Qualification & Disqualification of Auditor under Section 141 of company Act 2013.

v            Applicability of Audit

Board of Directors has to present the Financial Statement in the Annual General Meeting and the financial statement presented in the AGM should be audited and Reported to the shareholder’s.

Annual General Meeting takes place each year so, automatically Financial Statement should be audited for each year for all the Companies.

v              Qualification Section 141 of company Act 2013.

o   Section 141(1)

(a)    Individual Chartered Accountant practicing in India (CA + COP)

(b) Partnership firm where majority of partners are Chartered Accountant having certificate of practice. Only Partners who are CA+COP can perform audit and sign financial statement and Audit Report.

o   Section 141(2)

Where a firm includes LLP is appointed as auditor only CA partners are authorized to act and sign on behalf of firm.

Note: Meaning of CA section 2(17) of companies Act 2013: CA means Chartered defined under Chartered Accountant Act 1949 and holding certificate of Practice.

v              Dis-qualification Section 141(3) of Companies Act 2013

Disqualification should be checked at the time of appointment and at after the appointment. It does not matters whether auditor was dis-qualified before the appointment.

If a person is disqualified at the time of appointment

o   An appointment is Invalid or void-ab-inito.

o   If auditor is disqualified after appointment then he is automatically removed from office of auditor he cease to be auditor of the company.

Clause a:      A body corporate but excludes LLP firms

Ø  Accounts and Audit is a sensitive job responsibility should be on individual for better deliver rather than on artificial legal entity.

Ø  On the same lines, Chartered Accountant Act 1949 has prohibited accountancy practice by auditor in the form of Company.

Ø  Management Consultancy Company formed by auditor cannot do Audit & Accounting but can perform all other consultancy.

Ø  Co-operates Society is excluded from the definition from Body Corporate.

      Clause b:       Office or employee of the company.

Office includes Director/ Manager/ Key-managerial personnel, any person on whose instruction board is accustomed.

A person disqualified at in one company can perform the audit in other company.

Example: A employee of A Ltd cannot audit in A Ltd because he is employee of company but can perform the audit in other company. He/she is just disqualified for A Ltd.

      Clause c:        Partner or employee of officer/ Employee of the company.

A partner of officer/ Employee are disqualified. Partners of partner officer/ Employee are not disqualified.

Example: A is a director of Company can they perform Audit.

A	NO
ABC & Co	NO
B	NO
BPQ & Co	NO
P	YES
PLM & Co	YES

Clause d:      Person, his partner, his relative having Security, In debts or 
                      Guarantee.

(i.)                Person

(ii.)               His partner

(iii.)              His relative is holding

Any security or interest, In debts in exceeding Rs.5 Lakh, or has given a guarantee or security in connection of in debts to third person exceeding Rs.1 lakh to it's Company it,s Holding, it's Subsidiary, Holding co-subsidiary and Company Associates.

Picture I

                  Important Points

Ø  Security means performance share/ equity shares/ debentures/ Bonds/ Any marketable security/ Derivative right or interest on security.

o   Both the point holders of shares will be disqualified.

o   Only registered shareholders are disqualified, beneficial shareholders are not covered.

o   Nominee of shares are not disqualified.

Ø  Interest word is relative for membership without holding shares like signatory of MOA or given guarantee in company.

Ø  Exemption in case of Relatives

Relative may hold security or interest (Guarantee) in the company of face value not exceeding Rs.1, 00,000/-

Explanation: If a relative hold security or interest (Guarantee) other than company i.e Holding, it's Subsidiary, Holding co-subsidiary and Company Associates he will be dis-qualified.

Correction Action

In the event of acquiring any security or interest by relative above Rs.1,00,000/- the correction action to maintain the limit as specified above shall be taken by the auditor within 60 days of such acquisition or interest.

Ø  Significance of word INDEBTEDNESS

·     Because of Credit, purchase borrowing money or any other obligation.

·    Purchase of Rs.50, 000/- from company and paid through credit card not   disqualified.

·      Credit period is 2 months so, person gets disqualified immediately on date of purchase or at the end of credit period immediately because word is “Indebted not overdue” so don’t want for due date.

