The division of labor became possible due to the industrial revolution, and as business activities expanded, large-scale companies were formed to conduct trade and industry on a bigger scale. In such companies, capital was collected from the general public through the sale of shares, but the shareholders themselves were usually not professional managers and could not run the business directly.
Because of this situation, the need for professional management was strongly felt so that companies could operate smoothly and efficiently. This led to the separation of ownership from management, which made it necessary to protect the rights and interests of owners through independent examination of business records.
As a result, professional auditors appeared in the business world to examine the work performed by management. An auditor is generally a chartered accountant who first obtains the required educational qualifications and then undergoes practical training with a firm of chartered accountants. During this training period, he is also required to pass professional examinations.
After successfully completing this process, he is granted a license to work as an independent chartered accountant. In this way, an auditor becomes an expert in the fields of accounting and auditing and is competent to give an opinion about a business entity after examining its accounting records and other relevant documents.
Definition of an Auditor
An auditor is an independent person who provides a true and fair view of the performance of a business concern. He examines whether accounting standards, management policies, and other rules and regulations have been properly followed. Various experts have defined an auditor in the following ways.
1. Definition by C. De Paula
C. De Paula says that an auditor is the individual or firm carrying out the audit of the enterprise, including the partners of such individual or firm.
2. Definition by E. R. Martin
E. R. Martin says that an auditor is a person appointed to examine the books of accounts and the accounts of a registered company and to report upon them to the company members.
3. Definition by International Standards on Auditing
According to International Standards on Auditing, the auditor means the person with final responsibility for the audit. The term audit firm refers to either the partners of a firm providing audit services or a sole practitioner providing such services, as the case may be.
Appointment of an Auditor
The appointment of an auditor may be made either by the directors or by the shareholders, depending on the stage and circumstances of the company.
Appointment by Directors
1. First Auditors
The directors are required to appoint the first auditor or auditors of a company within sixty days from the date of incorporation of the company. The auditors appointed in this way hold office until the conclusion of the first annual general meeting.
2. Casual Vacancy
The directors may also fill any casual vacancy in the office of the auditor within thirty days of its occurrence. Until such vacancy is filled, the continuing auditor or auditors, if any, may act as auditor. Any auditor appointed to fill a casual vacancy holds office until the conclusion of the next annual general meeting.
Appointment by Shareholders
1. First Auditors
If the directors fail to appoint the first auditors within the required time, the shareholders may appoint them within one hundred twenty days from the date of incorporation. The auditors so appointed hold office until the end of the first annual general meeting.
2. Annual Appointment
Every company is required, at each annual general meeting, to appoint auditors who will hold office from the conclusion of that meeting until the conclusion of the next annual general meeting. A firm of auditors may also be appointed, and all persons who were partners in the firm at the time of appointment are treated as auditors.
3. Eligibility in Private Companies
A chartered accountant or cost and management accountant may be appointed as auditor of a private company having a share capital of Rs. 0.5 million or more, according to the provisions of the Income Tax Ordinance.
Procedure for Appointment of First Auditor
1. Consent of Auditor
Before appointment, the consent of the proposed auditor is obtained. In the case of a public company, the person must be a chartered accountant, while in the case of other companies, another qualified person may be appointed according to law.
2. Approval by Board of Directors
A meeting of the board of directors is convened within sixty days of incorporation to consider and approve the appointment of the first auditors. The approval may also be given through a resolution circulated among all directors and signed by them.
3. Filing of Return
The particulars of the auditors are filed on Form 29 within fourteen days of appointment. A copy of the auditor’s consent is also enclosed, along with a bank challan of Rs. 200 as filing fee.
4. Register of Officers
The particulars of the auditors are recorded in the register of officers maintained by the company under section 205 of the Companies Ordinance 1984.
5. Advice to Auditors
The auditors are informed of their appointment as auditors of the company.
