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Chapter X of Companies Act – Audit and Auditors

Section 139

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Important Information

We shall not be discussing 100% Sections and Sub-sections

The unimportant ones we shall be leaving and when we say unimportant ones, they shall be around 5-10% of the overall act

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Term Explainer for Future Sections

Term Explainer: General Meeting, Annual General Meeting and Extraordinary General Meeting
A general meeting is a meeting of a company's shareholders (unlike a board meeting, which is a meeting of the directors)
There are 2 types of General Meetings: AGM and EGM

1. Annual General Meeting (AGM): The AGM of a company or organization is a meeting which it holds once a year in order
to discuss the previous year's activities and accounts

2. Extraordinary General Meeting (EGM):An Extraordinary General Meeting (an EGM) can be defined as a meeting of
shareholders which is not an Annual General Meeting(an AGM). It is held when some urgent issue becomes about the
company arises or any situation of crisis

Term Explainer: Members of Company

1. Every person holding shares of the company


2. Every other person who agrees in writing to become a member of the company and whose name is entered in the
register of members of the company
3. The subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the
company
Memorandum of Company in short is like constitution of company
Term Explainer for Future Sections

Term Explainer

Auditors : An auditor is a person authorized to review and verify the accuracy of financial records and ensure that
companies comply with tax laws

Acts and Rule : An act is a law or the statute which has been passed by the legislature and approved by the President of
India whereas Rules provide the details which have not been provided for in the Act

Paid up Share Capital: Paid-up capital is the amount of money a company has received from shareholders in exchange
for shares of stock. Paid-up capital is created when a company sells its shares on the primary market, directly to investors

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Companies Act 2013 -> Section 139 (1) – Appointment of Auditors

Appointment of Auditors

Government Companies : Companies Directly or Non-Government Companies: Companies other than


Indirectly Owned by Central Government or State which are Directly or Indirectly Owned by Central
Government or Both Government or State Government or Both

The procedure for appointment of auditors is different in both. Let's discuss them one by
one

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Companies Act 2013 -> Section 139 (1) – Appointment of Auditors
Appointment of Auditors - Non-Government Companies

Shall Appoint an Individual or Firm as an Auditor at its first


Every Company Annual General Meeting

The Auditor appointed shall hold office from the conclusion of that
There is a proper Manner and Procedure meeting till the conclusion of its sixth annual general meeting and
for selection of Auditors thereafter till the conclusion of every sixth meeting with the meeting
wherein such appointment has been made being counted as the first
meeting
Companies Act 2013 -> Section 139 (1) – Appointment of Auditors
Appointment of Auditors - Non-Government Companies

Shall Appoint an Individual or Firm as an Auditor at its first


Every Company Annual General Meeting

The Auditor appointed shall hold office from the conclusion of that
There is a proper Manner and Procedure meeting till the conclusion of its sixth annual general meeting and
for selection of Auditors thereafter till the conclusion of every sixth meeting with the meeting
wherein such appointment has been made being counted as the first
meeting
Companies Act 2013 -> Section 139 (1) – Appointment of Auditors
The Companies (Audit and Auditors) Rules, 2014 – Rule 3 – Manner and procedure of selection and appointment of auditors:

Manner and procedure of selection and appointment of auditors - Non-Government Companies


Companies Act 2013 -> Section 139 (1) – Appointment of Auditors
The Companies (Audit and Auditors) Rules, 2014 – Rule 3 – Manner and procedure of selection and appointment of auditors:

Manner and procedure of selection and appointment of auditors - Non-Government Companies

If a company has Audit Committee then Audit the committee shall recommend the name of an individual or a firm as
auditor to the Board for consideration otherwise the Board shall consider and recommend an individual or a firm as
auditor to the members in the annual general meeting for appointment.

If the Initial recommendation was made by audit Committee to the Board then Board can send back or approve that
recommendation

I. if the Board agrees with the recommendations of the Audit Committee, it shall place the matter for
consideration by members in the annual general meeting.

