion of the company's first Annual General Meeting (AGM). At this first AGM, a subsequent auditor is appointed who shall hold office from the conclusion of that meeting until the conclusion of the sixth AGM. This effectively establishes a tenure of five consecutive years for the auditor appointment.
Before finalizing the appointment, companies must obtain written consent from the proposed auditor, along with a certificate stating that the appointment meets all conditions prescribed under the Act. Additionally, the company must inform the appointed auditor of their appointment and file the appropriate notice with the Registrar of Companies within 15 days of the meeting where the appointment was made.
{{company-reg-cta}}
Purpose of Appointment of Auditor
The appointment of a company auditor serves several critical purposes within the corporate governance framework. Primarily, auditors protect the interests of shareholders by providing an independent assessment of the company's financial position. They act as vigilant gatekeepers who examine the accounts maintained by directors and report on the company's true financial condition.
Independent auditors provide assurance to stakeholders that the financial statements presented by management accurately reflect the company's financial position and performance. This third-party verification builds confidence among investors, lenders, and regulatory authorities in the reliability of financial reporting.
Additionally, auditor appointments fulfill statutory requirements under the Companies Act, 2013, helping businesses maintain legal compliance. The audit process identifies potential areas of financial risk, inefficiency, or non-compliance, allowing management to address these issues proactively. Through their objective assessment, auditors contribute significantly to improved financial discipline and transparency, which ultimately strengthens corporate governance practices.
Documents Required for Auditors Appointment
For the proper appointment of an auditor, companies must ensure they have the following essential documents:
- Written consent from the proposed auditor agreeing to the appointment
- A certificate from the auditor confirming eligibility and compliance with all conditions specified under the Companies Act, 2013
- Board resolution recommending the auditor's appointment to shareholders
- Shareholder resolution approving the appointment of the auditor
- Form ADT-1 for filing notice of appointment with the Registrar of Companies
- Copy of the auditor's Chartered Accountant certification and practice certificate
- Declaration of independence from the auditor confirming no conflicts of interest
- Letter of engagement outlining the terms of the audit assignment and responsibilities
Procedure for the Appointment of Auditor
Eligibility Verification
The appointment process begins with verifying the eligibility of the proposed auditor. Only a practicing Chartered Accountant or a firm of Chartered Accountants can be appointed as an auditor. The company must ensure the auditor doesn't fall under any disqualification criteria specified in Section 141 of the Companies Act, 2013.
Obtaining Consent and Certificate
Before appointment, the company must obtain written consent from the proposed auditor. Additionally, the auditor must provide a certificate stating that the appointment complies with all conditions prescribed under the Act and Rules. This certificate should confirm that the auditor meets independence requirements and has no conflicts of interest that might compromise audit objectivity.
Board Recommendation
The Board of Directors reviews the qualifications and credentials of potential auditors and passes a resolution recommending suitable candidates to shareholders. For the first auditor, the Board directly makes the appointment within 30 days of company registration.
Shareholder Approval
For subsequent auditors, the appointment requires approval from shareholders at the Annual General Meeting. The company includes the auditor appointment as an agenda item in the AGM notice, and shareholders vote on the resolution.
Filing Requirements
After appointment, the company must file Form ADT-1 with the Registrar of Companies within 15 days of the meeting where the appointment was made. This filing formally notifies regulatory authorities about the auditor appointment and includes details about the auditor's term and remuneration.
Communication to Auditor
The company must formally communicate the appointment to the auditor, specifying the tenure and terms of engagement. This communication establishes the official relationship between the company and its auditor for the designated period.
Guidelines for Appointment of Auditor for Different Types of Companies
The appointment process varies depending on the company type, as outlined below:
Changing the Auditor: Special Notice Requirements Under Companies Act
The Companies Act, 2013 establishes specific procedures when changing auditors to ensure transparency and protect auditor independence. A special notice is required in the following circumstances:
- When appointing someone other than the retiring auditor
- When explicitly deciding not to reappoint a retiring auditor
- When removing an auditor before the expiration of their term
The special notice requirement involves:
- Providing notice to the company at least 14 days before the general meeting
- The company must immediately forward a copy of this notice to the affected auditor
- The auditor has the right to make written representations to the company, which must be circulated to members
- The auditor is entitled to be heard at the meeting where the resolution is being considered
These provisions ensure that auditor changes are properly scrutinized and that auditors have an opportunity to address any concerns regarding their removal or non-reappointment. This process safeguards against arbitrary dismissals of auditors who may have discovered irregularities or disagreed with management on accounting treatments.
Rotation of an Auditor
The Companies Act, 2013 introduced mandatory auditor rotation to enhance auditor independence and audit quality. This requirement primarily applies to listed companies and certain classes of companies as specified under Section 139(2).
For individual auditors, the maximum term is one period of five consecutive years. For audit firms, the maximum term is two periods of five consecutive years each (totaling ten years). After completing the maximum term, there must be a cooling-off period of five years before the same auditor or audit firm can be reappointed.
