Qualification and Disqualification of an Auditor
An auditor is an independent professional who examines and assesses an organization's financial records, statements, and internal controls in order to provide an opinion on the fairness and accuracy of the financial information presented by the organization. Auditors are essential in making sure that financial reporting is transparent, dependable, and compliant with applicable laws, regulations, and accounting standards. An auditor's main goal is to reassure stakeholders, including shareholders, investors, creditors, and the general public, that the financial information presented by an organization is trustworthy and can be relied upon for making decisions. They also identify and mitigate risks, look for fraud or errors, and offer suggestions for enhancing internal controls and financial reporting procedures. In this article, we will explain the qualifications and disqualifications of an auditor in detail.
Table of content
Qualification of an Auditor
The eligibility requirements for a person or entity to be appointed as an auditor are outlined in Sections 141(1) and 141(2) of the Companies Act of 2013. According to the terms of the Chartered Accountant Act of 1949, an individual who is a chartered accountant and possesses a current certificate of practice (COP) may be appointed as an auditor in the following capacities:
An Individual
LLP
The Institute of Chartered Accountants of India (ICAI) administers the Chartered Accountant (C.A.) test, which must be passed in order to become a chartered accountant. After paying the required yearly fee, a certificate of practice must be received from the ICAI council in order to practice as a chartered accountant. Associates and fellows are the two types of members that make up the ICAI. When a person's name appears in the Institute's Members Register, they are deemed associate members and are allowed to use the letters A.C.A. after their name. To become a Fellow of the Institute, an associate must have been in continuous practice in India for at least five years under any other associate who has been a member of the Institute for five years and who meets the requirements set forth by the Institute's Council. Fellows have the right to follow their names with the letters F.C.A.
Disqualification of an Auditor
Section 141(3) specifies a list of individuals who are ineligible to serve as the company's auditors:
a) A body corporate besides LLP
b) An employee or officer of the company.
c) Partner or who is in the employment of an employee or officer of the company.
d)Relative/Partner shall not be eligible for appointment in case the person:
Has any kind of interest or security in the business, its subsidiary, its holding, associate business, or subsidiary of the holding company
Has debts owed to the business, its subsidiary, its holding, associate business, or subsidiary of the holding company.
Has guaranteed or provided security about a third party's debt to the company, its subsidiary, its holding company, its associate company, or a subsidiary of such a holding company. (A relative may, however, own stock or an interest in the business up to the face value of Rs. 1000 or Rs. 1,00,000, as specified by the regulations).
Owes more than Rs. 5 lacs to the company, its subsidiary, its holding company, its associate company, or a subsidiary of such holding company.
A person or business that has a business relationship with the company, its subsidiary, its holding company, its associate company, or a subsidiary of such a holding company or associate company, whether directly or indirectly.
A person whose family member serves as a director or is employed by the company as a key management or director.
An individual who works full-time for another company, or a partner or individual appointed as its auditor is currently serving as an auditor for over 20 companies at the time of appointment or reappointment.
A person who has been found guilty by a court of a fraud-related offense and has not had ten years pass since the conviction date.
Any individual whose subsidiary, associate business, or other type of corporation is providing consulting or specialised services in accordance with Section 144 of the Companies Act, 2013 as of the date of appointment.
Implications of Disqualification of an Auditor
According to the provisions of Section 141(4) of the Companies Act of 2013, a person appointed as the company's auditor must resign from his position if he becomes disqualified in any way after his appointment, as stated in Section 141(3) of the Companies Act of 2013, and the vacancy will be considered a casual vacancy in the auditor's officer. The list of services that an auditor is prohibited from providing is outlined in Section 144 of the Companies Act of 2013.
Accounting and Bookkeeping
Investment Advisory Services
Investment Banking Services
Internal Audit
Actuarial Services
Design and Implementation of any Financial Information System
Rendering of Services
Any other kind of services prescribed.
Powers and Duties of an Auditor under Section 143 of the Companies Act
It is the auditor's responsibility to comment and create an opinion based on his expertise and beliefs, as well as the information and explanations he has received, and to determine whether or not the company's financial statements present a truthful and fair picture. An auditor's responsibility is to report on the following issues:
If the auditor has received all the information and explanation required to conduct the audit, and if not, what those specifics are.
Whether the customer has kept accurate books of accounts in accordance with legal requirements.
Whether or not the company's auditor received the branch audit report under 143(8).
Whether the balance sheet and P&L A/C are produced in accordance with the books of accounts.
Whether financial reporting adheres to the Accounting Standards.
If any director is ineligible under Section 164(2) of the 2013 Companies Act.
