Compliance Management, Audit and Due Diligence · Audit Engagement

Appointment, Eligibility and Independence of Auditor

Updated 11 October 2026

A company's statutory auditor is appointed under Section 139 by members at the AGM, for a five-year term. The person must be a qualified chartered accountant or firm, must not be disqualified under Section 141, and must stay independent. Listed and large companies must also follow rotation limits.

Understand Appointment, Eligibility and Independence of Auditor

An auditor gives members an independent opinion on the financial statements. The law therefore controls who can be appointed, who appoints, how long they stay and who fixes their pay. All of this protects independence.

Under Section 139, the first auditor is appointed by the Board. Later auditors are appointed by members at an annual general meeting for a term of five years. The term runs from the conclusion of the first AGM at which the appointment is made to the conclusion of the sixth AGM, a period of five years. Before appointment, the company must get the auditor's written consent and a certificate that the appointment satisfies the eligibility conditions and the limits in the law. The company then informs the Registrar of the appointment.

Section 141 says who is eligible. Only a chartered accountant, or a firm of chartered accountants (including an LLP where the partners are chartered accountants), can be appointed. Where a firm or LLP is appointed, only the partners who are chartered accountants are authorised to act and sign on its behalf.

Certain persons are disqualified: a body corporate other than an LLP, an officer or employee of the company, and a person who holds any security of or interest in the company, its subsidiary, its holding company, its associate company, or a subsidiary of its holding company. The same holds if the person's partner holds such security. The person and the partner get no ₹1,000 allowance. Only a relative gets an allowance: a relative may hold securities or interest of face value up to ₹1,000 (or such sum as the rules prescribe). A relative's holding above that limit disqualifies the person if it already exists when the appointment is made. If the relative acquires the holding after the appointment, the person is not disqualified at once, provided the excess is disposed of within 60 days of the date of acquisition of the security or interest.

Also disqualified are a person (or the person's relative or partner) indebted to the company above the prescribed amount, a person who has given a guarantee or security for a third person's indebtedness to the company above the prescribed amount, a person with a prohibited business relationship, and a person convicted of fraud in the last ten years.

A person also cannot be auditor of more than 20 companies. The count leaves out one-person companies, dormant companies, small companies and private companies with paid-up share capital below ₹100 crore. For a firm, the limit is counted per partner who is not a partner of another firm that is auditor of the same companies.

Rotation applies to listed companies and to other prescribed classes of companies, set by size (paid-up capital or public borrowings). An individual auditor can serve one term of five consecutive years. A firm can serve two terms of five consecutive years. After that, a cooling-off period of five years applies, counted from the date the term is completed. During it, the individual or firm cannot be re-appointed. Under the proviso to Section 139(2), a firm that has a common partner with the outgoing firm is also not eligible to be appointed auditor of the same company for five years.

Casual vacancy under Section 139(8) is filled by the Board within 30 days. If the vacancy arose from the auditor's resignation, the Board's appointment must also be approved by the company in general meeting convened within three months of the Board's recommendation. The appointee holds office until the conclusion of the next AGM after the appointment.

Independence is also protected by other rules. The members or the Board fix remuneration as the law allows. Section 144 bars the auditor from providing certain services to the company, such as accounting and book-keeping or internal audit. Removal before term needs a special resolution and prior Central Government approval. A resigning auditor must file a statement in Form ADT-3 with the company and the Registrar within 30 days of resignation. For a government company, the statement also goes to the CAG. It is not filed with the Central Government. The auditor's engagement letter under SA 210 is addressed to the Board and refers to the appointment letter, so appointment and terms stay linked.

