# Eligibility, Qualifications & Disqualifications of Auditors [Section 141]

## (1) Who Can Be an Auditor? – Qualifications

Eligible Persons
(a) An individual who is a Chartered Accountant (CA) holding a valid Certificate of Practice, OR
(b) A firm (including LLP) where the majority of partners are practicing CAs in India

> Note: In case of a firm/LLP appointed as auditor, only those partners who are CAs are authorised to act and sign on behalf of the firm.

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

The following persons cannot be appointed as auditor:

### (a) Body Corporate (other than LLP)

A body corporate (other than an LLP) is disqualified.

### (b) Officer or Employee

An officer or employee of the company; OR a partner/employee of such officer or employee is disqualified.

### (c) Relative is Director/KMP

A person whose relative is a director or KMP of the company is disqualified.

### (d) Security / Interest in Group (CASHA)

If the person himself, his relative, or his partner (in aggregate) holds any security or interest in:

The Company,
Its Associate,
Its Subsidiary,
Its Holding, or
Any subsidiary of the holding company.

> Memory hook: CASHA = Company, Associate, Subsidiary, Holding, Any subsidiary of Holding.

Exceptions:

Does not include securities held as nominee.
If a relative acquires securities exceeding face value of ₹ 1 lakh after the auditor's appointment, corrective action must be taken within 60 days.

### (e) Indebtedness

If the person, his relative or partner is indebted to CASHA in excess of ₹ 5 lakhs.

### (f) Guarantee/Security

If the person, his relative or partner has given guarantee/security for indebtedness of a third person in excess of ₹ 1 lakh to CASHA.

### (g) Business Relationship

Person/firm has a business relationship with CASHA or subsidiary of associate company.

'Business Relationship' means a commercial transaction except:

Transactions in the nature of professional services rendered by the auditor.
Transactions in the ordinary course of business of the company at arm's length price.

### (h) 20-Company Limit

A person/partner of a firm who is already an auditor in more than 20 companies is disqualified.

Excluded from the 20-company count:

Private companies with paid-up share capital < ₹ 100 crores (if no default u/s 92 & 137),
Dormant company,
OPC, and
Small company.

Firm-level treatment:

Limit of 20 audits is per partner.
If a person is partner in multiple firms, all such firms together are entitled to only 20 audits on his account.

### (i) Full-time Employment Elsewhere

A person in full-time employment elsewhere is disqualified.

### (j) Fraud Conviction

A person convicted of an offence involving fraud, where 10 years have not elapsed since conviction, is disqualified.

### (k) Section 144 Services

A person rendering any service under Section 144 (prohibited services) directly or indirectly to the company, its holding or subsidiary, is disqualified.

## (3) Vacation of Office

If an auditor incurs any disqualification after his appointment, he shall vacate office, and such vacancy shall be deemed a casual vacancy.

Worked example

### Example 1

Example 1: Maximum audits for a firm

ABC & Co. has Mr. A, B and C as partners, who are currently auditors of 4, 6, and 10 companies respectively. Find the maximum number of audits ABC & Co. can accept.

Solution:

Per partner limit u/s 141(3) = 20 audits.
Total firm limit = 3 × 20 = 60 audits.
Audits already held = 4 + 6 + 10 = 20.
Additional audits available = 60 − 20 = 40.

Partner-wise additional capacity:

Mr. A: 20 − 4 = 16 audits
Mr. B: 20 − 6 = 14 audits
Mr. C: 20 − 10 = 10 audits

### Example 2

Example 2: Indebtedness disqualification

M Ltd. proposes to appoint Mr. X as auditor. Mr. Y (partner of Mr. X) has a loan of ₹ 4 lakh from a subsidiary of M Ltd., and Mr. X's relative owes ₹ 2 lakh to an associate of M Ltd.

Analysis:

Under Section 141(3), a person is disqualified if he, his relative, or his partner is indebted to CASHA in aggregate exceeding ₹ 5 lakhs.

Total indebtedness to CASHA entities:

Partner (Mr. Y) → Subsidiary: ₹ 4 lakh
Relative → Associate: ₹ 2 lakh
Aggregate = ₹ 6 lakh > ₹ 5 lakh threshold

Conclusion: Mr. X is disqualified to be appointed as auditor of M Ltd.

⚠️ Common exam mistakes

Counting indebtedness to each CASHA entity separately — the limit (₹ 5 lakhs) applies on aggregate basis across the person, relative and partner.
Including OPC, dormant, small companies, and small private companies in the 20-company limit — they are excluded.
Forgetting that for a firm, the 20-company limit is per partner who is a CA — not for the firm as a whole.
Treating relative's security holding as immediately disqualifying — corrective action within 60 days is allowed if face value crosses ₹ 1 lakh post-appointment.
Confusing the indebtedness limit (₹ 5 lakhs) with the guarantee limit (₹ 1 lakh).
Forgetting that LLP is permitted as auditor; only other body corporates are disqualified.
Missing that auditor incurring disqualification post-appointment must vacate — creating a 'casual vacancy'.

Bare-Act text Section 141 · 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. (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. (3) The following persons shall not be eligible for appointment as an auditor of a company...

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Eligibility, Qualifications and Disqualifications of Auditors – Section 141

Worked example

⚠️ Common exam mistakes