Appointment of auditor

M. V. Kali Prasad

The auditor should verify that the removal of the previous auditor is in accordance
with the provisions of law, particularly with reference to the procedures to be
followed.

Auditor's appointment is covered in Sections 224 and 225 of the Companies Act. The
Code of Conduct requires an auditor to ensure that his appointment is in order and
that it is all right for him to accept the assignment.

The auditor should ensure that the appointment is proper and in accordance with
Sections 224 and 225, failing which, he would be held guilty of professional
misconduct.

The auditor should verify that the removal of the previous auditor is in accordance
with the provisions of law, particularly with reference to the procedures to be
followed and the permissions to be obtained, notices being issued, resolutions
passed, and so on.

Verification of the minutes of meetings of the board of directors and of the members
of the company would be essential.

Communication of appointment: The company should communicate to the

auditor of his appointment within seven days of his appointment as auditor of the
company, enclosing a copy of the resolution passed at the meeting of shareholders
or of the board of directors. Though there is no legal requirement, courtesy demands
that the auditor acknowledges the receipt of the letter of appointment.

Communication with outgoing auditor: Unless there is a strong reason, the

auditor is not removed in the normal course of business. In broad interests of the
profession and as a matter of professional etiquette, the auditor is required to
communicate with the outgoing auditor to ascertain if there are any professional
reasons as to why he should not accept the appointment. SAccepting any
assignment (not only audits) previously held by a member of the ICAI without first
communicating with him would render the new incumbent liable for professional
misconduct. There are several case laws on this matter; their burden is that the
communication must be sent only by registered post or by hand delivery against a
valid acknowledgement.

The incoming auditor should have enough proof that the communication has reached
the outgoing auditor. Merely saying that it was dispatched to the address of the
outgoing auditor would not suffice. This clause is inserted to safeguard the interests
of the profession at large. The outgoing auditor would be in a position to advise the
incoming auditor if he should exercise caution during the course of work, though it is
not mandatory. It is obligatory on the part of the outgoing auditor to reply within a
reasonable time to the communication sent in by the incoming auditor.

Acceptance: Appointment of an auditor is a contract as much as any other

contract. Offer, acceptance, communication of acceptance, etc., are essential for the
appointment of the auditor also. The appointment is not complete until the auditor
communicates his acceptance to the company.
The auditor should communicate his acceptance or otherwise within 30 days from
the date of receipt of communication of his appointment from the company.

Communication to RoC: Filing of Form 23B with the Registrar of Companies (RoC)
is an additional procedure. It is in addition to the communication of acceptance to be
sent by the auditor to the company. Communication to the RoC does not absolve the
auditor of his responsibility to communicate to the company of his acceptance or
declining the appointment.

Communication to the company is under the Contract Act, whereas filing of Form
23B is a requirement of the Companies Act.

Declining appointment as an auditor: An auditor can as well choose to decline

the appointment based on circumstances, professional commitments, reply of the
outgoing auditor, etc.

The fact that he consented earlier to the appointment does not bind him to take up
the audit. Passing a resolution is the offer made by the company. Offer is
communicated to the auditor by the company. Unless the offer is accepted and
communicated to the company, the contract is not binding and appointment is
incomplete.

Consequently, declining of appointment by an auditor does not result in a casual

vacancy.

It leads to a situation where it is deemed that no auditor is appointed at the meeting

and Section 224(3) would apply.
Appointment and removal of company auditors  
   
Introduction  
This article explains the role of a company auditor. It details which types of companies must appoint an auditor and  
the circumstances when an auditor is not required. It also explains the procedure for appointing and removing auditors
from office.
   
Appointment of auditors  
   
What is an auditor?  
An auditor makes an independent report to a company's members as to whether its financial statements have been  
properly prepared in accordance with the Companies Act. The report must also say if a company's accounts give a
true and fair view of its affairs.
   
Must all company accounts be audited?  
No. If they qualify for exemption and wish to take advantage of it, dormant companies and certain small companies do  
not have to have their accounts audited.
   
To qualify for audit exemption as a small company, the company must:  
 Qualify as small;  
 Have a turnover of not more than £6.5 million; and
 Have a balance sheet total of not more than £3.26 million.