Key rules to remember

Who appoints: First auditor: Board. Later auditors: members at AGM.; Section 139. The Board appoints the first auditor within 30 days of registration; if it fails, members appoint within 90 days.
Term of auditor: From the conclusion of the first AGM (at which appointed) to the conclusion of the sixth AGM, a period of five years; Section 139(1). Yearly ratification is no longer required.
Rotation limits: Individual: 1 term of 5 consecutive years. Firm: 2 terms of 5 consecutive years. Cooling-off: 5 years from completion of the term.; Section 139(2) for listed companies and prescribed classes of companies (set by size under the Audit and Auditors Rules). After the term, the individual or firm cannot be re-appointed during the cooling-off. A firm that has a common partner with the outgoing firm is also not eligible to be appointed auditor of the same company for five years.
Eligibility: Chartered accountant or firm of chartered accountants (Section 141(1)); A body corporate, other than an LLP, is not eligible. Where a firm, including an LLP, is appointed, only partners who are chartered accountants are authorised to act and sign on behalf of the firm.
Disqualifications: Section 141(3): body corporate (not LLP); officer or employee; partner or employee of an officer or employee; person or partner holding any security or interest; indebtedness; guarantee; business relationship; relative is director or KMP; convicted of fraud in last 10 years; more than 20 companies; A person, or the person's partner, holding any security of or interest in the company, its subsidiary, its holding company, its associate company, or a subsidiary of its holding company is disqualified outright, with no ₹1,000 exception (Section 141(3)(d)(i)). Only a relative may hold securities or interest of face value up to ₹1,000 (or such sum as prescribed). If a relative's holding already exceeds the limit at the time of appointment, the person is disqualified. If the relative acquires the holding after appointment, the person is not disqualified at once where the excess is disposed of within 60 days of the date of acquisition. Limits for indebtedness, guarantee and business relationship come from the rules. Indebtedness limit is ₹5 lakh and guarantee limit is ₹1 lakh.
Ceiling on audits: Maximum 20 companies per person (Section 141(3)(g)); The count excludes one-person companies, dormant companies, small companies and private companies with paid-up share capital below ₹100 crore. For a firm, the limit is counted per partner who is not a partner of another firm that is auditor of the same companies.
Casual vacancy: Casual vacancy (other than by resignation): Board fills within 30 days. Vacancy caused by resignation: Board fills it within 30 days, and the company must approve in general meeting convened within 3 months of the Board's recommendation.; Section 139(8). Only a vacancy caused by the auditor's resignation needs members' approval. The appointee holds office until the conclusion of the next AGM after the appointment.
Removal and resignation: Removal: special resolution + prior Central Government approval. Resignation: auditor files statement in Form ADT-3 with the company and the Registrar within 30 days (also with the CAG for a government company).; Section 140. The auditor must get a chance to be heard before removal. The resignation statement is not filed with the Central Government.
Remuneration: Fixed by members at AGM or as they decide; by the Board for the first auditor and casual vacancy; Section 142. Out-of-pocket expenses can be included. Fees for other permitted services are separate.

How to solve Appointment, Eligibility and Independence of Auditor questions

Case questions on appointment and independence need a clear provision-analysis-conclusion pattern. Follow this order.

1Identify the stage of the question: first auditor, appointment at AGM, casual vacancy, removal, resignation or rotation.
2Name the section that governs that stage (Section 139, 140, 141, 142 or 144) and state the rule in one or two lines.
3Check the facts for eligibility: is the person a chartered accountant or firm, and is any disqualification under Section 141(3) triggered by an office, relative, loan, business tie or conviction?
4For rotation, check whether the company is listed or in a prescribed class, count the years of the term already served, and check whether a cooling-off is running.
5Check independence points: prohibited services under Section 144, remuneration fixed by the right authority, and the 20-company limit.
6Check the procedure: consent, eligibility certificate, intimation to the Registrar, special resolution, previous Central Government approval, or time limits.
7State a clear conclusion in one line (valid, invalid, or what the company must do) and add the practical compliance step, such as the form to file or the notice to give.

Quickest way: Four-question check

When to use it: Use it for short case questions where you have about ten minutes.

Who is being appointed, and by whom (Board or members)?
Is the person eligible: chartered accountant or firm, and not disqualified under Section 141(3)?
Does rotation or the 20-company limit stop the appointment?
What is the procedure and time limit, and what is the conclusion?

Common mistakes in Appointment, Eligibility and Independence of Auditor

Saying a company or a private limited company with no CA partners can be auditor.
Students remember that a firm can be appointed but forget that a body corporate (other than an LLP) is disqualified.
Fix: Write that only a chartered accountant or a firm of chartered accountants (including an LLP of CAs) is eligible under Section 141.
Applying rotation to every company.
Students read Section 139(2) as a general rule.
Fix: State first that rotation covers listed companies and prescribed classes by size; then apply the term limits (individual one term, firm two terms, cooling-off five years).
Mixing up individual and firm limits.
The numbers 5 and 10 years get confused.
Fix: Remember: individual five years, firm two terms of five years, cooling-off five years.
Applying the ₹1,000 allowance to the auditor's own holding, or ignoring it for a relative.
Students merge the rule for the person with the rule for a relative.
Fix: State the two rules separately: if the auditor or a partner holds any security of the company, the auditor is disqualified outright. A relative may hold securities with face value up to ₹1,000. If the relative's holding is above that at the time of appointment, the auditor is disqualified. If the relative acquires it after appointment, the excess must be disposed of within 60 days.
Ignoring the procedure for removal or vacancy.
Students focus on eligibility and forget the process steps.
Fix: Write the exact process: a special resolution and prior Central Government approval for removal; a Board appointment within 30 days for a casual vacancy; and, only if the vacancy arose from resignation, general meeting approval within 3 months of the Board's recommendation. A resigning auditor files Form ADT-3 with the company and the Registrar within 30 days.
Forgetting that an auditor who becomes disqualified after appointment must vacate office.
Students think eligibility is tested only at appointment.
Fix: Add that under Section 141(4), if a disqualification arises after appointment, the auditor vacates office and the company must treat it as a casual vacancy.

