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Appointment of Auditor in Pvt. Ltd Co. (Corporate Law)

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This query is : Resolved



( Author )
10 March 2010

If an auditor is appointed in a private limited company then can he be removed by directors any time ? Can the board appoint new auditor every year ? Is it compulsory that the auditor who is auditing the private limited company should continue as auditor forever ? Will the provisions of appointment of auditor which are applicable to public limited company is applicable to Private Limited Company also ?

If a private limited company wants to appoint new auditor after completion of F.Y then can they do so ? If new auditor is appointed then will he write to old auditor as a part of code of ethics followed in the case of public limited company is applicable here also ?


Ankur Garg

( Expert )
10 March 2010

1. As per section 224(6) auditor other than first auditor can be removed by the members only with the prior permission of central govt.

2. Yes board may recommend new auditor every year which may be appointed as statutory auditor by the members in the AGM u/s 224(1).

3. No it is not compulsory to continue with the old auditor.

4. Section 224 is equally applicable to private and a public company.


Ankur Garg

( Expert )
10 March 2010

Check auditor connected letters from the link below:

http://www.caclubindia.com/articles/resolutions-notices-letters-related-with-statutory-auditor-2928.asp

Download very useful file to clear your all doubts from the link below:

http://www.caclubindia.com/forum/ca-final-pcc-company-audit-handout-48972.asp


VUELVE

( Author )
10 March 2010

But in case of Private limited company, how can sec. 224 apply ? If in pvt. ltd company only 2 directors are there who are brothers, then they only brought capital and when ultimate ownership and management is under the control of the directors why auditor cannot be removed ?

And if there is no agreement between the company and auditor about audit engagement, then can the auditor be removed and replaced with someone else ??


CS REMESH B

( Expert )
11 March 2010

• If an auditor is appointed in a private limited company then can he be removed by directors any time?
The Board of Directors has no right to remove an auditor by passing a board resolution. If they want to remove an auditor, the Co. shall obtain previous approval of the Central Govt. and then Board shall convene an Extra-Ordinary General Meeting of the members. At the EGM a resolution shall be passed to remove the auditor.
Note: Central Govt.’s previous approval is not required for removing 1st auditor. (1st auditor means the auditor appointed by the Board within one month from the date of incorporation of the Co.) But if the 1st auditor was appointed by the members at EGM (because board failed to appoint auditor within one month from co. incorporation), then such 1st auditor can be removed only with the Central Govt.’s previous approval and passing a resolution at EGM.
• Can the board appoint new auditor every year ?
It is not the Board that appoints auditor every year. The Annual General Meeting appoints auditor every year.

• Is it compulsory that the auditor who is auditing the private limited company should continue as auditor forever ?
No. The members at the AGM can appoint another auditor instead of the retiring auditor and the resolution shall be such that the retiring auditor shall not be re-appointed and new auditor is appointed instead of the retiring auditor. (If the retiring auditor informs the Co. that he is not interested in re-appointment, then the resolution will change accordingly)
• Will the provisions of appointment of auditor which are applicable to public limited company is applicable to Private Limited Company also ?
Sub-Section (1-B) to Section 224 of Companies Act, 1956 is not applicable to a pvt co. That is an auditor can audit more than 20 private limited companies in a year (not public limited cos.)

If a private limited company wants to appoint new auditor after completion of F.Y then can they do so?

Normally auditors are appointed or re-appointed at the AGMs. The period of holding office is conclusion of the AGM (in which they are appointed ) and until the conclusion of the next AGM. Completion of FY is not the criteria to remove audito. At the AGM a resolution shall be passed that the retiring auditor shall not be re-appointed and a new auditor shall be appointed (See Sec. 224(2)

• If new auditor is appointed then will he write to old auditor as a part of code of ethics followed in the case of public limited company is applicable here also ?
Normally all CAs inform the previous auditors. This is not a requirement as per Companies Act, 1956 but CA code of conduct.


VUELVE

( Author )
12 March 2010

Hello Sir, thank you for the reply of my query about auditor in pvt. ltd company. My question is if in pvt. ltd co. there are only 2 directors who are brothers then entire capital is brought by them, in this case i dont think there will be AGM or EGM, so if they want to remove auditor how can they pass resolution when there are only 2 directors ? and when entire capital is brought by them then there is no question of members or shareholders, so in this particular case please let me know about auditors removal.


CS REMESH B

( Expert )
15 March 2010

In almost all pvt ltd companies the directors and shareholders will be same. And they may be close relatives too. That is husband and wife, brothers etc. However they shall convene and hold annual general meeting every year besides usual minimum 4 board meetings. This is as per the requirements of Companies Act, 1956. One of the important point to be noted is that, in a board meeting all directors have one vote each. And this is not based on their shareholding. But in an AGM / EGM they have one vote for each one share they held.

So even if the directors and shareholders are same, the General Meeting and Board meetings must be held as per the requirement of Companies Act, 1956. Such companies cannot mix up the items earmarked for each meeting. For eg. Annual Accounts adoption, Auditors re-appointment etc. are earmarked for AGM. Alteration of MOA, AOA can be done at a General Meeting only. You cannot transact the same at a board meeting claiming that both the directors together hold 100% shareholding. You shall convene a separate EGM (or at AGM) for transacting these items. You shall give separate notice, keep separate minutes book, attendance register etc. also. In otherwords a very closely held pvt co. (as your case) is not exempted from holding AGM / EGM


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