·   No automatic appointment even if amount is repaid and indebtedness is removed.

Example: 1

Loan taken 1^st January 2018 and Loan repaid on 2^nd July 2018 appointment for financial year 2018-19 as auditor 1^st August 2018 is appointment valid.

Answer: Valid, since auditor was not indebtedness at the time of appointment and after appointment.

Example: 2

Auditor fees of 10 lakh taken in advance on 1^st day of audit is auditor disqualified.

Answer: Yes

·         As per ICAI advance can be taken only on progressive basis.

·         Limit of Audit firm is also Rs. 5, 00,000/- because firm in indebted means each partners indebted.

·         Only net amount should be considered.

·         If there is only CC limit but no actual loan taken then not disqualified.

Ø  Significant of Guarantee or security.

Security or guarantee given to company for amount exceeding Rs.1, 00,000/- on behalf of third party.

Note: Auditor accepts guarantee or security from company or its officials not disqualified.

Note: meaning of Relative: Father & step father, Mother & Step Mother, Brother & Step Brother and their Spouse, Sister & Step Sister & their Spouse, Son & Step son and their Spouse, Daughter and Sons in law.

Same meaning for HUF as per individual as in Income tax Act 1961.

    Note: Relative may hold security having face value up to Rs.1 Lakh.

Clause e:          Business Relation

A Person or a form who whether directly or indirectly has a business relationship with company or its subsidiary or its holding or associates company or subsidiary of such company or Associates Company.

Picture III

Note:     Meaning of Direct/ Indirect Business Relationship.

Any Transaction entered for commercial purpose But EXCLUDES

       o   Professional Services permitted under company Act (Not prohibited under section 

                    144 of companies Act) & CA Act.

       o   Sales of Goods and services in ordinary course of Business at arm length price.

   Hotel, Hospital, Airlines & Telecommunication.

        Clause f:       Relative is Key managerial Personnel or Director of Company.

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

         Clause g:              Celling Limit.

Person who is in the full time employment elsewhere or a person or a partner of the firm holding appointment as auditor of more than 20 companies other than One person company, small company, private company having paid up share up to 100 crores.

§  If Auditor is in the full time employment, his limit of an Audit will be Zero.

§  If an auditor is partner in the multiple firms then total audit in his name should not exceeds limit of 20 companies.

§  Auditor cannot use limit of one Auditor. Numbers of signature of each auditor cannot exceeds 20.

         Clause h:              Fraud.

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

It is applicable when court declare fraud but if Fraud has been declared by SEBI, ICAI or any other Act then this provision will not sustain.

Clause i :         Prohibited Services section 144 of the companies Act 2013.

                      A person or firm is engaged as on date of appointment in any of the prohibited services  under section 144, of the company Act 2013 whether directly or indirectly to Company it’s holding or Subsidiary.

o   Investment Banking Services

o   Investment Advisory Services

o   Designing & Implementation Financial Statement

o   Management Services

o   Actuarial Services

o   Outsourcing of Financial Services

o   Internal Auditor

o   Accounting Services.

      Note:   Meaning of directly/ indirectly in case of Individual Auditors.

           o   Individual Chartered Accountant provides prohibited service-Disqualified.

           o   Relative-Disqualified

           o   Any person professionally who is associated or connected who provides services                                  disqualified.

           o   Any company upon CA or his relative have significant holding 20% or more then                                 disqualified.

           o   If working within same brand or trademark then disqualified.

          v  In case of Partnership, firm Individual CA replaced by CA firm. 

          v  Relative are replace Partners.

         Other Disqualification

•     Cost Accountant cannot be auditor.
•     Relative holding 20% or more shares
•     Partner or firm holding 20% or more shares
•     Unsound mind 
•     Membership Removal 
•     Insolvent    

         Additional things to know

•     Director cannot become auditor for 2 years after leaving directorship.
•     Tax Auditor and company auditor can be same.
•     Internal Auditor and Cost auditor cannot be same.
•     Tax auditor and internal auditor cannot be same.               

v Section 141(4) of companies Act.

    If after appointment auditor incurs any dis-qualification he shall vacates the office and such vacant shall be treated as casual vacancy.
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