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Unit 11: Appointment, Right, Duties and Liabilities of an Auditor

Section 224. Persons appointed as auditors under other sub-sections need not inform the Registrar. Notes
Hence, the first auditors who are appointed by the Board of Directors are under no obligation to
inform the Registrar.

Casual Vacancy

A casual vacancy is a vacancy of temporary nature that may occur during the currency of the year
after an appointment is made by the company at its general meeting. Thus, a casual vacancy is
not one created by a deliberate omission on the part of the company to appoint an auditor at its
general meeting. It denotes a vacancy caused by a validly appointed auditor ceasing to act as
such, due to death, disqualifications, etc. The auditor appointed in a casual vacancy shall hold
office till the conclusion of the next annual general meeting.

Ceiling on Number of Company Audits

Before an appointment or reappointment of auditors is made, a certificate in writing is required
by the company from the auditor regarding compliance of ceiling limit on total number of
audits. Sub-section (1B) places a ceiling on the number of company-audits which a Chartered
Accountant in full time employment, or a firm of Chartered Accountants, can conduct. The
limitation on number of company audits vide Explanation I and II is applicable to i) a member
of the Institute of Chartered Accountants of India who, while being in whole-time employment
elsewhere, also holds operating agency certificate of practice from the Institute, and ii) a practicing
firm of Chartered Accountants. In other words, the section does not cover (a) a Chartered
Accountant, who, while in part-time employment elsewhere, holds a certificate of practice from
the Institute, and (be) a Chartered Accountant who is practicing in his sole capacity (that is, as a
proprietor) and not as a partner of a firm of Chartered Accountants. As per the Companies Act,
the ‘specified number’ of company audits which a auditor is allowed to handle, that is, the
overall ceiling limit on company audits is twenty. Of these twenty companies, not more than ten
should be companies should have a paid up capital of ` Twenty-five lakhs or more. In the case of
a firm, the specified number is to be calculated with reference to each partner in the firm, who is
not in full time employment elsewhere. For the purpose of ceiling on number of company
audits in the case of a partner of a firm who is also a partner in another firm, the total number of
audits held by him individually or by different firms on his account should be taken into
consideration. In computing the number of audits for the above purpose, joint audits are to be
taken into account, that is, each of the firms appointed as joint auditors of a company shall count
the audit assignment as one company audit. An important question which has arisen is with
regard to whether the audit of the branches of Indian companies and the audits of the Indian
business of foreign companies which have established places of business in India and are doing
business in India are to be taken into account while calculating the specified number of company
audits a company can take up. The Department of Company Affairs has clarified that the branch
audits are not to be included while calculating the specified number. The Branch auditor of an
Indian company appointed under section 28 audits the accounts of the specific branch only for
which he is appointed and forwards his report to the auditor appointed under section 224 of the
Act. Hence the branch auditor cannot be equated with the company auditor appointed under
section 224 of the Act who has to report to the annual general meeting on the accounts of the
company as a whole including the accounts audited by the branch auditor. With regard to the
auditing of the accounts of foreign companies, the Department has clarified that since the definition
of companies under section 3 of the Act does not include foreign companies, they are outside the
scope of Section 224 of the Companies Act. Therefore, the accounts of foreign companies are also
not to be included within the specified number of twenty. Also, since there is no legal requirement
under the Companies Act to prepare consolidated accounts or group accounts and a subsidiary
is considered to be a separate legal entity, no responsibility is cast upon the auditors of the
holding company in respect of the work of the auditors of the subsidiary company.

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