The step of forming a new company involves several legal formalities, one of them being the appointment of the first auditor. The appointment of the first auditor is immensely important for establishing a stable financial base and for getting the initial financial records of the company to be aligned to legal standards. At Bizpole we have been providing a diversified list of business services such as income tax return, GST registration, and many more. Our experience will keep guiding you through every compliance requirement to ensure your business is legally sound from day one.
What is the first auditor?
The first auditor is the Chartered Accountant / Chartered Accountancy firm appointed to carry out an audit of the newly incorporated company financial statements. It is a limited appointment to the company’s first financial year, yet on which future reporting and compliance are predicated.
Legal Requirements to Appoint the First Auditor
Section 139(6) of the Companies Act, 2013 is related to the appointment of the first auditor.
According to this section:
- The Board of Directors shall appoint the auditor in the company within thirty days from incorporation date.
- If the said Board fails to do the same before the said period lapses, the shareholders become
- The office term of the first auditor lasts up to the date till the end of the first Annual General Meeting (AGM).
Why is the appointment of the first auditor important?
The appointment of the first auditor is much more than a formality required by statute; it is the base compliance action giving a lot of benefits:
Financial credibility
Financial Credibility is assured, as every financial transaction and report is absolutely correct and in compliance, which determines the credibility of the company’s financials.
Accelerated Subsequent Audits
The first audit would be used as a basis of subsequent financial audits, and by having been compliant on an annual basis; you can continue that pattern without incident.
Avoids Further Penalties and Litigation:
Failure to appoint auditors may put the company in a position of penalty and legal wrangles.
How to Appoint the First Auditor
Here is a step-by-step guide on how to appoint the first auditor for your company.
1. Call Board Meeting
The Board Meeting The first act should be that within 30 days from the date of incorporation, an initial Board Meeting should be held. It is relevant as it implies discussing and resolution for choosing the first auditor. Some of those eligible auditors may be pre-shortlisted for appointment.
2. Resolution by the Board
The auditor chosen requires a formal Board Resolution passed. The resolution should include the following:
- The name and credentials of the proposed auditor
- Terms of engagement, including
_confirmation whether the auditor adheres to Sections 139 and 141 of the Companies Act, 2013. The resolution shall be recorded in the Board’s minutes.
3. Obtain Written Consent an Declaration of Eligibility
Obtain a letter of consent from the proposed auditor. This letter shall reflect his willingness to accept the appointment as auditor. He shall give a declaration of eligibility in compliance with the relevant provisions of the Companies Act.
4. File Form ADT-1 with ROC
The company has to file the form ADT-1 with the ROC within 15 days of appointment. The above form is a legal communication with the ROC for the appointment of the first auditor. It contains details like the name of the auditor, his registration number, and a copy of Board Resolution, etc .
3. Issue an Appointment Letter
It will issue an official letter of appointment with the auditor as a final action. Those letters ought to provide the scope of audit, terms of engagement, and remuneration. This is a legal agreement by the company with the auditor.
What happens if the Board fails to appoint the first auditor?
In the worst scenario, it will depend on the appointment of the company’s shareholders if the Board of Directors fails to appoint within 30 days after the Board decision. This is via an Extraordinary General Meeting (EGM) within the following 90 days.
In such cases, the resolution passed by the shareholders must be filed just like in the case of the Board of Directors. As such, it must be filed with a Form ADT-1 and the appointment letter issued.
Tips for Choosing the Ideal First Auditor
Eligibility and Qualification
Investigate if the auditor is eligible under the Companies Act, 2013.
Experience
Hire an auditor who has experience conducting audits for newly incorporated companies.
Independence
The auditor should be free of any kind of conflict of interest from the company.
Conclusion
Among the critical steps of compliance that all newly set up companies would undertake is appointing the first auditor. And at Bizpole, we ensure to stay compliant with the various statutory requirements for your business to meet the statutory compliance requirements. Be it an appointment of auditor or GST registration, pan/TAN application, or copyright registration, we have got you covered on all those services.
Contact us today to learn how we can assist you in setting up the company compliance framework without any hitches.
