This handout deal with certain provisions related to Audit of Accounts like
Necessity of audit, Appointment and remuneration of Statutory Auditor along
with their powers, duties and removal etc. and various other connected audits
like Cost Audit and Special Audits are also dealt with in this handout.
Other features of this handout are:
1. Audit of accounts is compulsory for all types of companies
2. Appointment of Auditors
3. Intimation as to appointment
4. Written certificate from auditor regarding eligibility must be obtained before
appointment of auditor at the annual general meeting by a public limited company
5. Limit of Audit
6. Appointment of auditor by the Central Government (Regional Director)
7. Casual Vacancy in the office of Auditor
8. Appointment of other than a retiring auditor
9. Removal of auditors
10. Remuneration of Auditors
11. Internal auditor cannot be appointed as statutory auditor(s)
12.Powers and duties of auditors
13.Qualifications and disqualifications of auditors

Audit of accounts is compulsory for all types of companies
All the companies registered under the Companies Act, 1956, whether public or private
and whether having a share capital or not, are required to maintain proper books of
accounts under Section 209 of the Companies Act, 1956. Companies have also to get their
Books of accounts audited as required under section 224 of the Act.
APPOINTMENT OF AUDITORS
Section 224 governs the appointment of auditors. The auditors are to be appointed by the
shareholders of the company in an annual general meeting by passing an ordinary
resolution. Kindly note appointment of Statutory under section 22 4(1) is an ordinary business
read with Section 173 of the Companies Act, 1956. However, special resolution is required
to be passed when section 224A comes into play. First auditors are to be appointed by the
Board of directors within one month of the date of registration of the company as per
section 224(5).
A casual vacancy in the office of auditor can be filled up by the Board of directors but
where the casual vacancy is caused by the resignation of auditor such vacancy is to be
filled up by the company in general meeting as per section 224(6).
Appointment of first auditors
As per section 224(5), the first auditor or auditors of a company shall be appointed by the
Board of directors within one month of the date of registration of the company; and the
auditor or auditors so appointed shall hold office until the conclusion of the first annual
general meeting. Following provisions are related to the matter:
(i) Appointment of first auditors in general meeting.—A company in general meeting may
appoint the first auditor or auditors if the Board of directors fails to exercise its power of
appointment of first auditors within one month of the date of incorporation of the
company.
(ii) Appointment of first auditors through Memorandum and Articles of Association.—
The Institute of Chartered Accountants of India has expressed its opinion vide
Compendium of Opinion Volume No. 1 that the appointment of first auditors through the
Memorandum and Articles of Association of the newly floated private company is not a
valid appointment.
(iii) Removal of first auditors.—The company may, at a general meeting, remove first
auditor(s) or all or any of such auditors and appoint in his or their places any other person
or persons who have been nominated for appointment by any member of the company
and of whose nomination notice has been given to the members of the company not less
than fourteen days before the date of the meeting.

(iv) Tenure of office of the first auditor.—The first auditor(s) shall hold office until the
conclusion of the first annual general meeting of the company and then be eligible for reappointment.
Appointment of other than first auditors
Section 224(1) state that every company shall, at each annual general meeting, appoint an
auditor or auditors to hold office from the conclusion of that meeting until the conclusion
of the next annual general meeting.
Appointment of auditor shall be an ordinary business
As per section 173(l)( a)(iv) of the Act, the appointment of, and the fixing of the
remuneration of the auditors shall be an ordinary business to be transacted at an Annual
General Meeting of a company. Only an ordinary resolution is to be passed for this
purpose except, in the circumstances stated u/s 224A requiring the passing of a special
resolution.
Appointment of auditor by passing special resolution in certain cases [Section 224A]
Section 224A stipulates that in case, if not less than 25% of the subscribed share capital of
a company is held by specified institutions, whether singly or in any combination of
others, appointment of auditors in such companies shall be made by a special resolution
passed at the annual general meeting of the company. Specified Institutions means:—
(i) a public financial institution or a Government Company or Central Government or any
State Government, or
(ii) any financial or other institution established by any Provincial or State Act, in which a
State Government holds not less than 51% of the subscribed share capital, or
(iii) a nationalised bank or an insurance company carrying on general insurance business.
MATERIAL DATE FOR DETERMINATION OF THE 25% OF THE SUBSCRIBED SHARE
CAPITAL
The Department has clarified by Circular No. 2 of 1976, dated 5-6-1976 that the
material date for determination of the 25% of the subscribed share capital of the
company is held by specified institutions, whether singly or in any combination of others
will be the date of the annual general meeting at which the special resolution is required to
be passed.
Generally, Articles of Association of companies provide for closure of the Register of
members before annual general meeting during a period not exceeding thirty days at any
one time, it is unlikely that the position regarding shareholding in the company will be
different between the date or issue of notice and the date of the annual general
meeting.