II. In case of rejection, Audit committee will reconsider the firm or Individual whose name was proposed earlier and
may withdraw its recommendation. In such a case the board send its own recommendation for consideration of
the members in the annual general meeting

Question: What will happen if the recommendation send back by Board to auditor is not withdrawn by audit Committee?
Answer: There is no mention of this scenario in the act/rules, so it means ultimately will of Board shall prevail
Companies Act 2013 -> Section 139 (1) – Appointment of Auditors
The Companies (Audit and Auditors) Rules, 2014 – Rule 3 – Manner and procedure of selection and appointment of auditors:

Manner and procedure of selection and appointment of auditors - Non-Government Companies

The Audit Committee or the Board (as the case will be ) shall take into consideration the qualifications and experience of
the individual or the firm proposed to be considered for appointment as auditor to decide whether the qualification and
experience of the firm are good enough to act as an auditor

While considering the firm or Individual to act as an Auditor the Audit Committee or the board shall take into
consideration any disciplinary order against the firm or individual by any court or Institute of Chartered Accountants

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Companies Act 2013 -> Section 139 (1) – Appointment of Auditors
The Companies (Audit and Auditors) Rules, 2014 – Rule 4 – Conditions for appointment and notice to Registrar:

Appointment of Auditors – Non-Government Companies

The auditor to be appointed before the appointment must give a written consent and a certificate be obtained from him

The certificate shall contain


1. The individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment
under the Act
2. The proposed appointment is as per the term provided under the Act
3. The list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to
professional matters of conduct, as disclosed in the certificate, is true and correct.

Once the certificate is obtained and Auditor is appointed, the company shall inform the auditor concerned of his or its
appointment and file a notice of such appointment with the Registrar within fifteen days of the meeting in which the
auditor is appointed.

The notice to Registrar shall be in Form ADT-1

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Companies Act 2013 -> Section 139 (1) – Appointment of Auditors
The Companies (Audit and Auditors) Rules, 2014 – Rule 4 – Conditions for appointment and notice to Registrar:

Appointment of Auditors – Non-Government Companies

Once the certificate is obtained and Auditor is appointed, the company shall inform the auditor concerned of his or its
appointment and file a notice of such appointment with the Registrar within fifteen days of the meeting in which the
auditor is appointed.

Exceptions:
For any IFSC Public or IFSC Private Company the notice of appointment of auditor to Registrar should be sent with in
30 Days of the meeting in which the auditor is appointed.

Term Explainer
International Financial Services Center (IFSC) is not defined in companies act but as per notification of government of
India it is an unlisted “public company” or “private company” which is licensed to operate by the Reserve Bank of India
or the Securities and Exchange Board of India or the IRDAI

As per Companies Act, Public companies are those which have at least 7 members and no restriction on maximum
members and they can issue shares to public where a Private companies are those which have minimum of 2 members
and maximum of 200 members, but they cannot issue shares to Public
Companies Act 2013 -> Section 139 (6) – Appointment of Auditors

First Appointment of Auditors - Non-Government


Despite what is mentioned in sub-section (1)

The first auditor of a company shall be appointed by the


Board of Directors within thirty days from the date of
registration of the company and such auditor shall hold
office till the conclusion of the first annual general meeting

In the case of failure of the Board to appoint such auditor


with 30 Days, it shall inform the members of the company,
who shall within ninety days at an extraordinary general
meeting appoint such auditor and such auditor shall hold
office till the conclusion of the first annual general meeting.
Concept Check

If a company calls an emergency meeting to discuss some urgent issues, then what kind of meeting it would be?
(Ans: EGM)

The first auditor of a non-government company needs to appointed by the Board in how many days from the date of
registration of the company?
(Ans: 30 Days)

In the case of failure of the Board to appoint first auditor with 30 Days of registration of non-government company, it shall
inform the members of the company, who shall with in __________ days at an ________ appoint such auditor and such
auditor shall hold office till the conclusion of the first annual general meeting

1. 30, AGM
2. 30, EGM
3. 90, AGM
4. 90, EGM

Ans: Option 4
Concept Check

The non-government company except for IFSC Company shall file a notice of appointment of auditor in the annual general
meeting with the Registrar within ____ days of the meeting in which the auditor is appointed
1. 10
2. 15
3. 20
4. 30

