Compliance Management, Audit and Due Diligence · Concepts of Various Audits

Statutory Audit and Auditor under Companies Act 2013

Updated 11 October 2026

A statutory audit is the independent audit every company must get under the Companies Act, 2013. The members appoint an auditor under Section 139, who has the powers and duties in Section 143 and must report on the financial statements. You answer by stating provision, facts and conclusion.

Understand Statutory Audit and Auditor under Companies Act 2013

Every company must have its financial statements audited by an independent professional. The Act makes this compulsory so that members, lenders and regulators can rely on the accounts. The auditor works for the members, not for the board.

The law covers the whole life of the auditor. Section 139 deals with appointment and rotation. Section 140 deals with removal, resignation and special notice. Section 141 deals with eligibility and disqualification. Section 142 says the members or board fix the remuneration. Section 143 gives the powers, duties and reporting content. Section 144 bars certain services. Section 145 requires the auditor to sign the report. Section 146 gives the right to attend general meetings. Section 147 covers punishment and liability for default. Section 148 deals with cost records and cost audit.

Think of it as a sequence: who can be auditor (141), how the auditor is appointed and changed (139, 140), what the auditor may do and must report (143), what the auditor must not do (144), and what happens if the auditor defaults (147).

Rotation exists to protect independence. A long relationship with one auditor can reduce objectivity, so the Act caps the tenure for certain companies. The auditor must also be free of conflicts, which is why Section 141 lists disqualifications and Section 144 lists prohibited services.

In the exam, the same chapter is tested through facts: a company appoints an auditor, an auditor is removed, or an auditor finds a fraud. You must name the right provision, apply it to the facts and give a clear conclusion.

Key rules to remember

Appointment of first auditor: Board appoints within 30 days of registration; if it fails, it must inform the members, who appoint at an extraordinary general meeting (EGM) within 90 days from the Board's failure; The 90 days run from the Board's failure, that is, from the end of the 30-day period. The first auditor holds office until the conclusion of the first annual general meeting (AGM).
Subsequent auditor term: Appointed at an AGM to hold office from that AGM until the conclusion of the sixth AGM; The requirement to ratify the appointment at every AGM was removed by the Companies (Amendment) Act, 2017, effective 7 May 2018. So no annual ratification is needed during the five-year term.
Casual vacancy: Board fills the vacancy within 30 days; if the vacancy is caused by resignation, the Board recommends the appointment and the company must approve it at a general meeting convened within 3 months of the Board's recommendation; This applies to a company whose auditor is not appointed by the Comptroller and Auditor General (CAG). Where the auditor was appointed by the CAG, the CAG fills the vacancy. The appointee holds office until the conclusion of the next AGM. The members' approval is the extra step needed only for a vacancy caused by resignation.
Rotation: individual auditor: Section 139(2) read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014: applies to listed companies and the prescribed classes, other than one person companies and small companies; individual auditor maximum 1 term of 5 consecutive years; Rotation does not apply to one person companies and small companies. Prescribed classes: (a) all unlisted public companies with paid-up share capital of ₹10 crore or more; (b) all private companies with paid-up share capital of ₹50 crore or more; (c) all companies, whatever their paid-up capital, with outstanding loans or borrowings from public financial institutions or banks, or public deposits, of ₹50 crore or more. Cooling-off period of 5 years after the term.
Rotation: audit firm: Maximum 2 terms of 5 consecutive years each, i.e. 10 years; Applies to the same companies as above. Cooling-off period of 5 years after the second term. Partners common to the new firm are also restricted.
Auditor's reporting duty: Report on whether accounts give a true and fair view of state of affairs, profit or loss and cash flow, as per Section 143; The report also covers matters in Section 143(3), such as books of account and the internal financial controls report.
Fraud reporting: Under Section 143(12) and Rule 13: fraud involving ₹1 crore or above is reported to the Central Government; fraud below ₹1 crore is reported to the audit committee or the board; The threshold is ₹1 crore. At or above ₹1 crore, the report goes to the Central Government. Below ₹1 crore, the auditor reports to the audit committee, or to the board if the company has no audit committee.
Removal of auditor before term ends: Board resolution to seek approval + Central Government's previous approval (application in Form ADT-2) + special resolution of members; Section 140(1) requires the Central Government's approval first, and only then the special resolution. The Board resolution only starts the process and recommends calling the general meeting. The auditor must be given a reasonable opportunity of being heard.

How to solve Statutory Audit and Auditor under Companies Act 2013 questions

Use this method for any case or theory question on statutory audit. It keeps your answer in the provision, analysis and conclusion format.

1Identify what the question tests: appointment, rotation, removal, eligibility, powers, duties, reporting or liability.
2Note the type of company: listed, unlisted public, private, small, or a government company. Rotation and reporting rules depend on this.
3Recall the relevant section and state the rule in plain words with its exact conditions, such as time limits and who approves.
4Apply the rule to the facts given. Check dates, number of years served, amounts and who took the decision.
5Test for disqualifications or prohibited services if the facts show any relationship, loan, business link or non-audit service.
6Write a clear conclusion. Say whether the act is valid or invalid and what the company or auditor should do next.
7Add the consequence if there is a default, such as penalty or liability under Section 147, and one practical compliance point such as filing a form with the Registrar.

Quickest way: Section map and time-line check

When to use it: Use this when you have about ten minutes for a short case question.

Write the section number next to the issue: 139 appointment, 140 removal, 141 eligibility, 143 powers and reporting, 144 prohibited services.
Mark every date and number of years in the facts and compare them with the time limits.
Check company type once: listed or large unlisted companies face rotation.
Write the rule in one line, the facts in one line and the conclusion in one line.
Close with the compliance step, such as intimation to the Registrar or a general meeting approval.

