Amended and updated notes on section 141 of Companies Act 2013. Detail discussion on provisions and rules related to eligibility, qualifications and disqualifications of auditors.
Chapter X (Sections 139–148) of the Companies Act, 2013 (CA 2013) deals with the provisions related to audit and auditors. Section 141 of CA 2013 provides for eligibility, qualifications and disqualifications of auditors.
Recently, we have discussed in detail section 140 (Removal, resignation of auditor and giving of special notice) of CA 2013. Today, we learn the provisions of section 141 of Companies Act 2013.
The provisions of section 141 are effective from 1-April-2014. You may refer Notification No. S.O. 902(E) issued dated 27.03.2014. In this article, you will learn detail of the provisions of section 141 of the Companies Act 2013 read with the Companies (Audit and Auditors) Rules, 2014.
| Name of Act | The Companies Act 2013 |
|---|---|
| Enacted by | Parliament of India |
| Administered by | Ministry of Corporate Affairs (MCA) |
| Number of Chapters | 29 |
| Number of Sections | 484 (470-43+57) |
| Number of Schedules | 7 |
| You are reading: | |
| Chapter No. | X |
| Chapter Name | Audit and Auditors |
| Section No. | 141 |
| Section Name | Eligibility, qualifications and disqualifications of auditors |
| Monthly Updated Edition | Company Law PDF |
Eligibility and Qualifications of Auditors of a Company [Section 141(1) & (2)]
Chartered Accountants (CA):
A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant. As per clause (17) of Section 2 of CA 2013, the term “chartered accountant” means a chartered accountant as defined in clause (b) of subsection (1) of section 2 of the Chartered Accountants Act, 1949 who holds a valid certificate of practice under sub-section (1) of section 6 of that Act.
That means Chartered Accountants holding certificate of practice can only be appointed as an auditor of a company. In other words, an auditor must be a member of ICAI and he should also hold a valid COP.
Firm of Chartered Accountants (CA Firm):
A firm of Chartered Accountants whereof majority of partners practicing in India are qualified for appointment as an auditor of a company. CA firm may be appointed by its firm name to be auditor of a company.
Thus, the eligibility requirement that a firm could be appointed as an auditor only if all the partners practicing in India are qualified for appointment has now been changed under the New Companies Act, 2013. In other words, there is no need to practice in India by all partners of a CA firm as required under the Companies Act, 1956.
Accordingly, if majority of partners of a CA firm practicing in India, the firm shall be eligible to be appointed as an auditor in a company.
Limited Liability Partnership (LLP):
As per explanation given under section 139(4) of CA 2013, the word “firm” shall include a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008.
Accordingly, a Limited Liability Partnership (LLP) may also be appointed as an auditor of a company. However, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the LLP firm.
Disqualifications of Auditors of a Company [Section 141(3)]
The list for disqualification of auditors has been increased under the Companies Act, 2013. As per section 141(3) of CA 2013, the following persons shall not be eligible for appointment as an auditor of a company:
a) Body Corporate:
A body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008 shall not be eligible for appointment as an auditor of a company.
b) Officer or Employee:
An officer or employee of the company shall not be eligible for appointment as an auditor of a company.
c) Partner or Employee:
A person who is a partner, or who is in the employment, of an officer or employee of the company shall not be eligible for appointment as an auditor of a company.
d) Relative or Partner:
The following person including his relatives or partners shall also not be eligible for appointment as an auditor of a company.
(i) Security or Interest: A person who, or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company.
However, the relative may hold security or interest in the company of face value not exceeding ₹1,000 or such sum as may be prescribed. The sum has now been prescribed under sub-rule (1) of Rule 10 of the Companies (Audit and Auditors) Rules, 2014.
Accordingly, a relative of an auditor may hold securities in the company of face value not exceeding ₹1,00,000.
Further, the above condition shall, wherever relevant, be also applicable in the case of a company not having share capital or other securities. If the relative acquires any security or interest above the prescribed threshold (₹1 Lakh), the corrective action to maintain the limits as specified above shall be taken by the auditor within 60 days of such acquisition or interest.