Course of Action where a change in the shareholding pattern occurred
In exceptional cases, where a change in the shareholding pattern in the
company has taken place, between the date of issue of notice of the annual
general meeting and the date of actual passing of the resolution regarding
appointment of auditor, the company may either,—
(i) adjourn the meeting to another date, and later issue the required notice in accordance
with law and thereafter pass the special resolution required to be passed u/s 224A of the
Companies Act, 1956;
or
(ii) omit or pass over the item on the agenda regarding appointment of auditor.
In the event of the company adopting the procedure at (ii) above, the situation would
be then covered by section 224A(2) of the Act.
· A question has been raised whether, it is only those shares in a company which
are beneficially held by a nationalised bank that will be taken into account in
calculating the 25% of the subscribed share capital of that company or even those
shares of the company which having come into the custody of the nationalised
bank as security for loans advanced to the constituents are got transferred by
the nationalised bank in its name for making the security ef fective, will also be
taken into account. It is clarified that irrespective of the circumstances in which a
nationalised bank is holding shares if the name of the bank is entered in the
Register of members of the company as holder of shares, such holding of shares
will have to be taken into account, for the purposes of section 224A of the
Companies Act, 1956. (The Department’s Circular No. 18 of 1974, dated 12-12-
1974)
The Department has issued a General Circular No. 14/2001 [No. 6/1/2001-CL.V], dated
16-7-2001 on provisions of section 224A of the Companies Act, 1956 that the
Department of Company Affairs had recently received a reference regarding clarification
in respect of section 224A of the Companies Act, 1956 which relates to appointment of
auditor in certain cases with the approval of the company by special resolution. The
clarification had been sought on sub-section (1) of that section which reads as under—
“224A(1) In the case of a company in which not less than 25% of the subscribed share
capital i s held, whether singly or in any combination, by—
(a) a public financial institution or a Government company or Central Government or
any State Government, or
(b) any financial or other institution established by any Provincial or State Act in which a
State Government holds not less than 51% of the subscribed share capital, or
(c) a nationalised bank or an insurance company carrying on general insurance business,

the appointment or re-appointment at each annual general meeting of an auditor or
auditors shall be madeby a special resolution.”
The querist was of the opinion that three clauses (a) to (c) mentioned in sub-section (1)
of that section [section 224A] should be treated as mutually exclusive. According to
them, the aggregate holdings of the institutions grouped under either clause (a) or
clause (b) or clause (c) of section 224A(1) are to be treated as mutually exclusive and are
not to be aggregated with institutions covered by any other sub-clause, for determining
the applicability of section 224A.
The Department has examined this matter in consultation with Department of Legal
Affairs and Solicitor General of India and found that three sub-clauses (a) to (c) to subsection
(1) of section 224A are not mutually exclusive. The provisions of sub-section (1)
of that section would, therefore, apply to all cases of shareholdings in any combination
by any of the Institutions mentioned in the three clauses.
Where any company referred to in section 224(1) omits or fails to pass at its annual
general meeting any special resolution appointing an auditor or auditors, it shall be
deemed that no auditor has been appointed by the company at its annual general
meeting and then Regional Director shall have powers under section 224(3) for
appointment of auditors.
The company shall file e-Form 23 electronically along with certified copy of the special
resolution and explanatory statement with the Registrar within 30 days of passing of
resolution as per section.
Re-appointment of the retiring auditor(s)
As per section 224(2), a retiring auditor shall be re-appointed subject to the limit on
maximum number of audits as stated u/s 224(1B). However, in the following cases, a
retiring auditor shall not be reappointed:—
(i) he is not qualified for re-appointment;
(ii) he has given the company a notice in writing of his unwillingness to be re-appointed;
(iii) a resolution has been passed at that meeting appointing somebody instead of him
or providing expressly that he shall not be re-appointed; or
(iv) where notice has been given of an intended resolution to appoint some other
person or persons in the place of a retiring auditor, and by reason of the death,
incapacity or disqualification of that person or of all those persons as the case may
be, the resolution cannot be proceeded with.