Procedure for Appointment of a Subsequent Auditor
1. Consent of Auditor
The consent of the proposed auditor is obtained first. In the case of a public company, the auditor must be a chartered accountant, while in other cases the appointment may be made according to the law.
2. Approval by Board of Directors
The board of directors considers the proposal and recommends the appointment of auditors for approval in the annual general meeting.
3. Notice of Meeting
Notice of the annual general meeting, including the item relating to appointment of auditors and fixation of remuneration, is sent to members at least twenty-one days before the meeting.
4. Approval by Members
The appointment of auditors and the fixation of their remuneration are considered by the members in the annual general meeting and approved by them.
5. Filing of Return
The particulars of the auditors are filed on Form 29 in duplicate within fourteen days of appointment. A copy of the consent of the auditors is enclosed, together with a bank challan of Rs. 200 as filing fee.
6. Register of Officers
The particulars of the auditors are entered in the register of officers maintained under section 205 of the Companies Ordinance 1984.
7. Advice to Auditors
The auditors are informed of their appointment without delay after the meeting.
Remuneration of an Auditor
1. Remuneration Fixed by Directors
When the auditor is appointed by the directors, the directors have the authority to fix the auditor’s remuneration.
2. Remuneration Fixed by Shareholders
When the auditors are appointed by shareholders at the annual general meeting, the shareholders have the authority to fix their remuneration.
3. Remuneration Fixed by Commission
When the Securities and Exchange Commission of Pakistan appoints an auditor, it has the authority to fix the remuneration of that auditor.
Removal of an Auditor
A company may remove its auditor by passing a special resolution with the support of a three-fourths majority of members in a general meeting. However, although the company can remove the auditor, it does not itself appoint the replacement, because that power belongs to the commission.
Procedure for Removal of an Auditor
1. Board Meeting
The proposal for the removal of auditors is first considered and approved by the directors in a board meeting.
2. Notice to Auditors
A formal notice of proposed removal is given to the auditors.
3. Representation by Auditor
The auditor is given an opportunity to make a representation against the proposed removal.
4. Notice to Members
Notice of the meeting, along with the auditor’s representation, is sent to members. The notice also contains the proposal for recommending the appointment of a new auditor to the commission.
5. General Meeting
The proposal for removal is considered in the general meeting and may be approved by members through a special resolution. The chairman may permit the auditor to present his representation. The members may also approve the recommendation for appointment of a new auditor to the commission.
6. Notice to Commission
The company is required to give notice to the commission within one week of removing the auditors.
7. Appointment of New Auditor
An application is made for the appointment of a new auditor in place of the removed auditor. It is appropriate to include the name of the proposed auditor and the proposed remuneration, together with a bank challan of Rs. 500.
8. Remuneration of Auditor
The remuneration of the auditor appointed in this situation is fixed by the commission.
9. Register of Officers
When the appointment notification is received, Form 29 is filed within fourteen days, and the particulars of the new auditor are entered in the register of officers.
10. Removal of Existing Auditors
The removal of the existing auditors is notified on Form 29 within fourteen days, and a copy of the special resolution is filed on Form 26 within fifteen days. A bank challan of Rs. 400 is enclosed for this purpose.
Conclusion
An auditor protects the rights of people who are away from the business, especially the shareholders. Since the shareholders appoint the auditor, he reports to them about the performance of management.
The law defines the rights, duties, and liabilities of auditors, and they receive fees from their clients for the services they provide. In reality, audit is one of the most important methods of ensuring accountability of management and protecting the owners from possible losses.
An auditor is a professionally qualified and independent person who examines the financial records of a business and expresses an opinion on their truth and fairness. The existence of auditors became necessary when ownership and management were separated, and the need arose to protect the interests of shareholders and other stakeholders.
The appointment, remuneration, and removal of an auditor are governed by legal procedures so that independence and accountability can be maintained. Because of this role, the auditor remains one of the most important figures in the corporate and financial structure of any business organization.
See Also: What are the Duties of an Auditor
