Section 141 of the Companies Act, 2013- Eligibility, qualifications, and disqualifications of auditors

• Auditing and Assurance
• ||
• February 22, 2020

Introduction
A company is defined as a business entity formed for performing certain lawful purposes and is incorporated under the Companies Act, 2013. It is somewhat imperative on the part of the company to work transparently in the best interests of the public in general and its stakeholders. In this regard, an auditor is generally appointed by the company who is entrusted with monitoring the company’s affairs and inspecting the company’s books of accounts and further validating the accuracy of the transactions.

An audit is an impartial or unprejudiced analysis and assessment of the financial statements of a business entity. It is carried out to ensure that the books of accounts are a fair and accurate representation of the affairs or transactions that business entity claims to represent.

The term “Auditor” refers to an individual who is entrusted with all the audit works of the business entity. In other words, the Auditor’s primary role is to critically and prudently inspect the books of accounts of the business entity.

Appointment of Auditors
It is mandatory on the part of the company to appoint an auditor in its very first Annual General Meeting (AGM).  The written consent from the appointed auditor should also be produced before finally appointing him as the company’s auditor. In this regard, a certificate may also be taken from him concerning his appointment in compliance with prescribed rules and regulations. The auditor so appointed shall fulfill the criteria provided in Section 141 which mentions the qualifications and disqualifications of auditors. The Registrar of Companies (ROC) should also be notified about such an appointment and a notice must be issued within 15 days of the AGM in this regard.

Qualifications of an auditor [Section 141(1) & (2)]:
There are certain conditions that must be fulfilled with a view to successfully qualify to be appointed as an Auditor in a company. The conditions are:

an individual shall be considered eligible to be appointed as company’s auditor if he mandatorily fulfills certain conditions prescribed under the Chartered Accountants Act (or CA Act), 1949 and further possesses a valid certificate of practice as-

• An individual, or
• In a partnership firm (a business entity of which majority of partners practicing in India are considered qualified for such appointment), or
• In a limited liability partnership (where an LLP is being appointed as a company’s auditor, then only the partners who are qualified chartered accountants (or abbreviated as CAs) shall be accredited with acting and signing on firm’s behalf).

Disqualifications of auditors [Section 141(3)]
The following individuals shall not be considered qualified for appointment as a company’s auditor.

• Body corporate-A body corporate except LLP registered under LLP Act, 2008 shall not be considered eligible for appointment as auditor.
• Officer or employee- An officer or company’s employee shall also not be considered eligible for an appointment as an auditor.
• Relative or partner- an individual who is a partner in business or who is rendering services as an employee, of an officer or company’s employee shall also not be considered eligible or qualified for appointment as auditor.
• Business relationship-An individual or a firm that is either directly or indirectly having an association with the company or its affiliates shall not be considered eligible for an appointment as an auditor.
• Director or Key managerial personnel (or abbreviated as KMP) – an individual whose relative is a director or rendering services as an employee in the position of company’s director or KMP shall not be considered eligible for appointment as auditor.
• Full-time employment and audit limit- An individual who is in employment at a different place or an individual or a firm’s partner holding appointment as its auditor, if such individuals or partner is at that particular time duration of such appointment or reappointment holding appointment as auditor over more than 20 companies should also not be considered eligible for appointment as auditor.
• Convicted by a court-an individual who was held guilty of some sort of conviction by a court of an offense involving fraud and a period of 10 years has not elapsed from the date of such conviction.
• Consulting and specialized services (or abbreviated as C&S services)- any company or business entity whose subsidiary or affiliates, is engaged as on the appointment date in C&S services as specified in section 144.
• Where an individual appointed as a company’s auditor sustains any of the disqualifications as specified in sub-section (3) after his appointment, he then will have to vacate his office as such auditor and such vacation would be considered as a casual vacancy in the auditor’s office.

At AJSH & Co, we do assist our clients in complying with the regulatory requirement by auditing their financial statements. To know more about our services and offerings, you can write to us info@ajsh.in or click here.