Things To Know Before Appointing An Auditor for your Company

Things To Know Before Appointing An Auditor for your Company

LegalKart Editor
LegalKart Editor
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Last Updated: May 16, 2024

Every company requires an Auditor to audit its financial accounts. This ensures that the company is not manipulating its accounts, inflating its profits or cheating its shareholders. An audit is an examination of accounting records to determine its genuineness. The law mandates that every company needs to appoint an Auditor to examine their accounts. Through this post, we shall discuss how to appoint an auditor.

Appointment of Auditors

The appointment of auditors is a critical process for any organization, as it ensures transparency, accountability, and regulatory compliance in financial reporting. An auditor's role is to independently review and verify a company's financial statements, providing assurance to stakeholders regarding the accuracy and reliability of the information presented. The selection of an auditor involves careful consideration of various factors, including their qualifications, experience, independence, and reputation. In this introduction, we will explore the importance of appointing auditors, the key considerations in the selection process, and the steps involved in ensuring the appointment of qualified and trustworthy professionals to fulfill this crucial function within an organization. 

 

Appointment of first Auditor 

Every company needs to appoint the first auditor within 30 days of incorporation. Typically, the Board of Directors appoints the first auditor. Certain criteria are laid down in the Companies Act for an auditor, The auditor is required to sign a written consent and certificate confirming that he fulfills the given criteria.  The tenure of an auditor appointed by the board shall be until the conclusion of the first Annual General Meeting (AGM). In case they fail to appoint one, an Extraordinary General Meeting (EGM) shall be convened within 90 days. Government companies are exempt from this rule. Appointment in government companies is done by Comptroller Auditor General within a set period from incorporation, failing so the Board of Directors fulfills the duty. In the event that both fail to carry out an appointment, it is the members, through an EGM, who end up appointing an Auditor.  The appointment of the first auditor for a company marks a significant milestone in its journey, representing the initiation of formal financial oversight and accountability. This process typically occurs during the incorporation of the company or shortly thereafter, as mandated by company law or regulatory requirements. Selecting the first auditor is a crucial decision that sets the tone for the company's commitment to transparency and compliance with financial reporting standards. The appointment is often guided by considerations such as the auditor's expertise, reputation, independence, and alignment with the company's industry and specific needs. Additionally, the first auditor must possess the requisite qualifications and certifications to perform their duties effectively. This initial appointment lays the foundation for the company's ongoing relationship with its auditors, shaping the standards of governance, integrity, and financial management that will define its operations in the years to come. Therefore, careful deliberation and due diligence are essential in ensuring that the first auditor appointed by a company is capable, trustworthy, and committed to upholding the highest standards of professionalism and ethical conduct.

 

Appointment of Auditor in the first AGM

In the context of corporate governance, the appointment of an auditor during the first Annual General Meeting (AGM) of a company is a pivotal milestone. This initial AGM sets the tone for the company's financial transparency and compliance with regulatory standards from its inception. During this meeting, shareholders gather to make crucial decisions about the company's affairs, including the selection of an auditor to oversee its financial reporting processes. The appointment of an auditor is typically mandated by company laws and regulations, which require an independent and qualified professional to review the company's financial statements and provide an unbiased opinion on their accuracy and fairness. The shareholders play a significant role in this process, as they have the authority to approve the appointment of the auditor based on recommendations from the board of directors. Factors such as the auditor's expertise, reputation, independence, and fees are carefully considered during this decision-making process to ensure that the selected auditor is capable of fulfilling their responsibilities effectively. Additionally, the first AGM serves as an opportunity for the company to establish trust and credibility with its stakeholders by demonstrating a commitment to robust financial governance through the appointment of a reputable auditor. Overall, the appointment of an auditor during the first AGM is a critical step in laying the foundation for sound corporate governance practices and fostering investor confidence in the company's financial integrity.

Appointment of Auditor arising out of a casual vacancy

If there is a vacancy arising out of death, disqualification or resignation of an auditor then it’s referred to as Casual Vacancy. If the same arises out of resignation, then the EGM appoints a new one within 3 months of the recommendation of the Board.  If it is any other reason than Resignation the Board appoints an Auditor within 30 days. Any auditor appointed in a casual vacancy continues to hold office until the ending of the next Annual General Meeting. 

 

Appointment of Retiring Auditor

The retiring auditor can be reappointed again provided that he is not disqualified, has not given a notice to the company about his unwillingness to continue and no special resolution appointing some other auditor or specifically denying his re-appointment has been passed. If no auditor is appointed at the end of the tenure of the serving auditor then the same auditor shall continue.

 

Removal of Auditor

An Auditor, who is statutorily appointed can only be removed by a special resolution, after obtaining the previous approval of the Central Government on that behalf in the prescribed manner. The auditor concerned shall be given a reasonable opportunity of being heard before proceeding with the same.

Conclusion

An Auditor is a necessary part of company functioning. They ensure the money invested or earned by the company is utilized in a proper manner. Audits carried out by the Auditor increase trust of the Public and Government in a company. This increase in trust and compliance ultimately helps increase investment in the business. It also helps keep the company financially healthy by detecting fraud. 
 

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