Audit and Auditors
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Contents
- How the chapter fits together
- Appointment, term and rotation — Section 139
- Removal and resignation — Section 140
- Eligibility, disqualifications and remuneration — Sections 141–142
- Powers, duties and the audit report — Sections 143–146
- Penalties, cost audit and key timelines — Sections 147–148
- Quick revision cards
In 30 seconds
- Ten sections run the chapter — S.139 appointment through S.148 cost audit. Mnemonic: Appoint, Removal/Resign, Eligibility, Remuneration, Powers/duties, Services-prohibited, Signing, Attend AGM, Punishment, cost-Audit.
- Rotation under 139(2): individual 1 term of 5 years, firm 2 terms of 5 years, then a 5-year cooling period in the same company only — applicable to listed and large companies per Rule 5.
- Removal is company-initiated and heavy (SR + CG approval via ADT-2 + hearing the auditor); resignation is auditor-initiated and light (ADT-3 within 30 days) — never merge the two.
- Section 141(3) lists 13 disqualifications (a)–(m): own/partner securities have a NIL threshold, relative's is ₹1,00,000 face value; indebtedness over ₹5 lakh; guarantee over ₹1 lakh.
- Fraud reporting splits at ₹1 crore — ADT-4 to the Central Government through the 2/45/15-day chain above it, Audit Committee/Board only below it; penalties sit in S.147.
Companies Act, 2013 (Sections 139–148) and the Companies (Audit and Auditors) Rules, 2014, as amended — May 2026 syllabus. Section numbers refer to the Companies Act, 2013 unless stated.
How the chapter fits together
Ten sections carry the whole chapter — memory hook “A-R-E-D R-P-S-S-A-P”. Learn it as one life cycle of an auditor:
- 139 Appointment — first auditor, subsequent auditor, Government companies, casual vacancy, rotation →
- 140 Removal / Resignation — plus Tribunal-ordered change for fraud →
- 141 Eligibility / Disqualifications — who may (and may not) audit →
- 142 Remuneration →
- 143 Powers, duties, standards — report, CARO, fraud reporting, Government-company audit →
- 144 Prohibited services · 145 Signing · 146 Attend AGM →
- 147 Punishment → 148 Cost audit — with NFRA watching audit quality throughout.
Appointment, term and rotation — Section 139
Section 139(1): the auditor is appointed at the first AGM and holds office till the conclusion of the sixth AGM. Rule 3 makes the Audit Committee (where Section 177 makes it compulsory) — else the Board — the competent authority to recommend the selection. Rule 4 requires the auditor’s written consent and certificate before appointment, and ADT-1 filed with the ROC within 15 days of the meeting. “Appointment” includes re-appointment, so consent, certificate and ADT-1 apply to re-appointment too.
Retiring auditor (139(9)/(10)): re-appointed at the AGM unless disqualified, unwilling, or replaced by special resolution; if no auditor is appointed, the existing auditor is deemed to continue. 139(11): wherever the Audit Committee is compulsory (listed company; public company with PUC ≥₹10Cr, turnover ≥₹100Cr or borrowings ≥₹50Cr), its recommendation is mandatory for all appointments — casual vacancies included.
Cooling period [Sec 139(2)]
The 5-year bar on re-appointment in the same company after the maximum term(s). Not industry-wide — same company only — and it extends to a firm with a common partner.
Same network [Rule 6(3)]
Firms operating under the same brand name, trade name or common control are treated as one for rotation. The bar travels with people: even a retiring common partner joining another firm makes that firm ineligible for 5 years.