Deemed re-appointment == Require some action on the part of the company
As per Department’s Circular No. 5/72, dated 21-2-1972, the appointment or
reappointment of auditors at the annual general meeting is one of the items of ordinary
business to be transacted at such a meeting. As provided by section 224(2) of the Act at
any annual general meeting, a retiring auditor shall be re-appointed except, in four
types of cases referred to therein. The expression shall be re-appointed, postulates
some action on the part of the company resulting in the auditor getting re-appointed or
automatically re-appointed at the annual general meeting.
It has been clarified that passing of the resolution for that purpose at the annual general
meeting is essential for the re-appointment of the retiring auditor who is still qualified
and willing to act. Till this is done, a retiring auditor cannot be said to have been reappointed
as contemplated by the section. In this view, it is not correct to say that in the
absence of the resolution to the effect that the retiring auditors shall not be reappointed;
the retiring auditors shall stand re-appointed as auditors of the company.
Appointment of auditor is mandatory at each annual general meeting
The auditor(s) appointed at the last annual general meeting ceases to hold office at the
conclusion of the next annual general meeting. Therefore, the auditor(s) must be
appointed at each annual general meeting to hold office till the conclusion of the next
annual general meeting. It has been held in the case of the Institute of Chartered
Accountants v Jnanendranath Saikia (1955) 25 Comp Cas 53, 55 (Assam)
that the appointment of auditor is mandatory in the annual general meeting for the
ensuing year.
Intimation as to appointment
A company is required to give intimation of appointment to every auditor(s) so
appointed within seven days of the appointment as desired by section 224(1). The
intimation may be given in form of a letter on the letter head of the company by a
responsible officer of the company.
Written certificate from auditor regarding eligibility must be obtained
The company shall, before making any appointment or re-appointment of auditor(s) at
any annual general meeting, obtain a written certificate to the effect that the
appointment or re-appointment, if made, shall be in accordance with the limits specified
in section 224(1B) of the Act. A company or its Board of directors shall not appoint or reappoint
any person who is in full time employment elsewhere or firm as its auditor, if
such person or firm is, at the date of such appointment or re-appointment, holding
appointment as auditor of the specified number of companies or more than the
specified number of companies. [Section 224(1B)].

LIMIT ON NUMBER OF AUDITS
The expression ‘specified number’ means—
(i) in the case of a person or firm holding appointment as auditor of a number of
companies each of which has a paid-up share capital of less than rupees twenty-five
lakhs, twenty such companies;
(ii) in any other case, twenty companies, out of which not more than ten shall be
companies each of which has a paid-up share capital of rupees twenty-five lakhs or
more.
In computing the specified number of companies in respect of which or any part of
which any person or firm has been appointed as an auditor, whether singly or in
combination with any other person or firm, shall be taken into account in computing the
specified number as defined in Explanation I of section 224(1C).
The following types of companies shall be excluded from reckoning specified limits, in
terms of share capital:—
(a) Guarantee companies (Department’s Letter No. 8/12/(224)/74-CL-V, dated 28-9-74)
(b) Foreign companies (Circular No. 21 of TSF No. 35/3/75-CL-III, dated 24-9-1975)
As mentioned above, as per the Companies (Amendment) Act, 2000 private
companies will not be taken into account for counting the 20 number of companies
audit as specified as per sub-section (1B) of section 224.
(c) Branch audit of the Indian Companies not counted for calculating the specified
number.
The Department is of the view that the branch auditor appointed under section 228 of
the Act audits the accounts of the particular branch only and forwards his report to the
auditor appointed u/s 224 of the Act and henc e he cannot be equated with the
company auditor appointed u/s 224 of the Act who has to report to the AGM on the
accounts of thecompany as a whole including the branches audited by a branch auditor.
Hence the branch audits are not to be included while calculating the specified number
of 20 units.
(d) Foreign Company
Foreign companies are outside the scope of section 224 since the definition of the
company u/s 3 of the Companies Act, 1956 does not include a foreign company. Hence
the audit of the account s of foreign companies is also not to be included within the

