Internal Audit Appointment

[umeshkumar jhawar]

Dear Sir

One CA firm ABC and Associates appointed as statutory auditor of company for FY 2024-25 due to compulsory rotation of previous auditor as per requirement of Companies Act, 2013.

Now the incoming auditor i.e. ABC and Associates want to resign as statutory auditor without signing any statutory audit for FY 2024-25 (Even the audit has not commenced). Can ABC and Associates be appointed as internal auditor of same company for FY 2025-26 after resigning from the office of Statutory audit without doing statutory audit for FY 2024-25?

[YAGAY andSUN]

Yes, ABC and Associates can be appointed as Internal Auditor for FY 2025-26, even after resigning as Statutory Auditor for FY 2024-25, provided they did not perform any statutory audit function, including signing or commencing the audit for that year. As per Section 144 of the Companies Act, 2013, a statutory auditor is restricted from providing certain services, including internal audit, during the term of their audit appointment. However, once they resign and their role as statutory auditor has effectively ended without conducting the audit, there is no bar under the Companies Act to appoint them as internal auditor in the next financial year.

It is important to ensure that the resignation is properly recorded, and there’s a clear gap between cessation as statutory auditor and appointment as internal auditor. The company should also consider ethical standards and independence guidelines issued by ICAI to avoid any perceived conflict of interest.

Please also refer the Chapter X: The Companies (Audit and Auditors) Rules, 2014.

[YAGAY andSUN]

Here are the relevant legal, statutory, and regulatory provisions that apply to your query regarding the resignation of a statutory auditor and subsequent appointment as an internal auditor:

1. Companies Act, 2013 – Section 144 (Auditor Not to Render Certain Services)

• This section prohibits a statutory auditor (individual or audit firm) from providing certain services to the company or its holding/subsidiary companies, including:

"(h) internal audit"

• However, this restriction is applicable only during the term of appointment as statutory auditor.

Implication: Once the statutory auditor resigns and their appointment ceases, the restriction under Section 144 no longer applies.

2. Companies Act, 2013 – Section 139(2) (Rotation of Auditors)

• Mandatory rotation of auditors applies to certain classes of companies (such as listed companies or prescribed public companies).
• A new firm (like ABC and Associates) can be appointed after the outgoing auditor’s term ends.

Implication: ABC and Associates' appointment as statutory auditor for FY 2024–25 is valid under rotation rules. Their resignation ends their statutory audit term.

3. ICAI Code of Ethics (Issued by the Institute of Chartered Accountants of India)

• The Code of Ethics (2020), Volume I and II, includes provisions on auditor independence and conflict of interest.
• Clause under “Independence – Section 290” (now aligned with IESBA Code) states that an auditor must remain independent in both appearance and fact.
• Once a firm resigns or ceases to be statutory auditor, they are free to accept other engagements (e.g., internal audit), provided there's no threat to independence and it's not prohibited by law.

Implication: Appointment as internal auditor in the subsequent year is permitted if there’s no overlapping period and ethical safeguards are in place.

4. MCA Notification – Companies (Audit and Auditors) Rules, 2014

• These rules detail the procedure for appointment, resignation, and reporting obligations of statutory auditors.
• Rule 8: Auditor resignation requires the company to file Form ADT-3 within 30 days of resignation.
• Rule 10: Restricts appointment of a firm having common partners with the outgoing auditor.

Implication: If proper resignation procedure is followed and there is no partner overlap issue, reappointment in a non-audit capacity (e.g., internal audit) in a future year is legally allowed.

Summary:

ABC and Associates can be appointed as Internal Auditor for FY 2025–26, after resigning from the statutory auditor role for FY 2024–25, provided:

1. They did not conduct or commence the statutory audit.
2. Their resignation is formally accepted and filed as per Rule 8 (Form ADT-3).
3. There is no overlapping period between resignation and new appointment.
4. Ethical and independence norms of ICAI are duly followed.

Let me know if you need draft board resolutions or ADT-3 format.