Rotation (139(2), Rules 5–6):
| Item | Rule |
|---|---|
| Individual auditor | 1 term of 5 years |
| Audit firm | 2 terms of 5 years — max continuous tenure 10 years (Rule 6) |
| Cooling period | 5 years, same company only; extends to a common-partner firm |
| Applies to (Rule 5) | Listed cos; unlisted public cos PUC ≥₹10Cr; private cos PUC ≥₹50Cr; any co with public borrowings/deposits ≥₹50Cr |
| Excluded | OPCs and small companies |
| Transitional period | 3 years from commencement of the Act |
| Proviso | Rotation does not prejudice the company’s right to remove the auditor or the auditor’s right to resign |
Rule 6 also governs the mechanics: transitional counting of past terms, the same-network bar, and staggering of joint auditors. Under 139(3)/(4) the members may resolve internal rotation of the audit partner or appointment of joint auditors.
Who appoints, and by when:
| Scenario | Who appoints | Time limit | Fallback |
|---|---|---|---|
| First auditor — non-Govt co (139(6)) | Board | 30 days from registration | Members at EGM within 90 days |
| First auditor — Govt co (139(7)) | CAG | 60 days from registration | Board within next 30 days → members at EGM within 60 days |
| Subsequent auditor — Govt co (139(5)) | CAG | 180 days from commencement of FY | — |
| Casual vacancy — non-CAG co (139(8)) | Board | 30 days | If caused by resignation: GM approval within 3 months of Board recommendation |
| Casual vacancy — CAG co (139(8)) | CAG | 30 days | Board within next 30 days |
The first auditor holds office only till the conclusion of the 1st AGM — it is not a 5-year term (classic trap).
Casual vacancy [Sec 139(8)]
A vacancy arising other than by expiry of term — death, resignation, disqualification. Vacation of office on post-appointment disqualification under 141(4) is a deemed casual vacancy, fillable under 139(8) — a commonly missed linkage.
Removal and resignation — Section 140
Removal before term (140(1)) is deliberately hard — the sequence matters:
- Board resolution →
- ADT-2 application to the Central Government within 30 days of the Board resolution →
- CG approval →
- General meeting within 60 days of the approval →
- Hear the auditor — audi alteram partem, mandatory →
- Special Resolution — the SR comes after CG approval, not before.
Audi alteram partem
“Hear the other side” — the natural-justice principle that makes a reasonable opportunity of being heard mandatory before removal under Section 140(1).
For specified IFSC public/private companies, CG approval is deemed if there is no response within 60 days, and the new auditor is appointed at a GM within 3 months of that period’s expiry.
Resignation (140(2)/(3)): the auditor files ADT-3 with the company and ROC (plus the CAG for Government companies) within 30 days. Failure: ₹50,000 or the remuneration, whichever is less, plus ₹500 per day of continuing default, capped at ₹2,00,000.
Auditor other than the retiring one (140(4)): requires special notice; the retiring auditor has representation rights, and the NCLT can restrain abuse of those rights (Rule 78).
Fraudulent auditor (140(5)): the NCLT — suo motu, on CG application (order within 15 days, Rule 78(3)), or on application by any concerned person — can direct the company to change its auditor. The removed auditor is ineligible for appointment in any company for 5 years and liable under Section 447 — and under 147(5) fraudulent partner(s) and the firm are jointly and severally liable too (cumulative, not alternative).
The four ADT forms:
| Form | What | To whom | Time |
|---|---|---|---|
| ADT-1 | Appointment notice | ROC | 15 days of the appointment meeting |
| ADT-2 | Removal application | Central Government | 30 days of the Board resolution |
| ADT-3 | Resignation statement | Company + ROC (+ CAG) | 30 days of resignation |
| ADT-4 | Fraud report ≥₹1 crore | Central Government | After the 2/45/15-day chain (Rule 13(2)) |
Eligibility, disqualifications and remuneration — Sections 141–142
141(1)/(2): only a Chartered Accountant in practice may be appointed. A firm (including an LLP) qualifies where the majority of partners practising in India are qualified — and only the CA partners may sign.
