It has been mentioned earlier that before appointment is given to any auditor, the company must obtain a certificate from him to the effect that the appointment, if made, will not result in an excess holding of company audit by the auditor concerned over the limit laid down in section 224(1B). Section 224(1B) provides that on and from the financial year next following the commencement of the Companies (Amendment) Act, 1974, no company or its Board of Directors shall appoint or re-appoint any person or firm as its auditors if such person or firm is at the date of such appointment or reappointment, holding appointment as auditor of the specified number of companies or more than the specified number of companies. The Companies (Amendment) Act, 1988 has further specified that no company or its Board of Directors shall appoint or re-appoint any person who is in full employment elsewhere. In the case of a firm of auditors, it has been further provided that ‘specified number of companies’ shall be construed as the number of companies specified for every partner of the firm who is not in full time employment elsewhere.* This limit of 20 company audits is per person. In the case of an audit firm having 3 partners, the overall ceiling will be 3 × 20 = 60 company audits of which not more than 30 should be in companies having paid up capital of Rs. 25 lakhs or more. Sometimes, a chartered accountant is a partner in a number of auditing firms. In such a case, all the firms in which he is partner or proprietor will be together entitled to 20 company audits on his account. Subject to the overall ceiling of company audits, how they allocate the 20 audits between themselves is their affairs.
Explanation II after sub-section (IC) of section 224 further amplifies the manner of identifying the audit units for calculating the specified number. Under this explanation, when an auditor is appointed to audit even a part of a company’s accounts, the part will be considered as a unit of audit for the purpose of calculation of the ceiling. Often, now-a-days, one comes across what is known as joint audit – when two or more auditors are appointed to audit the account of a company. Each of the joint auditor is considered a part auditor for the purpose. Any joint audit held by an auditor will be included as one audit unit for the purpose of calculating the ceiling of audits. However, audit of a branch of company is not included in the computation of the ceiling. Similarly, audit of corporations which are not companies and foreign companies are also not to be included. Further, it may be noted that even non-profit companies would be counted for the purpose of ceiling. However, guarantee companies not having share capital, special audit and investigation of companies will not be counted for the purpose. Students may also note that the Companies (Amendment) Act, 2000 has amended section 224(1B) by adding a proviso that provisions shall not apply to a private company on and after the commencement of the Companies (Amendment) Act, i.e. 13.12.2000. Therefore, with this amendment, while computing the ceiling a number of audits, only audit of public companies would be taken into consideration. In other words, an auditor can accept audit of any number of private companies. This, however, is subject to guidelines of the Institute which provide restriction in respect of private companies as well. The Notification reproduced below:
No.1-CA(7)/53/2001: In exercise of the powers conferred by clause (ii) of Part II of the Second Schedule to the Chartered Accountants Act, 1949, the Council of the Institute of Chartered Accountants of India hereby specifies that a member of the Institute in practice shall be deemed to be guilty of professional misconduct, if he holds at any time appointment of more than the “specified number of audit assignments of the companies under Section 224 and /or Section 228 of the Companies Act, 1956. Provided that in the case of a firm of chartered accountants in practice, the specified number of audit assignments shall be construed as the specified number of audit assignments for every partner of the firm. Provided further that where any partner of the firm of chartered accountants in practice is also a partner of any other firm or firms of chartered accountants in practice, the number of audit assignments which may be taken for all the firms together in relation to such partner shall not exceed the specified number of audit assignments in the aggregate. Provided further that where any partner of a firm or firms of chartered accountants in practice accepts one or more audit assignments in his individual capacity, or in the name of his proprietary firm, the total number of such assignment which may be accepted by all firms in relation to such chartered accountant and by him shall not exceed the specified number of audit assignments in the aggregate. Explanation:
1. for the above purpose, the specified number of audit assignments means-
- in the case of a chartered accountant in practice or a proprietary firm of chartered accountant, thirty audit assignments whether in respect of private companies or other companies.
- in the case of a firm of chartered accountants in practice, thirty audit assignments per partner in the firm, whether in respect of private companies or other companies. Provided that out of such specified number of audit assignments, the number of audit assignments of public companies each of which has a paid-up share capital of rupees twenty-five lakhs or more, shall not exceed ten.
2. In computing the specified number of audit assignments.
- the number of such assignments, which he or any partner of his firm has accepted whether singly or in combination with any other chartered accountant in practice or firm of such chartered accountants, shall be taken into account.
- the audit of the head office and branch offices of a company by one chartered accountant or firm of such chartered accountants in practice shall be regarded as one audit assignment.
- the audit of one or more branches of the same company by one chartered accountant in practice or by firm of chartered accountants in practice in which he is a partner shall be construed as one audit assignment only.
- the number of partners of a firm on the date of acceptance of audit assignment shall be taken into account.
- a chartered accountant in full time employment elsewhere shall not be taken into account.
3. this notification shall come into force from the date of its publication in the Official Gazette.
4. A chartered accountant in practice as well as firm of chartered accountants in practice shall maintain a record of the audit assignments accepted by him or by the firm of chartered accountants, or by any of the partner of the firm in his individual name or as a partner of any other firm as far as possible, in the prescribed manner. Students may note that while the law excluded private companies from the specified limits but the Institute has issued the above notification restricting the overall limit to 30 company audits including private limited companies. It may be noted that a member who fails to comply with the notification shall be liable for professional misconduct.