RIGHTS AND DUTIES OF AN AUDITOR

Table of Contents

Introduction

The purpose of an audit is to furnish company stakeholders with a specialist, independent, valid, and fair perspective on the monetary undertakings of a company. In this article, relevant provisions of the Companies Act, 2013 will be discussed in relation to the rights and duties of an auditor.

Who is an auditor

Under the Companies Act, 2013, a person practicing Chartered Accountant (hereinafter, “CA”) is qualified to be appointed as the statutory auditor in a company. A person would not be qualified as a company’s statutory auditor unless there is appropriation on the part of the person to perform in the capacity of an auditor. As per the Companies Act, 2013, only a practicing Chartered Accountant is qualified to be appointed as a statutory auditor in a company. Such appointments are possible if a majority of the partners are executing Chartered Accountants.

Appointment of an Auditor under the Companies Act

According to Section 139(6) of the Companies Act, 2013, the first auditor of a non-governmental company must be appointed by the board of directors within 30 days of its establishment. If the board does not pass, an extraordinary general meeting of shareholders will be held within 90 days to appoint the first auditor. The law does not specify when the 90 days period is calculated. So the benefit of this is to take a stricter view and explain that the 90-day period starts from the day the company is formed, rather than at the end of the 30 days period.

They are appointed in a way that they can exercise their powers until the conclusion of the First General Meeting of Shareholders. The company must file an ADT-1 form (hereinafter, Form for Appointment of First Auditor) with the Registrar of Companies along with the prescribed fee. For government companies, the first auditor will be appointed by the AG within 60 days from the date of incorporation of the company;

if the Auditor General of India fails to appoint the auditor within the said period, the Board of Directors of the company will appoint the latter within the next thirty days. If not appointed by the board within the next thirty days, members must approve an auditor within sixty days in the Extraordinary General Meeting (hereinafter, EGM). The term of office for the first auditor will be until the conclusion of the first annual general meeting.

Furthermore, the subsequent appointment of an auditor will be made by the members, and he/she will hold office until the conclusion of the sixth annual general meeting. However, it is important to note down that the company members will permit an auditor’s appointment in every annual general meeting.

Pursuant to Rule 3(6) of the Companies (Auditors and Auditors) Rules 2014, if the board decides not to reconsider the recommendation given by the Audit Committee related to the appointment of a firm or an individual as an auditor, the board must record the reasons for its disagreement with the committee, and submit its own proposals for consideration of the members at the Annual General Meeting (AGM).

Rights of an auditor

According to Section 143(1) of the Companies Act, every auditor has full rights to access books related to accounts, vouchers, and other relevant company documents at all times during his/her term of office. He also has full rights to go for surprise visits to check the entries in the books of accounts
The auditor has a right to suggest suitable modifications in methods of accounting, and if such suggestions are made, then the director should comply with them
The auditor has a right as well as a duty to make a report to the members on the account examined by him/her to state whether it is in his opinion and to the best of his knowledge and explanation stated by him. Auditors must explain whether the financial statement given is true and fair to the company’s business.
As per Section 143(8) of the Companies Act, an auditor has full authority to visit the branches to check all the works related to the company’s matter. However, the auditor has no authority to visit foreign branches.
As per Section 146 of the Companies Act, an auditor has full rights to receive the notice and communications related to all the meetings during his/her term. The company should send notice to the auditor even when his audited accounts are not discussed in the meeting.
Under certain conditions, a company can take civil or criminal actions against the auditor. If any legal action is taken against him, he generally defends himself against the proceedings.
The company determines the auditor’s remuneration in the general meeting. However, when the Board of Directors appoints the company’s first auditor, they can fix his remuneration

Duties of an auditor

Section 143 sets out the powers and duties of the auditor. Every auditor of the company shall have the right to inspect the books and records of the company at any time, whether kept at the company’s registered office or elsewhere and shall have the right to request such information as he deems necessary for the performance of his acts. Statements necessary for the duties of auditors and inquiries about the following, such as

Whether loans and advances made by the company by way of security are properly secured and whether the terms of the loans and advances are prejudicial to the interests of the company or its members;
Whether the company’s transaction represented solely by the booking is detrimental to the company’s interests;
If the company is not an investment company or bank; whether most of the company’s assets (including stocks, bonds, and other securities) are being sold at a lower price than when the company purchased it;
Whether the loans and advances made by the entity have been recorded as deposits;
Whether personal expenses are included in the revenue account;
If the company’s books and documents indicate that shares were distributed as cash, whether the distribution received cash, and if no cash was received, whether the item is correct, regular, and not misleading as indicated on the books and balance sheet.