141(3) — the 13 disqualifications (a)–(m), with every carve-out:
| Cl. | Disqualified person | Threshold / note | Exception / carve-out |
|---|---|---|---|
| (a) | Body corporate | — | LLP is allowed |
| (b) | Officer or employee of the company | — | — |
| (c) | Partner/employee of such officer or employee | — | — |
| (d)(i) | Self/partner holding security or interest | Any amount disqualifies (NIL threshold) | No ₹1,000 relief of the 1956 Act anymore |
| (e) | Relative holding security/interest | Face value >₹1,00,000 | Corrective action within 60 days (Rule 10) cures it; check all relatives combined; one partner’s relative breach disqualifies the whole firm |
| (f) | Self/partner/relative indebted to the company | >₹5 lakh | — |
| (g) | Guarantee/security given for a third party’s indebtedness | >₹1 lakh | — |
| (h) | Business relationship | Any commercial-purpose transaction | Professional services under the CA Act; arm’s-length ordinary-course transactions (telecom/airline/hotel/hospital) |
| (i) | Relative is a director/KMP of the company | — | — |
| (j) | Full-time employment elsewhere | — | — |
| (k) | Holding more than 20 company audits | Per person; firm ceiling = 20 × partners | OPC, small co, pvt co with PUC <₹100Cr excluded from the count — only if no default in filing FS/AR |
| (l) | Convicted of fraud | 10 years not elapsed | — |
| (m) | Renders a Section 144 prohibited service | — | — |
Business relationship [Sec 141(3)(h)]
Any transaction entered into for a commercial purpose. Exceptions: professional services permitted under the CA Act, and arm’s-length ordinary-course transactions (telecom, airline, hotel, hospital) — the auditor can still buy air tickets or stay in the auditee’s hotel.
141(4): an auditor incurring a disqualification after appointment must vacate office, and that vacancy is a deemed casual vacancy under 139(8).
Remuneration (142): fixed in general meeting for subsequent auditors, by the Board for the first auditor. It includes the fee, expenses incurred and facilities extended, but excludes fees for other services rendered.
Powers, duties and the audit report — Sections 143–146
Powers (143(1)): right of access to the books at all times, right to information and explanations, and access to subsidiary records for consolidation. The same sub-section lists six inquiry matters:
- Loans and advances — properly secured?
- Book entries — transactions represented by mere book entries;
- Shares sold below cost;
- Loans shown as deposits;
- Personal expenses charged;
- Cash for shares allotted.
Report (143(2)/(3)): the auditor reports whether the accounts give a true and fair view, covering 10 matters (a)–(j), and under 143(4) must state reasons for any negative or qualified answer. Rule 11 adds six more report matters — including pending litigation, delay in IEPF transfers, layering of funds, dividend compliance with Section 123, and the audit trail (accounting-software edit log, mandatory from FY commencing 1 April 2022).
IFC reporting exemption (143(3)(i)): internal financial controls reporting does not apply to an OPC or small company, or a private company with turnover <₹50Cr and borrowings <₹25Cr — conditional on no default in filing financial statements (S.137) or annual return (S.92).
Standards and CARO: under 143(9)/(10) the CG notifies auditing standards (ICAI recommendation + NFRA consultation); until then ICAI standards are deemed to be the standards. 143(11) empowers CARO 2020 — additional order-based reporting for specified companies.
Fraud — for Sec 143(12)
An offence involving fraud against the company by its officers or employees which the auditor has “reason to believe” is being committed. The auditor must be the first to detect it — if management has already reported the matter, the auditor reports only to the Audit Committee/Board, not the CG.
Fraud reporting (143(12)/(13)/(15), Rule 13):
- ≥₹1 crore: report to the Board/AC within 2 days → their reply within 45 days → forward to the CG within 15 days, in ADT-4.
- Below ₹1 crore: report to the AC/Board only, within 2 days; disclosed in the Board’s Report.
- Good faith (143(13)): bona fide reporting is never a breach of duty.
- Penalty for non-reporting (143(15)): ₹5,00,000 (listed co) / ₹1,00,000 (other co) — applies equally to the auditor, cost accountant and company secretary.
