Auditor Appointment & Related Filings

What is auditor appointment?

Every company in India, however small, has to have its financial statements audited each year by a statutory auditor — a practising Chartered Accountant or CA firm. The Companies Act, 2013 sets out who appoints the auditor, when, for how long, and how they can be changed.

Each appointment, resignation, or removal also has to be reported to the ROC. These are small filings, but a company without a validly appointed auditor can't complete its annual accounts.

The key rules

A handful of rules cover almost every auditor appointment:

Statutory auditor

A practising Chartered Accountant or CA firm that audits the company's financial statements every year. Every company needs one, whatever its size or turnover.

First auditor

Appointed by the board within 30 days of incorporation. If the board doesn't, shareholders appoint one within 90 days. The first auditor holds office until the first AGM.

Five-year term

At the first AGM, shareholders appoint an auditor to hold office until the end of the sixth AGM — a five-year term, without the annual ratification that used to be required.

ADT-1

The company's notice to the ROC of an auditor's appointment, filed within 15 days of the meeting where the auditor was appointed.

ADT-3

Filed by an auditor who resigns, with the ROC, within 30 days of resigning, stating the reasons for resigning.

ADT-2

The company's application to the Regional Director for approval to remove an auditor before their term ends.

Rotation

Larger companies must rotate auditors: an individual can serve one five-year term and a firm two, followed by a five-year cooling-off period.

Why it matters

The auditor's appointment underpins every set of accounts the company files:

No auditor, no accounts

The annual financial statements can't be filed without an auditor's report. A company without a validly appointed auditor can't complete its annual filings.

Appointment deadlines

Missing the 30-day window for the first auditor, or the AGM appointment, puts the company in default, and can let the government step in to appoint one.

Invalid audits

An auditor who's disqualified — a relative holding shares, an employee, someone indebted to the company — can't validly audit it, and the audit may have to be redone.

Late ADT-1 fees

ADT-1 filed after 15 days attracts additional fees that rise with the delay.

Removal needs approval

An auditor can't just be replaced mid-term. Removal needs a special resolution and the Regional Director's approval, which protects auditor independence.

Due diligence

Investors and lenders check the auditor's appointment history. Gaps or unexplained changes raise questions about the accounts.

Independence

The statutory auditor can't provide certain other services to the company, like bookkeeping or internal audit. Getting this wrong can compromise the audit.

Who is this for?

• Newly incorporated companies appointing their first auditor
• Companies approaching their first AGM, where the five-year appointment is made
• Companies whose auditor has resigned, or whose term is ending
• Companies that want to change auditors mid-term
• Companies large enough to be subject to auditor rotation

LLPs follow different rules: their designated partners appoint the auditor, and an audit is needed only above the turnover or contribution threshold. There's no ADT-1 for LLPs.

Auditor events compared

Each change in the auditor has its own rules. Here's how they compare:

What we'll need from you

Chosen auditor

The CA or firm you want to appoint. We can suggest options if you don't have one.

Consent and eligibility

The auditor's written consent, and a certificate that they're eligible and not disqualified under the Act.

Board or shareholder resolution

The resolution appointing the auditor and, for AGM appointments, fixing their remuneration.

Previous auditor details

For a change of auditor, the outgoing auditor's appointment, term, and any resignation letter or ADT-3.

Company size

Paid-up capital and borrowings, to check whether rotation rules apply.

Active DSC

A valid DSC for the director signing ADT-1.

The ROC fee for ADT-1 is small and depends on the company's share capital. The auditor's own fee is agreed with them and approved by the shareholders.

Appointing an auditor

Whether it's the first auditor or the five-year appointment, the steps are similar:

1. 1

   Choose the auditor

   Pick a practising CA or firm, checking they hold a certificate of practice and have capacity for your audit.

2. 2

   Get consent and eligibility

   The auditor gives written consent and a certificate confirming they meet the Act's conditions and aren't disqualified.

3. 3

   Check independence

   Confirm the auditor isn't a relative of a director, doesn't hold shares, and isn't providing prohibited services to the company.

4. 4

   Pass the resolution

   The board appoints the first auditor, or shareholders appoint the five-year auditor at the AGM and fix the remuneration.

5. 5

   Inform the auditor

   The company tells the auditor of the appointment in writing.

6. 6

   File ADT-1

   The appointment is filed with the ROC within 15 days of the meeting.

Auditor independence rules

The Act keeps the auditor independent of the company they audit. These are the rules that matter most:

Who can't be the auditor

An officer or employee of the company, a partner or employee of one, or someone whose relative holds its shares beyond the permitted limit.

Financial ties

An auditor can't be indebted to the company or have given a guarantee for someone else's debt to it beyond the prescribed limits, or have a business relationship with it.

Prohibited services

The statutory auditor can't provide the company with services like bookkeeping, internal audit, or management services. Other services need board approval.

Limit on audits

An auditor can hold at most 20 company audits, though audits of OPCs, dormant companies, small companies, and smaller private companies don't count.

Fraud reporting

If the auditor finds a fraud above the threshold during the audit, they must report it to the Central Government in ADT-4.

Tax audit is separate

A tax audit under the Income-tax Act is a different engagement. The statutory auditor can also do it, but it doesn't replace the statutory audit.

Benefits and responsibilities