Common mistakes in Statutory Audit and Auditor under Companies Act 2013

Applying rotation to every company.
Students remember the 5 and 10 year limits but forget that rotation applies only to listed companies and prescribed classes.
Fix: First check the company type. Rotation applies to listed companies, unlisted public companies with paid-up capital of ₹10 crore or more, private companies with paid-up capital of ₹50 crore or more, and companies with loans from banks or public financial institutions, or public deposits, of ₹50 crore or more. If the company is outside these classes, say rotation does not apply.
Forgetting the members' approval when a casual vacancy is caused by resignation.
Students remember that the board fills casual vacancies within 30 days and miss the proviso for resignation.
Fix: Write that the board fills the vacancy within 30 days, and that if the cause is resignation the appointment must also be approved by the company in a general meeting held within 3 months of the board's recommendation.
Getting the removal sequence wrong, or forgetting Central Government approval.
Students focus on the special resolution and skip the earlier step, or place the Central Government approval after it.
Fix: Remember the order: board resolution to seek approval, Central Government's previous approval (Form ADT-2), then the special resolution of members. Also mention the auditor's right to be heard.
Mixing up powers and duties in Section 143.
Both appear in the same section and look similar.
Fix: Powers are what the auditor may do, such as access to books and seeking information. Duties are what the auditor must do, such as inquiring into loans and reporting on controls.
Ignoring prohibited services under Section 144.
Students treat the auditor as only an auditor and do not test non-audit work in the facts.
Fix: Scan for services like accounting, internal audit or investment advice given to the company by the auditor or its associates, and flag them.
Stating fraud reporting rules without the threshold or authority.
Students recall that fraud must be reported but not the ₹1 crore threshold or to whom each case is reported.
Fix: State that fraud of ₹1 crore or above goes to the Central Government, and fraud below ₹1 crore goes to the audit committee or board.

Worked examples

Example 1

Sunrise Textiles Limited, a listed company, appointed Rao & Associates, an audit firm, as its auditor at its 2017 AGM for the first term. The firm was reappointed at the 2022 AGM for a second term, which ends at the conclusion of the 2027 AGM. At the 2027 AGM, the company proposes to reappoint the firm for a third term of five years. Advise the company.

Show the solution

Issue: rotation of an audit firm under Section 139 for a listed company.
Rule: an audit firm in a listed company can be appointed for at most two terms of five consecutive years each. After that there is a cooling-off period of five years.
Facts: the first term ran from the 2017 AGM to the 2022 AGM. The second term runs from the 2022 AGM to the 2027 AGM. That is two terms of five consecutive years each.
The firm has therefore used both permitted terms by the end of the 2027 AGM. No third term is allowed.
Conclusion: reappointment is not allowed. The company must appoint a different firm at the 2027 AGM. Rao & Associates can return only after a cooling-off period of five years, and the new firm should not have partners common with the old firm.

Answer: The company cannot reappoint Rao & Associates for a third term because the firm will have completed the maximum two terms of five years each (2017 AGM to 2022 AGM and 2022 AGM to 2027 AGM). It must appoint a new firm at the 2027 AGM, and the outgoing firm is subject to a five-year cooling-off period.

Example 2

Greenfield Foods Private Limited's auditor, Mr. Nair, resigns in March. The board wants to appoint Mr. Iyer immediately to fill the vacancy. Examine whether the board can do so and state the procedure.

Show the solution

Issue: casual vacancy in the office of auditor under Section 139.
Rule: a casual vacancy is filled by the board within 30 days. If the vacancy is caused by resignation, the appointment must also be approved by the company in a general meeting convened within three months of the board's recommendation.
Facts: the vacancy arises from resignation, so the board can appoint Mr. Iyer within 30 days, but the appointment needs the members' approval.
Procedure: the board passes a resolution appointing Mr. Iyer within 30 days and recommends him to the members. It then calls a general meeting, held within three months of the board's recommendation, to approve the appointment.
Mr. Iyer holds office until the conclusion of the next AGM.
Compliance: the company should obtain Mr. Iyer's written consent and eligibility certificate under Section 141 and file the required notice of appointment with the Registrar.

Answer: The board can fill the vacancy within 30 days, but because it was caused by resignation, the members must also approve Mr. Iyer's appointment in a general meeting held within three months of the board's recommendation. He then holds office until the conclusion of the next AGM.

Exam tips

Case questions on auditors usually hide a time limit or a company type. Underline both before writing.
Learn the removal sequence and the resignation sequence as two separate lists. Examiners test the difference.
Write the section number with the rule, but only when you are sure of it.
Finish every answer with a conclusion and one practical step such as a board resolution, a general meeting or a filing.
For reporting questions, list the matters the auditor must state and mention that qualifications or adverse remarks must be clearly given.

Practice questions from Concepts of Various Audits

Statutory Audit and Auditor under Companies Act 2013: frequently asked questions

Which sections cover the statutory auditor under the Companies Act, 2013?

Sections 139 to 148 form the core. They cover appointment and rotation, removal, eligibility, remuneration, powers and reporting, prohibited services, signing of the report, attendance at meetings, penalties and cost audit.

How long can an audit firm serve as auditor of a listed company?

An audit firm can serve at most two terms of five consecutive years each in a listed company or prescribed class. After that there is a five-year cooling-off period.

Who can remove a statutory auditor before the term ends?

The company needs a board resolution, prior approval of the Central Government and then a special resolution of the members. The auditor must get a reasonable chance to be heard.

Can the auditor of a company also provide internal audit services to it?

No. Section 144 prohibits an auditor from providing certain services to the company, including internal audit, accounting and book keeping. The bar also covers the auditor's associates.