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Section 141 - Eligibility, Qualifications and Disqualifications of Auditor

# Section 141 — Eligibility, Qualifications and Disqualifications of Auditor

## 1. Who is Eligible to be Appointed as Auditor?

### (a) Individual

A person shall be eligible for appointment as auditor of a company only if he is a Chartered Accountant in practice.

### (b) Firm (including LLP)

A firm whereof majority of partners practising in India are Chartered Accountants may be appointed as auditor in its firm name.

## 2. Who Will Sign on Behalf of the Firm?

Where a firm (including an LLP) is appointed as auditor, only the partners who are Chartered Accountants in practice shall be authorised to act and sign on behalf of the firm.

## 3. Disqualifications [Section 141(3)]

The following persons shall NOT be eligible for appointment as auditor of a company:

### (a) Body Corporate

A body corporate other than an LLP registered under the LLP Act, 2008.

(Note: Individual, Firm, LLP are eligible — body corporate is not.)

### (b) Officer or Employee

An officer or employee of the company.

### (c) Partner/Employee of Officer/Employee

A person who is a partner, or who is in the employment, of an officer or employee of the company.

### (d) Holding of Securities / Indebtedness / Guarantee

#### (i) Securities Held — Limit

A person (or his relative or partner) who holds any security or interest in:

The Company (C)
Its Subsidiary (S)
Its Holding Company (H)
Associate Company (A)
Subsidiary of Holding Company (SoH)

Exception: A relative may hold securities in the company of face value not exceeding ₹1,00,000 (one lakh) in aggregate.

Corrective Action: If the relative acquires securities exceeding ₹1 lakh, the auditor shall take corrective action within 60 days of such acquisition.

#### (ii) Indebtedness

A person (or relative or partner) who is indebted to the C / S / H / A / SoH in excess of ₹5,00,000 (five lakh rupees).

#### (iii) Guarantee or Security

A person (or relative or partner) who has given guarantee or provided security in connection with the indebtedness of any third party to the C / S / H / A / SoH in excess of ₹1,00,000 (one lakh rupees).

### (e) Business Relationship

A person or firm who, whether directly or indirectly, has a business relationship with the C / S / H / A / SoH.

Meaning: Any transaction entered into for a commercial purpose.

Exceptions (NOT treated as business relationship):

1. Commercial transactions which are in the nature of professional services rendered by the auditor.

2. Commercial transactions in the ordinary course of business of the company at arm's length price (e.g., telecom, airline, hospital services).

### (f) Relative is Director / KMP

A person whose relative is a Director or KMP (Key Managerial Personnel) of the company. (Anti-nepotism provision.)

### (g) Ceiling Limit — 20 Audits

A person who is in full-time employment elsewhere, OR a person/partner of a firm holding appointment as auditor of more than 20 companies on the date of appointment.

Excluded while calculating limit of 20:

One Person Company (OPC)
Small Company
Dormant Company
Private Company having Paid-up Share Capital less than ₹100 Crore

Note: In case of a firm, the limit of 20 is applicable per partner (other than partners in full-time employment elsewhere).

### (h) Conviction for Fraud

A person who has been convicted by a court for an offence involving fraud and a period of 10 years has not lapsed from the date of such conviction.

### (i) Section 144 Services

Any person whose subsidiary or associate company or any other form of entity, is engaged on the date of appointment in rendering services as prescribed under Section 144 (directly or indirectly) — including services to holding company.

## 4. Subsequent Disqualification [Section 141(4)]

Where a person appointed as auditor of a company incurs any of the disqualifications under Section 141(3) after his appointment, he shall be deemed to have vacated his office as an auditor and such vacation shall be treated as a casual vacancy.

Exception: In case of acquisition of securities by relative exceeding ₹1 lakh — auditor gets 60 days to take corrective action.

## 5. Important Note on Timing

Eligibility is to be checked on or after the appointment, not before.