Government-company audit (143(5)–(7)): the CAG appoints and directs the auditor, may conduct a supplementary audit within 60 days of receiving the report, and may order a test audit. Branch audit (143(8)): branch in India — the company’s auditor or a qualified person; branch outside India — the company’s auditor, or an accountant or person qualified under that country’s laws. 143(14): Section 143 applies mutatis mutandis to the cost auditor (S.148) and secretarial auditor (S.204).
Prohibited services (144): nine categories (a)–(i) — accounting/book-keeping; internal audit; design/implementation of any financial information system; actuarial services; investment advisory; investment banking; outsourced financial services; management services; and any other prescribed service (none prescribed till date). Only other services approved by the Board/AC may be rendered. “Directly or indirectly” is wide: for an individual it covers self, relative, connected person, an entity with significant influence, and the same brand; for a firm it covers the firm, its partners, parent/subsidiary/associate entities, and the same brand.
Signing (145): only the auditor (or a CA partner of the firm) signs the report. Only the qualifications and adverse remarks — not the entire report — are read out at the general meeting and kept open for inspection.
AGM (146): the auditor is entitled to notice of the AGM, must attend (personally or through an authorised representative), and has a right to be heard.
Penalties, cost audit and key timelines — Sections 147–148
| Default | Liable | Penalty | Section |
|---|---|---|---|
| Contravention of S.139–146 | Company | ₹25,000 – ₹5,00,000 | 147(1) |
| Contravention of S.139–146 | Officer in default | ₹10,000 – ₹1,00,000 | 147(1) |
| Contravention of S.139, 144, 145 | Auditor (ordinary) | ₹25,000 – lower of ₹5,00,000 or 4× remuneration | 147(2) |
| Same, but knowing/wilful with intent to deceive | Auditor | Imprisonment ≤1 year + fine ₹50,000 – lower of ₹25,00,000 or 8× remuneration | Proviso 147(2) |
| Conviction under 147(2) | Auditor | Refund remuneration + damages to company/authorities/members/creditors | 147(3)/(4) |
| Partner(s) acted fraudulently/abetted/colluded | Partner(s) + firm | Jointly & severally liable (civil/criminal); non-fine criminal liability only on the concerned partner(s) | 147(5) |
| Failure to file ADT-3 | Auditor | ₹50,000 or remuneration (less) + ₹500/day continuing (max ₹2,00,000) | 140(3) |
| Non-reporting of fraud u/s 143(12) | Auditor / Cost Accountant / CS | ₹5,00,000 (listed) / ₹1,00,000 (other) | 143(15) |
| Fraudulent auditor — Tribunal order | Auditor (individual/firm) | Ineligible 5 years for any company + liable u/s 447 | 140(5) |
| Default under S.148 | Company/officer; cost auditor | Per 147(1); per 147(2)–(4) | 148(8) |
Cost audit (148): cost records are mandatory where turnover ≥₹35 crore (Table A/B sectors) — micro and small enterprises are excluded (Cost Records Rule 3). Cost audit (148(2)/(4)) applies to specified classes on net-worth/turnover criteria and is in addition to the S.143 audit. The cost auditor must be a Cost Accountant (S.2(28) — whole-time practice under the CWA Act 1959, including a firm/LLP), and the S.139 statutory auditor cannot be the cost auditor of the same company, or vice versa (proviso to 148(3)). The company forwards the cost audit report to the CG within 30 days of receipt (148(6)/(7)).
NFRA: monitors and enforces auditing standards (Rule 8) and oversees audit quality (Rule 9). NFRA-1 is the event-based intimation of auditor particulars (15/30 days); NFRA-2 is the annual return due by 30 November every year — do not confuse the two.