specified number of 20 as laid down under Explanation I to sub-section (1C) of section
224 of the Act. [Circular No. 21 of 1975, dated 24 September, 1975]
Obligation on the auditor to give intimation to the Registrar
Every auditor appointed under section 224(1) by a company in annual general meeting
shall inform the Registrar in writing that he has accepted, or refused to accept the
appointment [Section 224(1B)]. The information shall be given in e-Form 23B within a
period of thirty days from the date of appointment.
It is worth noting here that only the auditors appointed under section
224(1) are obliged to give notice of their appointment to the Registrar in
e-Form No. 23B. Therefore, first auditors appointed by the Board of
directors of a company pursuant to section 224(5) are under no
obligations to give notice of their appointment to the Registrar.
Appointment of auditor by the Central Government (Regional Director)
Section 224(3) provides that if no auditors are appointed or re-appointed at an annual
general meeting of a company, the Central Government may appoint a person to fill the
vacancy. Therefore, the power of the Central Government to appoint auditors becomes
exercisable when no auditors are appointed or reappointed at an annual general
meeting of a company.
The Company is required to give intimation electronically to the Regional Director
(Powers of the Central Government were delegated to the Regional Director) vide
Notification No. GSR 288(E) dated 31st May, 1991) in new e-Form 24A prescribed by
Notification No. GSR 56(E) dated 10th Feb., 2006.
Obligation has been cast on the company that within seven days of the Central
Government’s power u/s 224(3) becoming exercisable, it shall give a notice of that fact
to that Government; and if a company fails to give such notice, the company, and every
officer of the company who is in default, shall be punishablewith fine which may extend
to five thousand rupees.
Consequences of failure to pass a special resolution at an AGM for appointment of an
auditor under section 224A:—
(a) it shall be deemed that no auditor or auditors had been appointed by the company
at its annual general meeting; and
(b) the power of the Central Government under section 224(3), to appoint auditors
becomes exercisable.

Circular No. 5 of 1972, dated 21-2-1972 inter alia provides that the Government’s
power to appoint auditors under section 224(3) becomes available where at an AGM no
auditors are appointed or re-appointed. Where auditors are not appointed or reappointed
in accordance with theprovisions of the Act including section 224(2), as read
with sections 225 and 190, section 224(3) becomes attracted in the matter.
No fee is required to be paid for intimation under section 224(4)
As per the Department’s Letter No. 35/16/69-CL-III, dated 1-11-1971 the Department is
of the view that notices under section 224(4) cannot be considered as applications
under the Companies (Fees on Application) Rules and as such are not chargeable with
the prescribed fees.
On receipt of such notice in the prescribed e-Form 24A, it is the statutory duty of the
Regional Directors to appoint auditors under section 224(3). No fee is chargeable on
such notices for appointment of auditors under section 224(3).
CASUAL VACANCY [Section 224(6)]
Meaning of casual vacancy in the office of auditor(s)
The expression ‘casual vacancy’ has not been defined in the Companies Act, 1956.
Simply stated, a casual vacancy in the office of an auditor means a vacancy caused in the
office of an auditor by his death, disqualification, resignation, etc. It has been held in the
case of the Institute of Chartered Accountants of India v Jnanendranath Saikia (1955)
25 Comp Cas 53, 56 (Assam) that casual vacancy is not a vacancy created by any
deliberate omission on the part of the company to appoint an auditor at its annual
general meeting.
Section 224(6) governs this aspect and relevant provisions are stated hereunder:—
(a) The Board may fill any casual vacancy in the office of an auditor, but while any such
vacancy continues, the remaining auditor or auditors, if any, may act.
(b) If any casual vacancy in the office of an auditor is caused by the resignation of an
auditor, such vacancy shall only be filled by the company in general meeting.
(c) Any auditor appointed in a casual vacancy shall hold office until the conclusion of the
next annual general meeting.
Powers of the Board to fill up the casual vacancy only in case of death or
disqualification of auditors
In terms of section 224(6)(a) where a casual vacancy arises in the auditors appointed by
a company due to death or disqualification, the Board of directors may appoint another
auditor.