Ans: Option 2

The appointment of auditor other than the first auditor by a non-government company needs to placed for consideration by
members in _______
1. AGM
2. EGM
3. AGM if AGM is available in next 30 days of appointment of auditor
4. EGM is no AGM is available in next 30 days of appointment of auditor

Ans: Option 1
General Definitions to understand future Sections

Term Explainer : Public Company, Private Company, Listed and Unlisted Company

Public Company Private Company


1. At least 7 members 1. At least 2 members
2. No Restriction on max members 2. Max 200 members
3. Can issue its shares to Public 3. Cannot Issue its shares to Public
Private Company can be of 2 types
Public Company can be of 2 : Small Company and One Person
types: Listed and Unlisted Company

Small Company
Unlisted Company
Listed Company 1. Paid-up share capital of which does
It is that company
It is that company whose not exceed fifty lakh rupees, or
whose securities are One Person Company
securities are listed on such higher amount as may be
not listed on A special case of
recognized stock prescribed which shall not be more
recognized stock Private company is
exchange than ten crore rupees
exchange One-person company
2. Turnover in immediately preceding
financial year does not exceed two which will have just
crore rupees or such higher one member
amount as may be prescribed
which shall not be more than one
hundred crore rupees
Companies Act 2013 -> Section 139 (2) – Appointment of Auditors
The Companies (Audit and Auditors) Rules, 2014 – Rule 5 – Classes of Companies

Appointment of Auditors – Non-Government Companies - Term


Individual shall not be
All the below companies except One an individual as auditor for eligible for
Person and Small Companies more than one term of five Reappointment for 5
consecutive years years from the date of
Listed Company completion of his term
Shall not
All unlisted public companies having
Appoint
paid up share capital of rupees ten
crore or more Audit Firm shall not be
an audit firm as auditor for eligible for
All private limited companies having Reappointment for 5
paid up share capital of rupees fifty more than two terms of five
consecutive years: years from the date of
crore or more completion of such term
Any Company having paid up share
capital less than rupees ten crore but Even audit firm having a common partner or partners to the other audit firm or
having public borrowings from if a partner joins another audit firm and leaves the first one, whose tenure has
financial institutions, banks or public expired in a company immediately preceding the financial year, shall not be
deposits of rupees fifty crores or appointed as auditor of the same company for a period of five years from the
more. date of completion of such term
Companies Act 2013 -> Section 139 (3 and 4) – Appointment of Auditors
The Companies (Audit and Auditors) Rules, 2014 – Rule 6 – Manner of rotation of auditors by the companies on expiry of term:

Appointment of Auditors – Non-Government Companies - Rotation

(a) in the audit firm appointed, the auditing partner


and his team shall be rotated at such intervals as
may be resolved by members

(b)the audit shall be conducted by more than one


auditor.

Rules are prescribed for rotation of auditors


Companies Act 2013 -> Section 139 (3 and 4) – Appointment of Auditors
The Companies (Audit and Auditors) Rules, 2014 – Rule 6 – Manner of rotation of auditors by the companies on expiry of term:

Appointment of Auditors – Non-Government Companies - Rotation Rules are prescribed for rotation of auditors

A break in the term for a continuous period of five


years shall be considered as fulfilling the
requirement of rotation

The incoming auditor or audit firm shall not be


eligible if such auditor or audit firm is associated with
the outgoing auditor or audit firm under the same
network of audit firms.

The term “same network” includes the firms


operating or functioning, under the same brand name,
trade name or common control.
Companies Act 2013 -> Section 139 (3 and 4) – Appointment of Auditors
The Companies (Audit and Auditors) Rules, 2014 – Rule 6 – Manner of rotation of auditors by the companies on expiry of term:

Appointment of Auditors – Non-Government Companies - Rotation Rules are prescribed for rotation of auditors

if a company has appointed two or more individuals


or firms or a combination thereof as joint auditors,
the company may follow the rotation of auditors in
such a manner that both or all of the joint auditors,
as the case may be, do not complete their term in
the same year.
Concept Check

What is the minimum number of people with which company can be formed?