Worked example

### Example 1

Example 1 (Securities): Mr. X, a CA, is being considered for appointment as auditor of ABC Ltd. His wife holds shares of ABC Ltd. of face value ₹80,000. → Mr. X is eligible as the relative holds securities below the ₹1 lakh threshold.

Variation: If wife purchased additional shares making total face value ₹1,50,000 after Mr. X's appointment → Mr. X must take corrective action within 60 days (i.e., ensure wife disposes of excess holding).

### Example 2

Example 2 (Indebtedness): Mr. Y, CA, took a housing loan of ₹4,50,000 from PQR Bank Ltd. He is offered appointment as auditor of PQR Bank Ltd. → Mr. Y is eligible since indebtedness (₹4.5 lakh) does not exceed ₹5 lakh threshold.

### Example 3

Example 3 (Business Relationship Exception): M/s ABC & Co., CAs, are auditors of Reliance Jio Ltd. The partners use Jio mobile services and pay regular tariff. → This is a transaction in the ordinary course of business at arm's length price, hence NOT a business relationship; firm remains eligible.

### Example 4

Example 4 (Ceiling — 20 audits): M/s LMN & Co. has 3 partners (all CAs in practice, none in full-time employment elsewhere). Maximum number of company audits the firm can accept = 3 × 20 = 60 audits (excluding OPC, small, dormant, and small private companies).

### Example 5

Example 5 (Relative as Director): Mr. P's brother is a Director in XYZ Ltd. Mr. P is offered audit of XYZ Ltd. → Mr. P is disqualified under Section 141(3)(f) — brother is a 'relative' as per Section 2(77).

### Example 6

Example 6 (Guarantee): Mr. Q gave a guarantee of ₹1,50,000 for a loan taken by his friend from DEF Ltd. Mr. Q is proposed as auditor of DEF Ltd. → Mr. Q is disqualified as guarantee exceeds ₹1 lakh limit.

⚠️ Common exam mistakes

Confusing the three limits under Section 141(3)(d): Securities = ₹1 lakh (relative only), Indebtedness = ₹5 lakh, Guarantee for third party = ₹1 lakh.
Forgetting that the ₹1 lakh securities exception applies ONLY to a 'relative' — auditor himself or partner cannot hold ANY securities.
Including OPC, small, dormant, and private companies (PUSC < ₹100 Cr) while computing the ceiling of 20 audits.
Applying the limit of 20 to the firm as a whole instead of per partner.
Treating ordinary commercial transactions at arm's length price as 'business relationship' disqualification.
Forgetting that an LLP is NOT a 'body corporate' for Section 141(3)(a) purposes — LLP can be appointed as auditor.
Confusing 60-day corrective action window (applicable only to relative acquiring securities >₹1 lakh) with immediate vacation in other cases of subsequent disqualification.
Checking eligibility before appointment instead of on/after the date of appointment.
Forgetting that disqualification under Section 141(3)(d) extends to C/S/H/A/SoH (not just the company being audited).

Bare-Act text Section 141, Companies Act, 2013 · Companies Act, 2013 · click to expand

Section 141(1): A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant. A firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company. Section 141(2): Where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm. Section 141(3): The following persons shall not be eligible for appointment as an auditor of a company, namely:— (a) a body corporate other than a limited liability partnership registered under the Limited Liability Partnership Act, 2008; (b) an officer or employee of the company; (c) a person who is a partner, or who is in the employment, of an officer or employee of the company; (d) a person who, or his relative or partner— (i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company: Provided that the relative may hold security or interest in the company of face value not exceeding one lakh rupees; (ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of five lakh rupees; or (iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of one lakh rupees; (e) a person or a firm who, whether directly or indirectly, has business relationship with the company, or its subsidiary, or its holding or associate company or subsidiary of such holding company or associate company; (f) a person whose relative is a director or is in the employment of the company as a director or key managerial personnel; (g) a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty companies; (h) a person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction; (i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144. Section 141(4): Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-section (3) after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.

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