Only members in general meeting may fill up the casual vacancy cause d by resignation
of auditors
Where the casual vacancy is caused by resignation of an auditor, the Board cannot fill up
the casual vacancy but place the matter before the company in the extraordinary
general meeting for appointing an auditor in respect of the casual vacancy.
Casual auditors shall hold office till the conclusion of the next annual general meeting
The auditor appointed in a casual vacancy shall hold office till the conclusion of the next
annual general meeting. If a casual vacancy arises, the remaining auditors if any, will
continue to Act.
APPOINTMENT OTHER THAN A RETIRING AUDITOR [Section 225]
As per section 225 a special notice of a resolution to be moved at an annual general
meeting for appointing an auditor other than the retiring auditor or removing of an
existing auditor is given to the company in the manner as prescribed under the Act.
Requirement of special notice to the company
Section 225(1) provides that special notice shall be to be given by a member and such
special notice must comply with the requirements of section 190. Following two types
of resolutions or notice may begiven under section 225 of the Act:—
(a) resolution at an annual general meeting for appointment of a person other than a
retiring auditor as auditor; and
(b) resolution at an annual general meeting providing expressly that retiring auditor
shall not be reappointed. Special notice has to be given to the company at least 14
days before the date of the meeting. The period of 14 days is exclusive of both the
day of meeting and the day of notice. Moreover, special notice has to be given 14
days before the date of the original meeting and not adjourned meeting.
Thus, special notice received after the adjournment of original meeting cannot be taken
and acted upon by a company.
In the case of Santosh Mani v New Delhi YMCA (1995) 19 CLA 178 (Del), it was held that
even though the resolution moved by a shareholder not to re-appoint a retiring auditor
failed to comply with requirement of section 188, yet since it was passed in annual
general meeting when notice of resolution was given by company to all members and
was carried by a majority, the same could be implemented.
As per Department’s Circular No. 5 of 1972, dated 21-2-1972 special notice shall be
required for such resolution. Any non-compliance with the provisions of the said section

would render such a resolution illegal and ineffective. Section 190 which provide a
resolution requiring special notice applies to special notice under section 225.
Section 190 which provide a resolution requiring special notice applies to special notice
under section 225.
COMPANY’S DUTY ON RECEIPT OF NOTICE
1. Intimation shall be given by the company to all members on receipt of notice
or draft of resolution
The company shall on receipt of a notice or draft resolution from a member give
intimation of the same to all the members immediately and where it is not possible to
do so then give notice to the members by advertisement in the newspaper circulating in
the place of its registered office, not less than seven days before the meeting.
2. Intimation shall be given by the company to the retiring auditor
On receipt of notice under section 225(1) of the Act, for the removal of a retiring auditor
the company shall send a copy of the notice to the retiring auditor forthwith. It is
advisable to send the same by registered post with acknowledgement due.
Circulation of the retiring auditors’ representation to all the members
Where the retiring auditor makes a representation on the notice or resolution for their
removal, the company shall circulate the same to all the members of the company, if it
is possible to do so before the meeting. If it is not possible to circulate the
representation to the members, the auditor may require the same to be read at the
meeting, unless the Central Government on an application by the company or an
aggrieved person orders that copies of the representation need not be sent to members
nor read at the meeting.
Following are the other relevant provisions in this regard:—
(i) In case where the retiring auditor makes with respect thereto representations in
writing to the company (not exceeding a reasonable length) and requests their
notification to members of the company, the company shall do the following:—
(a) the company shall state the fact of the representations having been made, in any
notice of theresolution given to members of the company;
(b) the company shall send a copy of the representations to every member of the
company to whom notice of the meeting i s sent, whether before or after the receipt of
the representations by the company;
(c) the company is not bound to send the copy of representations to members, if the
representations are received by it too late to do so;
(d) if a copy of the representations is not sent as aforesaid because they were received
too late or because of the company’s default, the auditor may require that the

representations shall be read out at the meeting. This right is in addition to the right of
auditor to be heard orally at the meeting.
(ii) Section 225 applies to all companies, whether public or private.
(iii) Any resolution requiring special notice must comply with the requirements of
section 190.
Contravention of the provision of section 225 would attract penalty to the company
under section 629A.
(iv) Acceptance of the position as auditor previously held by a retiring auditor without
first communicating to the existing auditor shall be deemed to be guilty of professional
misconduct as contemplated by clause (8) of the First Schedule to the Chartered
Accountants Act, 1949.
REMOVAL OF AUDITORS [Section 224(7)]
Board of directors has no power to remove an auditor
The Board of directors of a company has no powers to remove an auditor appointed by
the company in general meeting. Accordingly, the said auditor can be removed only by
the company in general meeting after receiving the previous approval of the Central
Government under section 224(7). Powers has been delegated to the Regional Director
vide Notification No. GSR 288(E), dated 31-5-1991.
Removal of auditor(s) at a general meeting with the prior approval of the Central
Government
As per Section 224(7) an auditor can be removed before expiry of his term only by the
company in general meeting after obtaining the previous approval of the Central
Government (Power has been delegated to the Regional Director).
Procedure for removal of auditors
The company shall take further action as prescribed in section 225 and make an
application to the concerned Regional Director in e-Form 24A as prescribed by the
Notification No. GSR 56(E) dated 10th Feb., 2006 for his approval.
Time limit
The application has to be filed for appointment within seven days of the annual general
meeting and for removal before general meeting.
Guidelines
(i) The power of the Central Government to appoint auditors become exercisable when
no auditors are appointed or re-appointed at an annual general meeting of a company.