   
Are all types of small companies eligible for the exemption?  
A company which falls into any of the following categories must have its accounts audited:  
 A parent company or subsidiary undertaking (unless dormant for the period during which it was a subsidiary)  
except where the group:

  - qualifies as a small group or would qualify if all the bodies; corporate in the group were companies; and  
  - the turnover for the whole group is not more than £6.5 million net (or £7.8 million gross); and
  - the combined balance sheet total is not more than £3.26 million net (or £3.9 million gross)
 a public company unless the company is dormant  
 a company that at any time in the financial year in question was:

  - a company that is an authorised insurance company, a banking company, an e-money issuer, a MiFID  
(ie Markets in Financial Instruments Directive) investment firm or a UCITS (ie Undertakings for
Collective Investment in Transferable Securities) management company;
  - a company that carries on insurance market activity; or
  - a special register body as defined in section 117(1) of the Trade Union and Labour Relations
(Consolidation) Act 1992 (c. 52) or an employers' association as defined in section 122 of that Act or
Article 4 of the Industrial Relations (Northern Ireland) Order 1992 (S.I. 1992/807 (N.I. 5)).
   
A company where an audit is required by a member or members holding at least 10% of the nominal value of issued  
share capital, or holding 10% of any class of share or - in the case of a company limited by guarantee - 10% of its
members in number.
   
Some flat management companies that would otherwise qualify for exemption may have to prepare audited accounts  
to comply with the terms of their lease.
   
What should a company do with the audited accounts?  
Audited accounts must be sent to Companies House annually.  
   
How is a company auditor appointed?  
The directors appoint the first auditor of the company. The auditor then holds office until the end of the first meeting of  
the company at which its accounts are laid before the members. At that meeting the members of the company can re-
appoint the auditor, or appoint a different auditor, to hold office from the end of that meeting until the end of the next
meeting at which accounts are laid.
   
However, private companies can pass an 'elective resolution' not to lay accounts before the members in a general  
meeting. If this is done, then the auditor has to be re-appointed, or a new one appointed, at another meeting of the
company's members that must be held within 28 days of the accounts being sent to the members.
   
Private companies can also pass an elective resolution dispensing with the need to appoint an auditor every year. If  
that happens, the auditor already appointed remains in office without further formality until a resolution is passed to re-
introduce annual appointment or to remove him or her as auditor.
   
What does an auditor do?  
The auditor will check the accounts and accounting records of the company and prepare a report for the company's  
members.
   
The report will say if the company's annual accounts have been properly prepared in accordance with the Companies  
Acts and if they give a true and fair view of the company's financial affairs. The auditor will also consider if the
information given in the directors' report is consistent with the annual accounts.
   
If in the auditor's opinion, the accounts or directors' report does not comply with the Companies Act, the auditor will  
say so in the report.
   
Can my accountant be my auditor?  
An auditor must be independent of the company, therefore, a person cannot be appointed as an auditor if they are:  
 An officer or employee of the company or an associated company;  
 A partner or employee of such a person, or a partnership of which such a person is a partner.

   
If your accountant does not fall into one of the above categories and if he or she has a current audit-practising  
certificate issued by a recognised supervisory body, they may act as the company's auditors.
   
What and who are recognised supervisory bodies?  
These are bodies recognised by the Secretary of State as having rules designed to ensure that auditors are of the  
highest professional competence. Each recognised body has strict regulations and a disciplinary code to govern the
conduct of their registered auditors. The five recognised bodies are:
 The Institute of Chartered Accountants of Scotland;  
 The Institute of Chartered Accountants in England and Wales;
 The Institute of Chartered Accountants in Ireland;
 The Association of Chartered Certified Accountants;
 The Association of Authorised Public Accountants.

   
Appointment and removal of company auditors  
   
Is an auditor only concerned with annual accounts?  
Yes. However, there is nothing to stop you employing an auditor for other purposes, such as keeping the books or  
compiling the tax return, provided he (or she) does not take part in the management of the company.
   
Removal of auditors  
   
Can an auditor be removed?  
Yes. The members of a company may remove an auditor from office at any time during his (or her) term of office or  
decide not to re-appoint the auditor for a further term. They must give the company 28 days' notice of their intention to
put a resolution to remove the auditor, or to appoint somebody else, to a general meeting. A copy of the notice of the
intended resolution must be sent to the auditor, who then has the right to make a written response and require that it
be sent to the company's members
   
If an auditor ceases for any reason to hold office, he must deposit a statement at the company's registered office. The  
statement should set out any circumstances connected with his ceasing to hold office that he considers should be
brought to the attention of the members and creditors of the company.
   
If there are any such circumstances, the company must send a copy of the statement to all the members of the  
company unless a successful application is made to the court to stop this. If the auditor does not receive notification of
an application to the court within 21 days of depositing the statement with the company, the auditor must within a
further 7 days send a copy of the statement to Companies House for the company's public record.
   
If there are no such circumstances, the auditor must deposit a statement with the company to that effect. This
statement need not be circulated to the members.