They are governed by section 226 of the Act. The main provisions are stated below :
(1) A person shall not be qualified for appointment as an auditor of a company (public or private) unless he is a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949; provided that a firm whereof all the partners practising in India are qualified for appointment, as aforesaid, may be appointed by its firm name to be the auditors of a company in which case any partner so practising may act in the name of the firm [Section 226(1)]; and
(2) Notwithstanding anything contained in sub-section (1) but subject to the Rules made under clause (b) of sub-section (2), the holder of certificate granted under the law in force entitling him to act as an auditor of companies in the whole or in any part of Part B States, immediately before the
commencement of the Part B States (Laws), 1951 is entitled to act as an auditor of companies registered anywhere in India.
Note: It was only a transitional provision and is not relevant as on date. As per the provisions of the Act, the chartered accountants have exclusive authority to act as the auditors. A chartered accountant either in his individual capacity may act as the auditor or a firm may also act as an auditor provided all partners in the said firm are chartered accountants within the meaning of the Chartered Accountants Act, 1949.
(3) Under sub-section (3) of section 226, the following persons are not qualified for appointment as auditors of a company :
- a body corporate;
- an officer or an employee of the company; a person who is a partner, or who is in the employment of an officer or employee of the
company; - a person who is indebted to the company for more than Rs. 1,000 or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for more than Rs. 1000; and
- a person holding any security of that company. Explanation – For the purposes of this section, “security” means an instrument which carries voting
rights.
(4) It is further laid down in sub-section (4) of section 226 that a person is not eligible for appointment as auditor of any company, if he is disqualified from acting as auditor of that company’s subsidiary or holding company or of any other subsidiary of the same holding company.
(5) Sub-section (5) of section 226 provides that if an auditor, after his appointment, becomes subject to any of the disqualification specified in sub-sections (3) and (4), i.e., in respect of matters described in paragraphs (3) and (4) above, he shall be deemed to have automatically vacated his
office.
Students may note that these provisions have been introduced with the objective that the accounts of companies shall be audited only by persons of proven standing who will be under the discipline of a professional body, viz., the Institute of Chartered Accountants of India. Only a person holding a certificate of practice issued by it is qualified for appointment as auditor. The provisions relating to disqualifications aim to prohibit certain financial or personal relationships so as to ensure that an auditor appears to be independent to the world at large. The main purpose of disqualifying a body corporate to
act as an auditor is perhaps on the grounds that the accountancy profession is rendering services to society which are of personal nature. The effect of corporate form of entity would be that the limited liability shall be detrimental in the interests of the profession. To ensure that he would be independent in
his attitude and judgment, it has also been provided that the auditor shall not be connected or associated with directors or any officer of the company either as a partner or an employee. With the inclusion of clause (e) in sub-section (3) of section 226, the legislator had introduced a very stringent requirement whereby an auditor shall not be able to hold even a single share or any other kind of security. A firm would also be disqualified to be appointed as an auditor even if one partner is disqualified under this clause.
It is also a requirement that when a Chartered Accountant, being a relative of person(s) having substantial interest in the company or in any business, expresses any opinion on financial statements of the company, or of the business, he should disclose his interest while making the report. If this disclosure is not made, it would amount to “misconduct” under the Chartered Accountants Act, 1949. ‘Relative’ for this purpose means a relative within the meaning of section 6 of the Act. Similarly, the expression ‘substantial interest’ shall have the same meaning assigned thereto under Explanation 3 to section 13 of the Income-tax Act, 1961. Students may also note carefully that there is no bar under the Act to prohibit an auditor of a company from rendering other services in the capacity of a consultant. Rather an auditor because of his vast knowledge and familiarity about the client’s affairs is perhaps the best person to render advisory services. In this case, attention is also invited to Part II of Schedule VI to Act where auditor’s remuneration has to be shown under different heads. Further, a person is also not disqualified for appointment as auditor of a company if his relatives or employees act as a director, secretary, or otherwise as an officer or employee of the company. But the Central Government’s permission may have to be obtained under section 314 of the Act. The Council of the Institute, however, recently issued a notification wherein it imposed a cap on audit fees to be received from audit vis-à-vis other services.