(ii) Obligation has been cast on the company that within seven days of the Central
Government power becomes exercisable; it shall give a notice of that fact to the Central
Government in the prescribed e-Form 24A electronically.
(iii) The powers of the Central Government under section have been delegated to the
Regional Directors of the Department of Company Affairs.
(iv) Reasons for not appointing any auditor at the annual general meeting and other
relevant details should be furnished.
(v) Only the company in general meeting after obtaining the previous approval of the
Central Government (Regional Director) can remove an auditor before expiry of his
term.
(vi) The remuneration of auditors appointed by the Central Government may be fixed by
the Central Government. But if the Central Government does not fix such remuneration
then remuneration of auditors shall be fixed by the company in general meeting or in
such manner as the company in general meeting may determine.
(vii) The remuneration which has been fixed for an auditor is considered to be inclusive
of all expenses allowable to him and consequently, he cannot claim any amount in
addition to the fixed remuneration.
Consequences
Omission or failure to pass a special resolution at an annual general meeting for
appointment of an auditor u/s 224A has under mentioned two consequences:
(i) It shall be deemed that no auditor or auditors had been appointed by the company at
its annual general meeting;
(ii) The power of the Central Government under section 224(3) to appoint auditors
becomes exercisable.
REMUNERATION OF AUDITORS [Section 224(8)]
Section 224(8) discusses the manner of fixation of remuneration of auditors. Following
are theprovisions in this regard:
Remuneration of first auditors
The remuneration of the first auditors appointed by the Board may be fixed by the
Board, if the Board does not fix such remuneration then remuneration of auditors shall
be fixed by the company in general meeting or in such manner as the company in
general meeting may determine.
Remuneration of other than first auditors

Appointment of an auditor at an annual general meeting is an ordinary business to be
transacted thereat. The remuneration of auditors other than first auditors shall be fixed
by the company in general meeting or in such manner as the company in general
meeting may determine.
Remuneration of auditors appointed to fill up causal vacancy
The casual vacancy in the office of an auditor caused by any reason except, resignation
can be filled up by the Board of directors and the remuneration of the auditor appointed
to fill up causal vacancy may be fixed by the Board of directors. If the Board does not fix
such remuneration then remuneration of auditors shall be fixed by the company in
general meeting or in such manner as the company in general meeting may determine.
The casual vacancy caused by resignation of an auditor may be filled up only by the
company in general meeting and the remuneration of auditor so appointed shall be
fixed by the company in general meeting or in such manner as the company in general
meeting may determine.
Remuneration of auditors appointed by the Central Government
The Central Government may appoint a person to fill the vacancy in case where no
auditors are appointed or re-appointed at an annual general meeting. The remuneration
of auditors appointed by the Central Government may be fixed by the Central
Government. But if the Central Government does not fix such remuneration then
remuneration of auditors shall be fixed by the company in general meeting or in such
manner as the company in general meeting may determine.
Remuneration of auditor of the Government companies
Section 224(8)(aa) provides that in the case of an auditor appointed u/s 619 by the
Comptroller and Auditor General of India, remuneration shall be fixed by the company
in general meeting or in such manner as the company in general meeting may
determine.
Remuneration includes all expenses allowed by the company
For the purposes of section 224(8), any sums paid by the company in respect of the
auditors’ expenses shall be deemed to be included in the expression “remuneration”.
The remuneration which has been fixed for an auditor is considered to be inclusive of all
expenses allowable to him and consequently, he cannot claim any amount in addition to
the fixed remuneration.
Internal auditor cannot be appointed as statutory auditor(s)
Circular No. 29 of 1976, dated 27-8-1976 states that the internal auditor is
appointed by the management and hence is in the position of an employee, whereas
thestatutory auditor is appointed by the company under section 224 and is required to
perform the duties imposed on him under section 227 and the Rules/Orders issued
thereunder.