Worked examples

Example 1

Verma & Associates, a firm of chartered accountants, has been the statutory auditor of Sundaram Textiles Limited, a listed company, for two consecutive terms of five years each. The Board proposes to reappoint the firm for a third term. Advise.

Show the solution

Provision: Section 139(2) limits the term of an audit firm in a listed company to two terms of five consecutive years, with a cooling-off period of five years.
Analysis: Sundaram Textiles is listed, so rotation applies. The firm has already served two terms, which is the maximum.
Conclusion: The firm cannot be reappointed for a third term now.
Practical point: The firm is eligible again only after five years. The company should start the process of appointing a new auditor, and the Board should recommend the name for approval at the AGM, with the auditor's consent and eligibility certificate.

Answer: The proposal is not valid. A firm can serve only two consecutive terms of five years in a listed company, so a five-year cooling-off applies before reappointment.

Example 2

Meera Rao, a chartered accountant, is proposed as auditor of Kaveri Foods Limited. Her brother already holds 500 equity shares of Kaveri Foods with a face value of ₹10 each. Is she eligible?

Show the solution

Provision: Under Section 141(3), a person who holds any security of the company is disqualified outright. A relative of the person may hold securities of face value not exceeding ₹1,000 (or such sum as prescribed) without causing disqualification. If a relative acquires securities after the appointment, the excess over the limit must be disposed of within 60 days.
Facts: Meera herself holds no shares. Her brother is a relative. Face value of his holding = 500 × ₹10 = ₹5,000.
Analysis: The relative's allowance applies, but ₹5,000 is more than the permitted ₹1,000. The holding already exists at the time of the proposed appointment, so the 60-day disposal window for holdings acquired after appointment does not help her.
Conclusion: Meera Rao is disqualified at the time of appointment. The company cannot appoint her.
Practical point: The Board should propose another eligible auditor. She could give a valid eligibility certificate only if the brother's holding is within a face value of ₹1,000 (100 shares or fewer) before the appointment is made.

Answer: Meera Rao is not eligible, because her brother's existing holding has a face value of ₹5,000, which is above the ₹1,000 limit under Section 141, and it already exceeds the limit at the time of appointment.

Exam tips

Use a three-part structure: provision, analysis of facts, conclusion. Examiners reward the order.
Do the arithmetic when facts give numbers, for example face value of shares or years served, and show it.
For a relative's holding above ₹1,000, check the timing: already held at appointment means disqualified; acquired after appointment means the excess must be disposed of within 60 days.
Link independence to Section 144 prohibited services and to SA 210 engagement terms when the facts mention extra work for the client.
Know the forms and time limits: the company informs the Registrar of the appointment; removal needs a special resolution and prior Central Government approval; a casual vacancy is filled by the Board within 30 days (with general meeting approval within 3 months if caused by resignation); a resigning auditor files Form ADT-3 with the company and the Registrar within 30 days (and with the CAG for a government company).
Mention the company's class (listed, unlisted public or private, with size thresholds) before applying rotation.

Practice questions from Audit Engagement

Appointment, Eligibility and Independence of Auditor: frequently asked questions

Who can be appointed as auditor of a company?

Only a chartered accountant or a firm of chartered accountants, including an LLP whose partners are chartered accountants, can be appointed. The person must not be disqualified under Section 141. The auditor must also give consent and a certificate of eligibility before appointment.

Does auditor rotation apply to all companies?

No. It applies to listed companies and to prescribed classes of companies, decided by paid-up capital or public borrowings under the Audit and Auditors Rules. Check the company's class before applying the limits.

What is the rotation period for an individual and a firm?

An individual can be auditor for one term of five consecutive years. A firm can serve two terms of five years each. After that, there is a cooling-off period of five years.

How can an auditor be removed before the term ends?

The company must pass a special resolution after getting prior approval of the Central Government. The auditor must get a reasonable chance to be heard. Resignation by the auditor is a separate route and requires filing with the Registrar within 30 days.

How does SA 210 relate to appointment?

SA 210 deals with agreeing the terms of the audit. The engagement letter is addressed to the Board of Directors and refers to the letter informing the auditor about the appointment. It confirms the auditor's acceptance and understanding of the engagement.