How to Appoint a Statutory Auditor: First Auditor, Five-Year Term and ADT-1

Appointing the first auditor

Section 139(6) requires the board to appoint the first auditor within 30 days of registration. If the board does not, it must inform members, who appoint the auditor at an extraordinary general meeting within 90 days. The first auditor holds office until the conclusion of the first AGM. Many founders miss this because the company has little activity, but every company needs an audit for its first financial year.

Five-year appointment at the AGM

At the first AGM, shareholders appoint an individual or firm as auditor to hold office from that meeting until the end of the sixth AGM. The requirement to ratify the appointment at every AGM was removed with effect from May 2018. Before appointment, the company must obtain the auditor's written consent and a certificate that the appointment meets the conditions of section 141, including the limit on the number of audits.

• Written consent of the auditor
• Eligibility certificate under section 141
• Board recommendation to shareholders
• Ordinary resolution at the AGM
• ADT-1 filed within 15 days

Who can be appointed?

Only a chartered accountant in practice or a firm in which most partners practise in India can be appointed. Section 141 disqualifies, among others, an officer or employee of the company, a person who is a partner or employee of an officer, a person holding securities beyond specified limits, and a person indebted to the company above prescribed limits. Auditor rotation after one or two terms applies only to listed companies and to specified classes of unlisted companies above capital or borrowing thresholds.

Casual vacancy, resignation and removal

If an auditor resigns, the board fills the vacancy within 30 days, and the appointment must be approved by members within three months. The resigning auditor files ADT-3 within 30 days stating reasons. Removing an auditor before the end of the term needs a special resolution and prior Central Government approval through ADT-2, after giving the auditor a reasonable opportunity of being heard.

Timeline and fees

The ROC fee for ADT-1 follows the slab table based on the company's nominal capital. Audit fees are agreed commercially and approved by members or the board as delegated. Late ADT-1 filing attracts additional fees that rise with the delay, so file promptly after the AGM. Keep the consent letter and certificate in the company's records for the auditor's term.

Questions to ask before engaging an auditor

Choosing an auditor is a five-year decision, so check fit as well as eligibility. Ask about experience with startups in your sector, familiarity with your accounting software and its audit trail reports, expected timelines for the year-end audit, and whether they also handle tax audits and transfer pricing if you need them. Agree the fee and scope in an engagement letter.

Common mistakes

The most common errors are not appointing a first auditor at all, appointing someone without written consent, forgetting to appoint for a five-year term at the first AGM, and missing ADT-1. An auditor who is also the company's internal accountant or a relative of a director may be disqualified.

Step by step

1. 1Shortlist auditor

   Choose a practising CA or firm and check independence.

2. 2Obtain consent

   Get written consent and the section 141 certificate.

3. 3Board resolution

   Appoint the first auditor within 30 days of incorporation.

4. 4Prepare for AGM

   Board recommends the five-year appointment.

5. 5Members appoint

   Pass the ordinary resolution at the AGM.

6. 6File ADT-1

   File within 15 days of the AGM.

7. 7Track the term

   Diarise the end of the five-year term.