In this connection, refer to para 4(vi) of the Manufacturing and Other Companies
(Auditor’s Report) Order, 1975 (Now, 1988) in CSR No. 533(E), dated 7-11-1975 notified
by Department in accordance with which the statutory auditor has to include in his
report under section 227, whether there is adequate internal control procedure
commensurate with the size of the company and the nature or its business for the
purchase of stores, raw materials including components, plant and machinery,
equipment and other assets and in the case of companies (having Rs. 25 lakhs or more
paid-up share capital) whether there is any internal audit system commensurate with its
size and nature of business. It is, therefore, obvious that if the statutory auditor of the
company is also the internal auditor, it will not be possible for him to give an
independent and objective report under section 227 read with the order under subsection
(4A) thereof. As such, in the opinion of the Department, a statutory auditor of a
company cannot also be its internal auditor.
Statutory Auditor cannot write books of account of the company
An issue can be raised whether there could be any objection in case the statutory
auditor of a company undertakes the work of writing the books of account and drawing
up the final accounts for which he might receive some extra remuneration from the
company over and above the fees payable to him as statutory auditor. The acceptance
of the book keeping work of the above nature is likely to place the statutory auditor in a
rather vulnerable position in the matter of free expression of his professional opinion as
an auditor on the annual accounts of the company. Such a practice deserves to be
discouraged.
POWERS AND DUTIES OF AUDITORS
Powers of auditors to access books of accounts and to require information and
explanations
Following are the rights of an auditor as detailed under section 227(1) of the Companies
Act, 1956:—
(i) Right of access at all times to the books and accounts and vouchers of the company,
whether kept at the head office of the company or elsewhere.
(ii) Entitlement to require from the officers of the company such information and
explanations as the auditor may think necessary for the performance of his duties as an
auditor.
[Section 231] Powers to receive all notices of general meetings and to attend it
section 231 provides that auditor shall be furnished with copies of all notices of and
other communications relating to any general meeting of the company which any
member of the company is entitled to have sent to him. The auditor shall be entitled to

attend any general meeting and to be heard at any general meeting which he attends on
any part of the business which concerns him as an auditor.
[Section 232] Default in complying with the provisions of sections 225 to 231 makes
the company and every officer of the company who is in default punishable with fine
which may extend to Rs. 5,000.
Duties of auditors to enquire and make report
Sections 227(1A) and 227(4A) lay down certain important duties of the auditors of a
company. The auditor has mandatory duties to inquire and report the following:—
(a) whether loans and advances made by the company on the basis of security have
been properly secured and whether the terms on which they have been made are not
prejudicial to the interests of the company or its members;
(b) whether transactions of the company which are represented merely by book entries
are not prejudicial to the interests of the company;
(c) where the company is not an investment company within the meaning of section 372
or a banking company, whether so much of the assets of the company as consist of
shares, debentures, and other securities have been sold at a price less than that at
which they were purchased by the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and papers of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment,
and if no cash has actually been so received, whether the position as stated in the
account books and the balance sheet is correct, regular and not misleading.
The auditor shall make a report to the members of the company on the accounts
examined by him, and on every other document declared by Companies Act to be part
of or annexed to the balance sheet or profit and loss account, which are laid before the
company in general meeting during his tenure of office. The auditor has duty to state in
his report that whether in his opinion and to the best of his information and according
to the explanations given to him, the accounts give the information required by the
Companies Act, 1956 in the manner so required and give true and fair view.
Duties towards comments on the compliance of the Accounting Standards
Section 227(2)(d) requires that the auditor to make comments whether, in his opinion,
the profit and loss account and balance sheet complied with the Accounting Standards
referred to in section 211(3C) of the Companies Act, 1956.
Duties to report certain matters in thick type or italics in the Auditors’ Report

