Auditors

The auditors are appointed at Annual General Meeting of the company. Their tenure is from the beginning of one Annual General Meeting to the conclusion of the next. Before such appointment, the company should obtain a certificate from the auditors that they are eligible to act as statutory auditor and the company should intimate the auditors within seven days of their appointment. Every such appointment shall, within thirty days, intimate the Registrar of Companies by filing form 23B. According to Section 226, only a Chartered Accountant can act as an auditor of a Limited Company.

Audit is an examination of accounting records. It involves the intelligent scrutiny of the books of accounts of the company. The main object of the audit is to ensure that the statement of accounts for a financial year truly and fairly reflects the state of affairs of the company. The main purpose of audit is detection and prevention of errors and fraud. Section 216 of the Companies Act, 1956 lays down that auditors report should be attached the Balance sheet. According to Section 2(30) of the Companies Act, 1956, an auditor is not an officer of the company. But in Connell v. Himalaya Bank Limited it was held that auditors, if appointed at a general meeting and if also paid by the company were officers of the company.

It is very suitable here to reproduce the words of Lopes L J in Re. Kingston Cotton Mills Co (1862). He said: “An auditor is not bound to be detective or to approach his work with suspicion or with a foregone conclusion that here is something wrong. He is a watch dog, not a blood hound; he is justified in believing tried servants of the company in whom confidence is placed by the company.

The liability of Auditors is not limited to the company and to its members.  Various judicial decisions underline the liability of Auditors to third parties also. According to the decision in Hedley Bryne & Co. Limited v. Haller and Partners Limited (1964), the auditors may become liable to non-members in certain circumstances.

The following are the important provisions in the Companies Act, 1956 relating to Auditors.

224(1)	Every company shall at each Annual General Meeting appoint auditor/auditors to hold office of statutory auditors.
	After appointment of the auditor in Annual General Meeting, within seven days, the company should give intimation thereof to every auditor so appointed.
Proviso to 224(1)	Before any appointment or re appointment of auditor is made by any company  at any Annual General Meeting a written certificate from the proposed auditor shall be obtained to the effect that such appointment, if made will be in accordance with the limits specified in Section 224 (1B)
226 (3)	The following persons are not qualified for the appointment as auditor of a company
	1.	A body corporate
	2.	An officer or employee of the company.
	3.	A person, who is a partner or                Who is in the employment, of an officer  or                employee of the company.
	4.	A person who is indebted to the company for more than `. 1000 or who has guaranteed the repayment of any debt of more than Rs.1000.0 due to the company by a third person.
	5.	A person holding any security of that company which carries voting rights of that company.
	6.	If a person is qualified for appointment as an auditor of the subsidiary or holding company of the company.
If an auditor becomes disqualified after his appointment, he shall be deemed to have vacated his office.
224(1)	Every company shall, after the appointment of Auditor at Annual General Meeting, intimate the concerned auditor within seven days after the appointment.
224A	Under the following Companies, appointment or re appointment of auditor shall be made by a special resolution.
	If 25% of the subscribed share capital is held, whether singly or jointly by:
	1.	A public financial institution or Government company or Central Government or any State Government; or
	2.	Any financial, or other institution established by any Provincial or State Act in which State Government holds not less than 51% of the subscribed share capital; or
	3.	A nationalized bank or an insurance company carrying on general insurance business.
619	The auditor of a Government company shall be appointed and re-appointed by C&AG.
Case study
The appointment of auditor is mandatory in the Annual General Meeting for the ensuing year
ICAI v. Jhanendranath Saikia,1955
The auditors are officers of the Company
Kingston Cotton Mill Company Limited (1896)
1.   Auditors must have free access to the information which is necessary material for their report
2.   The right of an auditor cannot be Limited or abridged either by the Articles or by any resolution of the members.
Newton v. Birmingham Small Arms Company Limited (1906)
The Court will grant to an auditor an injunction for enforcing this right only when there has been a general meeting decision to appoint him or to continue his appointment.
Cuff v. London and County Land and Building Company Limited(1912)
The auditor need not check that the Company possesses the stock in trade stated in its books of accounts or stock records, nor need to value its stock in trade, work in progress or finished products.
In Re.Kingston Cotton Mills Company Limited (1896)
An auditor is not concerned with the policy of the Company. It is not the duty of auditor to give advice either to directors or shareholders
Lord Justice Lindley in Re. London and General Bank (1895)
Once the auditor discovers alterations, mutilations, in the invoices, it is his duty to put an inquiry and he is not entitled to rest contended with the assurances of the Managing Director of the Company
Re. Thomas Gerard & Sons Limited (1967)
A Chartered Accountant should himself verify the assets of the Company of which he has been appointed auditor, and should not rely on the verification done by special examiners appointed by Company. If he fails to do, he will be guilty of misconduct. Therefore, an auditor is personally liable for neglecting willfully to perform his duties imposed by law.
Council of ICAI v. V Rajaram (1960)
Important points:
1.   Limit as to number of Companies to be audited by an auditor is 20 public Companies and any number of private Companies.(Section 224 IB, 4th proviso Companies(amendment) Act, 2000).
2.   Where a Chartered Accountant is consulted on Income Tax matters and such service is rendered professionally and not as an officer or employee, of the Company, he is not disqualified under Section (3)(b) (Circular letter no: 8/1/57-PR dated 11-07-1957)
3.   Statutory auditor cannot be appointed as internal Auditor. Moreover, the internal auditor of the Company being already an employee cannot be appointed as statutory auditor. (Circular No.29/76 dated 27/08/1976)
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