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Auditing Theory

Notes Disqualification {Sec 226 (3)(4)(5)}

The following person cannot become the auditor of the company (Section 254):

1. A body corporate
2. An officer or employee of the company
3. A person who is the employment of an officer or employee of the company.
4. A person who is indebted to the company for an amount exceeding ` 1000 or who has
given any guarantee of any third person to the company for an amount exceeding ` 1000.
5. The spouse of a director of the company.
6. A person who was a director other officer or employee of the company at any time during
the preceding three years.
7. A person who is a partner of a director, officer or employee of a company
According to Section 226(4) a person shall not be qualified for appointment as auditor of anybody
corporate. Further if the auditor already holds the appointment as auditor in the specified
number of companies as per Section {Section 224(1-13)}, he will be disqualified for further
appointment as auditor in any other company.
Apart from the disqualifications laid down in Section 226, the Institute of Chartered Accountants
of India has prepared its own code of ethics which is mandatory for its members. In order to
ensure independence of the auditors and also to prevent conflict of interest and duty, the Council
has decided not to permit a Chartered Accountant in employment to certify the financial
statements of the concern in which he is employed, or of a concern under the same management
as the concern in which he is employed, even though he is holding a certificate of practice and
even though such certification can be done by any chartered accountant in practice. This restriction
does not apply where the certification is permitted by any law. Further, it has also been decided
that a chartered accountant should not by himself or in his firm name: –(1) accept the auditorship
of a collage, if he is working as a part-time lecturer in the college. (2) Accept the auditorship of
a trust where his partner is either an employee or a trustee of the trust.

11.2 General Rule of Appointment

To ensure compliance with the statutory requirements and accountability to the shareholders,
Section 224 of the Companies Act, 1956 makes the appointment of an auditor or auditors by the
company in general meeting, before which accounts are laid, mandatory. An auditor thus
appointed at a general meeting holds office from the conclusion of that meeting until the
conclusion of the next such annual general meeting. The appointment of auditors at the AGM
ensures that they are appointed by the shareholders. The exception to this rule of appointment
at the annual general meeting is the appointment of the first auditor/auditors by the board of
directors of a company. The Board of Directors of the company have to appoint the first auditor
within one month from the date of its registration. Such auditors hold office until the conclusion
of the first annual general meeting. If the Board fails to appoint the first auditor, the company
may do so at the first annual general meeting. The remuneration of the first auditor is fixed by
the Board or the general meeting as the case may be. The company may, at a general meeting,
remove the first auditor appointed by the Board and appoint in its place another auditor, of
whose nomination a special notice has been given. An auditor appointed in the above manner
should be informed of his appointment within seven days and he is required to inform the
Registrar within thirty days whether or not he has accepted the appointment. The obligation to
give notice to the Registrar is cast only on auditors appointed under sub-section (1) of

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