1. 2
2. 1
3. 3
4. 4

Ans: Option 2

The minimum number of members in public company are ______ where as maximum number of members in private
company are __________-
1. 6,100
2. 7,200
3. 2,200
4. 7, no limit

Ans: Option 2
Concept Check

Which of the following are exempted from appointing individual auditors for not more than one term of five consecutive
years
1. One Person Company
2. Listed Companies
3. All unlisted public companies having paid up share capital of rupees ten crore or more
4. All private limited companies having paid up share capital of rupees fifty crore or more
Ans: Option 1

The Individual can be appointed as auditor for one term of ___ consecutive years and after that can be re-appointed as an
auditor after a cooling off period of ________years
1. 10,5
2. 5,10
3. 5,5
4. 10,10
Ans: Option 3
Concept Check

Which of the following statement is false?


1. A break in the term for a continuous period of five years shall be considered as fulfilling the requirement of rotation
2. The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing
auditor or audit firm under the same network
3. Joint auditors shall mandatorily complete their term on the same date
4. The incoming audit firm after the expiry of outgoing audit firm shall not have any common partners
Ans: Option 3

There is a condition for certain firms that individual auditor shall not be appointed for more than one term of 5 consecutive
years. Which of the following firms will note come under this condition?
1. unlisted public companies having paid up share capital of rupees 15 crore
2. private limited companies having paid up share capital of rupees 125 crore
3. A company having paid up share capital of < 10 crore but having borrowings from banks of 25 crores
4. Listed Company having paid up share capital of 25 crores

Ans: Option 3
Companies Act 2013 -> Section 139 (5) – Appointment of Auditors

Appointment of Auditors – Government Companies Despite what is mentioned in 139 (1), In the case of a

1. Government company or

2. Any other Company owned or controlled, directly or


indirectly, by the Central Government, or by any State
Government or Governments or

3. Partly by the Central Government and partly by one or


more State Governments

The Comptroller and Auditor-General of India shall appoint


an auditor within a period of one hundred and eighty days
from the commencement of the financial year

The auditor shall hold office till the conclusion of the annual
general meeting
Companies Act 2013 -> Section 139 (7) – Appointment of Auditors

The first auditor shall be appointed by the Comptroller and


First Appointment of Auditors - Government Companies Auditor-General of India within sixty days from the date of
registration of the company

In case the Comptroller and Auditor-General of India does


not appoint such auditor within the said period, the Board
of Directors of the company shall appoint such auditor
within the next thirty days

In the case of failure of the Board to appoint such auditor


within the next thirty days, it shall inform the members of
the company who shall appoint such auditor within the
sixty days at an extraordinary general meeting, who shall
hold office till the conclusion of the first annual general
meeting
Concept/Fact Check

In case of government company the _________of India shall appoint an auditor within a period of _____ days from the
commencement of the financial year and he shall hold office till the conclusion of next ______

1. CAG, 90, AGM


2. CAG, 180, EGM
3. CAG, 90, EGM
4. CAG,180, AGM

Ans: Option 4
Companies Act 2013 -> Section 139 (8) – Appointment of Auditors

Casual Vacancy of the Auditor means a vacancy caused


Casual Vacancy of Auditor
due to death, resignation, disqualification

Vacancy shall be If such casual vacancy is as a result of the


For Non-Government
filled by the Board resignation of an auditor, such appointment by
Companies
in consultation with board shall also be approved by the company at
audit Committee (if a general meeting convened within three
there is Audit months of the recommendation of the Board
Committee) within and the auditor shall hold the office till the
thirty days conclusion of the next annual general meeting

In case the Comptroller and


Auditor-General of India does not
For Government Companies Vacancy shall be filled by the
fill the vacancy within the said
Comptroller and Auditor-General
period, the Board of Directors
of India within thirty days:
shall fill the vacancy within next
thirty days.
Concept/Fact Check

In case of casual vacancy of auditor for non-government companies, the board shall fill the vacancy with in ____days from
date of vacancy. If such vacancy is due to resignation of an auditor then such appointment by board shall also be approved by
the company at a ___________convened within ______months of the recommendation
1. 30,AGM,6
2. 30,General Meeting, 3
3. 60,AGM,3
4. 60, EGM, 6
Ans: Option 2
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