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Auditor Appointment, Duties, and Term Rotation

Qualifications of an Auditor

The Companies Act 2013, specifically Section 141, delineates the qualifications required for an individual or a firm to be appointed as an auditor of a company. Key qualifications include:

  • Chartered Accountant: An individual must be a chartered accountant as defined by the Chartered Accountants Act, 1949, to be eligible for appointment as an auditor.
  • Partners of a Firm: If a firm, including a limited liability partnership (LLP), is appointed as the auditor, only those partners who are chartered accountants are authorized to act and sign on behalf of the firm.

Appointment of the First Auditor

  • Board of Directors: The first auditor of a company, excluding Government companies, is appointed by the Board of Directors within 30 days from the date of incorporation of the company.
  • Members' Appointment: If the Board fails to appoint the auditor, the company's members must appoint one within 90 days during an extraordinary general meeting (EGM).

Term and Rotation of Auditor

To ensure the independence and objectivity of auditors, the Companies Act mandates the rotation of auditors:

  • Individual Auditor: An individual auditor can serve for a term of 5 years.
  • Firm as Auditor: A firm appointed as an auditor can serve for two consecutive terms of 5 years each.
  • Cooling Off Period: Upon completing their term, auditors (both individuals and firms) are not eligible for re-appointment in the same company for a period of 5 years.

Duties of the Auditor

The auditor's responsibilities are critical for ensuring the accuracy and reliability of financial statements. Key duties, as outlined in Section 143 of the Companies Act 2013, include:

  • Audit Report Preparation: The auditor must prepare an audit report after examining the company's financial statements, ensuring they are maintained according to relevant laws and reflect a true and fair view of the company's financial position.
  • Compliance: The financial statements must comply with the relevant provisions of the Companies Act 2013 and applicable accounting standards.
  • Inquiries: The auditor has the duty to make inquiries regarding the security of loans and advances, personal expenses charged to the Revenue Account, the representation of loans and advances as deposits, and compliance with accounting standards.
  • Protecting against Fraud: Auditors safeguard businesses against fraud and highlight discrepancies in accounting methods.
  • Enhancing Reliability: The auditor’s opinion significantly impacts the reliability and credibility of the financial statements, making audited statements highly trusted compared to unaudited ones.
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