| Period | Event / action | Where |
|---|---|---|
| 15 days | ADT-1 filed with ROC, from the appointment meeting | 139(1) / Rule 4 |
| 30 days | Board appoints first auditor (non-Govt), from registration | 139(6) |
| 90 days | Members appoint first auditor at EGM if Board fails | 139(6) |
| 60 days | CAG appoints first auditor (Govt co), from registration | 139(7) |
| +30 days | Board appoints if CAG fails (Govt co) | 139(7) |
| 60 days | Members appoint at EGM if Board also fails (Govt co) | 139(7) |
| 180 days | CAG appoints subsequent auditor, from FY commencement | 139(5) |
| 30 days | Board fills casual vacancy (non-CAG cos) | 139(8) |
| 3 months | GM approval of resignation-CV, from Board recommendation | 139(8) |
| 30+30 days | CAG 30d, then Board next 30d (CAG-co casual vacancy) | 139(8) |
| 30 days | ADT-2 to CG for removal, from Board resolution | 140(1) / Rule 7 |
| 60 days | GM held after CG approval (removal) | 140(1) |
| 60 days | Deemed CG approval (IFSC cos, no response) | 140(1) |
| 3 months | New auditor at GM after deemed-approval expiry (IFSC) | 140(1) |
| 30 days | ADT-3 filed on resignation | 140(2) / Rule 8 |
| 15 days | NCLT order on CG application (auditor fraud) | 140(5) / Rule 78(3) |
| 5 years | Ineligibility — Tribunal-removed fraudulent auditor | 140(5) |
| 60 days | Corrective action — relative’s securities breach | Rule 10 |
| 5 years | Cooling period (individual after 1 term; firm after 2) | 139(2) |
| 3 years | Transitional compliance, from Act commencement | 139(2) |
| 10 years | Max continuous tenure — audit firm | Rule 6 |
| 60 days | CAG supplementary audit, from receipt of report | 143(6) |
| 2 days | Auditor reports fraud to Board/AC (initial, both slabs) | Rule 13(2)/(3) |
| 45 days | Board/AC reply window (fraud ≥₹1Cr) | Rule 13(2) |
| 15 days | Auditor forwards to CG after reply (fraud ≥₹1Cr) | Rule 13(2) |
| 1 April 2022 | Audit trail mandatory, FY commencing | Rule 11 |
| 30 days | Cost audit report furnished to CG, from receipt | 148(6) |
| 30 Nov | NFRA-2 annual return filing | NFRA Rules |
| 15/30 days | NFRA-1 intimation of auditor particulars | NFRA Rules |
| 10 years | Fraud-conviction disqualification bar elapses | 141(3)(l) |
- Merging removal and resignation — removal is company-initiated (SR + CG approval + hearing the auditor); resignation is auditor-initiated (just ADT-3 in 30 days, no CG approval).
- Putting the Special Resolution before CG approval in removal — the sequence is Board → ADT-2 to CG (30d) → approval → GM (60d) → hear → SR last.
- Confusing rotation with the cooling period — rotation is the maximum term (1×5 / 2×5 years); cooling is the 5-year re-appointment bar after it, in the same company only.
- Applying the relative’s ₹1,00,000 threshold to the auditor’s own holding — self/partner holding has a NIL threshold, and the ₹1,00,000 is face value, never market value.
- Swapping the indebtedness (>₹5 lakh) and guarantee (>₹1 lakh) thresholds under 141(3)(f)/(g).
- Treating S.147(2) as covering all of S.139–146 — the auditor’s penalty covers only S.139, 144 and 145; the full 139–146 range is S.147(1) for the company/officer.
- Giving the first auditor a 5-year term — the first auditor holds office only till the conclusion of the 1st AGM.
- Reporting sub-₹1-crore fraud to the CG — below ₹1 crore goes only to the AC/Board (plus Board’s Report); and if management already reported it, even a bigger fraud goes only to the AC/Board.
Quick revision cards
Rotation limits under Sec 139(2)?
Which companies must rotate auditors (Rule 5)?
First auditor of a non-Govt company?
Removal sequence under Sec 140(1)?
Resignation formalities and penalty?
The four ADT forms?
Securities thresholds under 141(3)?
The 20-audit ceiling counts how?
Fraud reporting split at ₹1 crore?
Sec 147(2) covers which sections, at what cost?
Cost audit essentials?
NFRA-1 vs NFRA-2?