An auditor's observation, remark, or qualification regarding financial transactions that negatively impact the company's ability to operate.
The auditor's unfavourable comments regarding account upkeep.
Whether or not the customer has appropriately maintained internal financial control over financial statements.
Any further matters that may be recommended.
Auditor’s Right to Attend the General Meeting
As per Section 146 of the Companies Act:
The company's auditor must get notice of all general meetings and
He must be present at all general meetings, either alone or through his designated representative who is an auditor and
He will be entitled to a hearing at such a meeting regarding any aspect of the business that affects him in his capacity as an auditor.
Conclusion
To ensure their eligibility and preserve their independence and objectivity in carrying out their audit duties, auditors must abide by the relevant laws, rules, and professional standards. It is important to remember that disqualifying auditors may have legal and professional repercussions. A knowledge of the qualification and disqualification of an auditor is a must to ensure that a company has the right person working in the role.
FAQ
Q1. What qualifications are required to become an auditor?
Any person certified as a Chartered Accountant (CA) under the Chartered Accountant Act of 1949 and trained to examine and validate accounting data is considered an auditor. In accordance with the 2013 Companies Act, every business must designate an auditor.
Q2. What is the purpose of the appointment of an auditor?
The company's auditors work to safeguard the interests of its shareholders. The law requires the auditor to review the directors' accounts and advise them of the company's actual financial status. In order to safeguard and maintain the company's sound financial standing, the auditor provides the owners or shareholders with his unbiased assessment.
Q3. How is an auditor’s remuneration decided?
According to Section 142 of the Companies Act, the compensation of a company's auditor must be determined at its general meeting or through a procedure set upon at that meeting.
Q4. What happens if an auditor detects fraud in a company?
An auditor must notify the Central Government if they detect fraud over a certain threshold. They have to notify the company's Board or Audit Committee of any fraud that falls below the threshold.
Q5. Do auditors need to adopt specific auditing standards?
Yes, after consulting the Institute of Chartered Accountants of India or the National Advisory Committee on Accounting and Auditing Standards, the auditors must follow the auditing standards set forth by the Central Government.
Q6. Who is not qualified to be an auditor?
An official or employee of the company is not eligible to serve as a company auditor.
Q7. Can an auditor claim tax deductions on professional expenses?
Yes, auditors can claim deductions on expenses like office rent, professional memberships, and software under Section 37 of the Income Tax Act.
Q8. How does an auditor's qualification impact company audits?
A qualified auditor ensures compliance with financial regulations, reducing the risk of penalties and tax disputes.
Q9. Are there tax benefits for auditors under presumptive taxation?
If an auditor operates as a sole proprietor, they may opt for Section 44ADA, which allows presumptive taxation for professionals.
Q10. Can an auditor provide tax consultancy services alongside auditing?
No, auditors of a company cannot provide tax consultancy due to independence and conflict-of-interest regulations.
Q11. Does an auditor's disqualification affect a company’s financial reports?
Yes, a disqualified auditor's reports may be invalid, leading to compliance issues and potential re-audit costs.
Q12. Can an auditor be appointed for tax audits as well as statutory audits?
Yes, but the same auditor cannot undertake both audits if it violates independence guidelines set by regulatory bodies.
Q13. How does an auditor’s disqualification impact a company’s ITR filing?
A company with a disqualified auditor may face scrutiny during tax filing, affecting its compliance record.
Q14. Can an auditor be disqualified due to non-filing of personal ITR?
While uncommon, a lack of tax compliance can impact an auditor’s credibility and professional standing.
Q15. What happens if an auditor fails to disclose financial interests in the company?
Such non-disclosure can lead to disqualification and legal action under corporate governance laws.
Q16. Can a disqualified auditor reapply for the same role?
A previously disqualified auditor may be eligible again after fulfilling regulatory conditions and resolving conflicts.
Q17. Are there any GST-related disqualifications for auditors?
If an auditor is non-compliant with GST regulations, it may affect their eligibility to audit companies.
Q18. Can an auditor be disqualified due to bankruptcy?
Yes, auditors declared insolvent lose their eligibility as they may not ensure financial independence.
Q19. What happens if a disqualified auditor signs an audit report?
Such reports may be considered invalid, leading to legal and tax-related complications for the company.
Q20. How do foreign qualifications impact auditor eligibility in India?
Foreign-certified auditors need to meet ICAI and Companies Act criteria before practicing in India.
Q21. Does an auditor’s disqualification affect shareholder trust?
Yes, investors may question the company's financial credibility, leading to reduced confidence in its reports.
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