It is an obligation on the auditors to make comments in his report in thick type or in
italics the observations or comments, which have any adverse effect on the functioning
of the company. [Section 227(2)(e)]
Duties to report disqualification of directors in certain cases
It is an obligation on the auditors to make comments in his report whether any director
is disqualified from being appointed as director under section 274(1)(g) of the Act.
The auditors are required to make independent investigation as to disqualification of
directors if any. Before reporting a particular person is disqualified or not he must seek
for the view and/or representation of the director concerned or any of the person as to
whether he was a director of the defaulting company as mentioned in section 274.
Duty to report regarding payment of Cess
As per the Companies (Second Amendment) Act, 2002, the Auditors are required to
comment whether the cess payable under section 441A has been paid and if not the
details of the amount of cess not paid. (Notification for implementation of section 441A
is yet to be issued by the Central Government)
Duties to report for non reporting of the diversion of funds
The Reserve Bank of India has directed the banks to crack down on negligent auditors in
case of falsification of accounts on the part of the borrower company, it has been also
directed to the banks and financial institutions to lodge a formal complaint against the
auditors with the Institute of Chartered Accountants of India, it is observed that auditors
were negligent or deficient in conducting to enable the Institute to examine and fix
accountability of the auditors.
Duties to verify accuracy of balance sheet
It is the duty of an auditor to verify not merely the arithmetical accuracy of the balance
sheet but its substantial accuracy and to see that it includes the particulars required by
the articles and the statute and contains a correct representation of the state of the
company’s affairs.
However, an auditor is not an ins urer; he does not guarantee that the books do
correctly show true position of company’s affairs or he does not even guarantee that his
balance sheet is accurate according to the books of the company
Liability in case of providing comfort to the company and its management by the
auditors
The Expert Group of the Ministry of Company Affairs, will make random scrutiny of the
balance sheet and profit and loss accounts submitted by the companies to the Registrar
of companies to ensure, whether the auditors have given comfort to the company or its
management this will reveal if the auditors report and notes accurately pointed out or
not regarding departures from the statutory disclosures and other requirements
pertaining to treatment of expenses for profitability calculation in their qualifications.

QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS [Section 226]
Section 226 of the Companies Act, 1956 contains provisions as regards qualifications
and disqualifications of auditors. It applies to all types of companies, whether public or
private and also to section 25 company and a Government Company.
Must be a Chartered Accountant for appointment as auditor
A person shall not be qualified for appointment as auditor of a company unless he is a
chartered accountant within the meaning of the Chartered Accountants Act, 1949.
A Chartered Accountant’s firm may be appointed as auditor
A firm whereof all the partners are practicing chartered accountants in India are
qualified for appointment as aforesaid, may be appointed by its firm name to be auditor
of a company, in which case any partner so practising may act in the name of the firm.
In such case the appointment of a firm as auditors shall be made in the name of the firm
whereas the appointment of a proprietary concern as auditor shall be made in the name
of the individual i.e., the proprietor. [Vide Circular No. 8/229/56 -PR, dated 20-3-
1957]
Certain category of persons not qualified for appointment as auditor
Section 226(3) states that none of the following persons shall be qualified for
appointment as auditor of a company:—
(a) a body corporate;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of
the company;
(d) a person who is indebted to the company for an amount exceeding one thousand
rupees, or who has given any guarantee or provided any security in connection with the
indebtedness of any third person to the company for an amount exceeding one
thousand rupees;
(e) a person holding any security of that company after a period of one year from the
date of commencement of the Companies (Amendment) Act, 2000 i.e. 13th December,
2000;
(f) For the purposes of section 226, “security” means an instrument, which carries voting
rights;
(g) a person if he is, by virtue of section 226(3), disqualified for appointment as auditor
of any other body corporate which is that company’s subsidiary or holding company or
subsidiary of that company’s holding company. [Section 226(4)]
A Chartered Accountant working on retainership basis or on fixed periodical
remuneration is disqualified for appointment as an auditor
Circular No. 8/1/57-PR, dated 11-7-1957 provides that the Government have examined
the question whether on his engagement as the income-tax consultant of a company
either on payment of ad hoc fee or fees plus retainer or on fixed periodical

remuneration, then he will be regarded as an officer or employee of the company for
the purpose of section 226(3)(b) of the Act, and consequently as being disqualifi ed for
appointment as an auditor of the company.
Appointment of a relative of a director as an auditor should not be made
In the legal sense a relative of a director of a company is not disqualified for
appointment as an auditor of the company. However, special resolution under section
314 shall be passed if the remuneration of auditor exceeds the limits specified in section
314.
However, the council of the Institute of Chartered Accountants of India has suggested
that a chartered accountant shall not accept the audit of a company where he is relative
of the company’s managing director or whole-time director and he believes that he
would not be in a position to express his independent opinion.
Deemed vacation of office of an auditor in case of disqualifications
According to section 226(5), if an auditor becomes subject, after his appointment, to
any of the disqualifications specified in sections 226(3) and 226(4), he shall be deemed
to have vacated his office as such.

SOURCE:- WWW.CACLUBINDIA.COM

December 31, 2010

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