Key aspects of auditor rotation include:
- Promotes auditor independence by preventing long-term relationships that might compromise objectivity
- Brings fresh perspectives to the audit process, potentially uncovering issues missed by previous auditors
- Enhances investor confidence in the integrity of financial statements
- Reduces the risk of familiarity threats between auditor and client
Companies must plan transitions carefully to ensure smooth handovers between outgoing and incoming auditors, maintaining audit quality throughout the process.
Re-Appointment of Retiring Auditor
A retiring auditor may be re-appointed at the Annual General Meeting provided:
- They are not disqualified for re-appointment under Section 141 of the Act
- They have not completed the maximum term allowed under rotation requirements
- They have not given notice in writing of their unwillingness to be re-appointed
- No special resolution has been passed appointing someone else or specifically providing that the retiring auditor shall not be re-appointed
The process for re-appointment typically involves:
- Board recommendation for re-appointment of the retiring auditor
- Obtaining fresh written consent and eligibility certificate from the auditor
- Placing the re-appointment resolution before shareholders at the AGM
- Filing the necessary forms with the Registrar after shareholder approval
It's important to note that the Companies (Amendment) Act, 2017 removed the requirement for annual ratification of auditor appointment by members at every AGM when the auditor is appointed for a five-year term.
Removal, Resignation and Replacement of an Auditor
The Companies Act provides specific provisions for handling auditor changes during their term:
- Removal before term completion: Requires special notice, Central Government approval, and a special resolution at a general meeting. The auditor must be given a reasonable opportunity to be heard.
- Resignation: An auditor may resign by filing Form ADT-3 with the company and the Registrar, stating reasons for resignation. For listed companies and certain other categories, the auditor must also file with the Comptroller and Auditor General of India.
- Casual vacancy: If a vacancy arises due to resignation, the Board of Directors must fill it within 30 days. If the vacancy is due to any other reason, the Board fills it within 30 days, but the appointment must be approved by members at a general meeting within three months.
- Replacement procedure: When replacing an auditor, companies must follow due process including obtaining no objection certificates from the outgoing auditor and ensuring proper handover of relevant audit documents.
These provisions ensure that auditor changes are transparent, properly documented, and comply with regulatory requirements to maintain audit integrity and independence.
Conclusion
The appointment of an auditor represents a critical aspect of corporate governance under the Companies Act, 2013. By following the prescribed procedures for appointment, rotation, re-appointment, and removal, companies ensure compliance with legal requirements while strengthening financial transparency and accountability. The structured approach to auditor appointments-with specific provisions for different types of companies-helps maintain the independence and effectiveness of the audit function. Businesses must stay informed about these requirements and any legislative updates to ensure proper audit practices, as non-compliance can lead to penalties and reputational damage. Ultimately, a properly appointed independent auditor serves as a safeguard for stakeholder interests and contributes significantly to the overall integrity of corporate financial reporting.
Frequently Asked Questions
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
(LLP)
- Professional services
- Firms seeking any capital contribution from Partners
- Firms sharing resources with limited liability
One Person Company
(OPC)
- Freelancers, Small-scale businesses
- Businesses looking for minimal compliance
- Businesses looking for single-ownership
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
One Person Company
(OPC)
- Freelancers, Small-scale businesses
- Businesses looking for minimal compliance
- Businesses looking for single-ownership
Private Limited Company
(Pvt. Ltd.)
- Service-based businesses
- Businesses looking to issue shares
- Businesses seeking investment through equity-based funding
Limited Liability Partnership
(LLP)
- Professional services
- Firms seeking any capital contribution from Partners
- Firms sharing resources with limited liability
Frequently Asked Questions
What is Sec 139 Appointment of Auditor?
Section 139 of the Companies Act, 2013 establishes the framework for auditor appointments, including first-time appointments, subsequent appointments, re-appointments, and rotation requirements. It specifies that every company must appoint an auditor at its first AGM who shall hold office until the conclusion of the sixth AGM.
What is the form for appointment of auditor?
Form ADT-1 is used for giving notice to the Registrar about the appointment of an auditor. The company must file this form within 15 days of the meeting where the appointment was made.
Who appoints the internal auditor in section 138?
Under Section 138, the Board of Directors appoints the internal auditor based on the audit committee's recommendation (if applicable). Internal auditors can be either individuals or firms with appropriate qualifications as prescribed by the Act.
What is the time limit for appointment of internal auditor?
While the Act doesn't specify a strict timeline for internal auditor appointments, companies typically need to have an internal auditor in place before the beginning of the financial year for which the audit will be conducted, ensuring continuous audit coverage.
Who appoints external auditors?
External auditors are appointed by the shareholders (members) of the company at the Annual General Meeting. For the first auditor, the Board of Directors makes the appointment within 30 days of company registration. In government companies, the Comptroller and Auditor General of India appoints the external auditor.
.png)
Sarthak Goyal is a Chartered Accountant with 10+ years of experience in business process consulting, internal audits, risk management, and Virtual CFO services. He cleared his CA at 21, began his career in a PSU, and went on to establish a successful ₹8 Cr+ e-commerce venture.
He has since advised ₹200–1000 Cr+ companies on streamlining operations, setting up audit frameworks, and financial monitoring. A community builder for finance professionals and an amateur writer, Sarthak blends deep finance expertise with an entrepreneurial spirit and a passion for continuous learning.
