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Auditing Theory

Notes wherever such Committees were mandated, in recommending the appointment of the Auditors
to the Board in general. The Committee recommended that the existing provisions relating to
appointment of first Auditor to be made by the Board, failing which by the shareholders and the
power of the Central Government to appoint the Auditors whenever the Board/shareholders
fail to appoint them were necessary and should continue. The company should also be required
to send intimation to the Registrar of Companies regarding appointment of First Auditors,
within 7 days of such appointment.
Subsequent to the appointment of First Auditors, the appointment of Auditors should be done
on AGM to AGM basis with a power to the Board to fill any casual vacancy. There should not be
any situation where the company is without duly appointed Auditors. Such appointment of
Auditors should be made by the shareholders taking into account the recommendations of the
Board, which, in turn should be arrived at after obtaining the recommendations of the Audit
Committee, where such a Committee is mandated or is in existence. In case any of the shareholders
wish to propose any other Auditor in place of retiring Auditors, this process should also
necessarily seek the views of the Audit Committee. There should be an obligation to intimate
appointment of Auditor to Registrar of Companies by the Company within 7 days.

14.2.5 Remuneration of Auditors

The Committee discussed the provisions relating to the payment of remuneration to the Auditors
and felt that this should be subject to decision by shareholders and that the provisions in the
existing law provided a suitable framework for the purpose. However, the Committee felt that
the basic remuneration to be termed as ‘Audit Fee’ should be distinguished from reimbursement
of expenses. Reimbursement of expenses to Auditors should not form part of remuneration but
should be disclosed separately in the Financial Statements along with the Auditor’s fees.

Rotation of Auditors

The view that rotation of Audit partner should take place every five years in the case of all listed
Companies was also considered by the Committee. However, the Committee thought it fit that
the matter of change of Auditors be left to the shareholders of the Company and the Auditors
themselves rather than be provided under law.
Provision of Non-audit Services

The Committee took note of the fact that rendering of non-audit services by Auditors of the
Company was is a matter of general concern. The Committee was of the view that rendering of
all services by the Auditors which were not related to audit, accounting records or financial
statements, should not be prohibited from being rendered by the Auditors subject to a prescribed
threshold of materiality. All non audit services may however be pre-approved by Audit
Committee where such a committee is mandated or in existence. An Audit firm should however
be prohibited from rendering the following non audit services to its audit client and its
subsidiaries. Accounting and book keeping services relating to accounting records.
1. Internal Audit: Design and implementation of financial information systems including
services related IT systems for preparing financial or management accounts and information
flows of a company.
2. Actuarial services: Investment Advisory or Investment banking services
3. Rendering of outsourced financial services: Management functions including provision of
temporary staff to audit clients.

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