(ii) Indebted to Company: A person who, or his relative or partner is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of such amount as may be prescribed.
Such amount has now been prescribed under sub-rule (2) of Rule 10 of the Companies (Audit and Auditors) Rules, 2014.
Accordingly, a person who or whose relative or partner is indebted to the company or its subsidiary or its holding or associate company or a subsidiary of such holding company, in excess of ₹5,00,000 shall not be eligible for appointment.
(iii) Guarantee or Security: A person who, or his relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed. Such amount has now been prescribed under sub-rule (3) of Rule 10 of the Companies (Audit and Auditors) Rules, 2014.
Accordingly, a person who or whose relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of ₹1,00,000 shall not be eligible for appointment.
e) Business Relationship:
A person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed shall not be eligible for appointment as an auditor of a company.
The nature has been prescribed under sub-rule (4) of Rule 10 of the Companies (Audit and Auditors) Rules, 2014. Accordingly, the term “business relationship” shall be construed as any transaction entered into for a commercial purpose, except –
i) Nature of Professional Services: Commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under CA 2013 and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts;
ii) Ordinary Course of Business: Commercial transactions which are in the ordinary course of business of the company at arm’s length price – like sale of products or services to the auditor, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.
f) Director or KMP:
A person whose relative is a director or is in the employment of the company as a director or Key Managerial Personnel (KMP) shall not be eligible for appointment as an auditor of a company.
g) Full time Employment and Audit Limit:
A person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies shall not be eligible for appointment as an auditor of a company.
Further, the Council of the Institute of Chartered Accountants of India (ICAI) has also specified that a CA in practice shall be deemed to be guilty of professional misconduct, if he holds at any time appointment of more than the “specified number of audit assignments of the companies under section 141(3)(g) of the Companies Act, 2013 i.e. 20.
Note that the limit of 20 company audits is per person (CA) basis and not the CA firm basis. Thus, a firm having 5 CAs the number of Audits available to that CA Firm shall be 100.
h) Convicted by Court:
A person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction.
i) Consulting and Specialised Services:
any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144.
Vacation of office by an auditor of a Company [Section 141(4)]
In accordance with the provisions of Section 141(4) of CA 2013, where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-section (3) of section 141 after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.
In other words, if an appointed auditor incurs any of the disqualifications specified in Section 141(3), he shall be deemed to have vacated his office. Note that such vacation shall be deemed to be a casual vacancy in the office of the auditor.
Section 141 of Companies Act 2013: Eligibility, qualifications and disqualifications of auditors
Section 141 shall come into force on 1st April, 2014 vide Notification No. S.O. 902(E) issued dated 27.03.2014.
(1) A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant:
Provided that a firm whereof majority of partners practicing in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company.
(2) Where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.
(3) The following persons shall not be eligible for appointment as an auditor of a company, namely: —
- (a) a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008;
- (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, or his relative or partner—
- (i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company:
Provided that the relative may hold security or interest in the company of face value not exceeding one thousand rupees or such sum as may be prescribed; - (ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of such amount as may be prescribed; or
- (iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, for such amount as may be prescribed;
- (i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company:
- (e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed;
- (f) a person whose relative is a director or is in the employment of the company as a director or key managerial personnel;
- (g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies;
- (h) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction;
- (i) a person who, directly or indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company.
Explanation: For the purposes of this clause, the term “directly or indirectly” shall have the meaning assigned to it in the Explanation to section 144.
(4) Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.
Exception/ Modification/ Adaptation:
In case of Private company, clause (g) of subsection (3) of section 141 shall apply with the modification that the words “other than one person companies, dormant companies, small companies and private companies having paid-up share capital less than one hundred crore rupees” shall be inserted after the words “twenty companies”. – Notification No. G.S.R. 464(E) dated 5th June, 2015.