Companies Ordinance 1984 – relevant sections 252. Appointment and remuneration of auditors Auditing Help

1. Every company shall at each annual general meeting appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting.

Provided that an auditor or auditors appointed in a general meeting may be removed before conclusion of the next annual general meeting through a special resolution.

2. Appointment of a partnership by the firm name to be the auditors of a company shall be deemed to be the appointment of all the persons who are partners in the firm at the time of appointment.

3. The first auditor or auditors of a company shall be appointed by the directors within sixty days of the date of incorporation of the company, and the auditor or auditors so appointed shall hold office until the conclusion of the first annual general meeting.

Provided that:

a) The company in a general meeting may remove any such auditor or auditors and appoint in his or their place any other person or persons who have been nominated for appointment by any member of the company and whose nomination notice has been given to the member of the company not less than fourteen days before the date of the meeting; and
b) If the directors fail to exercise their powers under this subsection. the company in general meeting may appoint the first auditor or auditors.

4. The directors may fill any casual vacancy in the office of an auditor; but while any such vacancy continues, the surviving or continuing auditor or auditors, if any, may act.

5. Any auditor appointed to fill in any casual vacancy shall hold office until the conclusion of the next annual general meeting.

6. Where the first auditors are not appointed under clause (b) of the proviso to subsection (3) within one hundred and twenty days of the date of incorporation of the company, or where at an annual general meeting no auditors are appointed, or where auditors appointed are unwilling to act as auditors of the company, or where a casual vacancy in the office of an auditor is not filled within thirty days after the occurrence of the vacancy, the Commission may appoint a person to fill the vacancy.

7. The company shall, within one week of the authority’s power under subsection (6) becoming execrable, give notice of the fact to the Commission.

8. The remuneration of the auditors of a company shall be fixed in the case of an auditor appointed by the directors or by the Commission, by the directors or by the authority, as the case may be; and. in all other cases, by the company in general meeting or in such manner as the general meeting may determine.


It is only fair that the directors who use the shareholders funds to carry out the business should be accountable to the shareholders. The Ordinance does not give powers to the shareholders to inspect the books. Even if they are allowed access to books they do not generally have required knowledge and skills to interpret the accounts. The Ordinance, therefore does not give powers to shareholders to appoint the auditors but requires that.

Sub section (1) also provides that the shareholders have powers to appoint auditors every year in replacement of previous auditors.

Scope of the section.
This section deals with appointment and remuneration of the auditors. Provisions of this section are applicable to all companies, public private and those companies which are governed by any special enactment except in so far as such provisions are inconsistent with the provisions of such special enactments.

The provisions discuss following matters:

a) Appointment of auditors at AGM
b) Appointment of first auditors
c) Filling of casual vacancy
d) Appointment by Commission
e) Remuneration of auditors.


The auditor is appointed at the annual general meeting and holds the office from the conclusion of the annual general meeting at which he is appointed until the conclusion of the next annual general meeting. If his appointment is made for the duration of any other period, their appointment will not be lawful and the auditor will not be entitled to remuneration for such portion of the period as extends beyond the next annual general meeting.

Section 233 provides that the directors of every company shall at the some date not later than eighteen months after the incorporation of the company an subsequently once at least in every calendar lay before the company in annual general meeting the financial statements. In case the annual general meeting is not held within the prescribed time, the auditor will continue until the. next annual general meeting is held and concluded.

Sub section (1) provides that the auditors will be appointed at each annual general meeting to hold office until the conclusion of the next annual general meeting. It implies that the auditor’s term is for one year. During hi tenure he can carry out audit for more than one accounting period, in case audits for such accounting periods are pending.

In this regard, the Institute of Chartered Accountants of Pakistan, has issued following ATR 11

The brief facts of the case on which the opinion on the above subject was sought are as follows:

i) X & Co. were the auditors of a public company for the year 1981 and the appointment was made in the Annual General Meeting of the company for 1980 held on 11th November, 1980.
ii) Annual General Meeting -of the company for 1981 was held on 315t December. 1981. In this meeting audited accounts of the company and the report of the auditors were not presented because these were not ready at the time.
iii) There was no proposal for appointment of new auditors other than the retiring auditors.
iv) Requirements of section 131 of the Companies Act 1913 were not complied with by the Company as the accounts for 1981 and auditors report thereon were not presented before the meeting.
v) According to the information conveyed to X & Co. verbally by the secretary of the Company it was resolved in the meeting that accounts for the year ended 30th September, 1981 were not yet ready. Therefore, these shall be discussed in the meeting for 1982 and appointment of auditors for 1982 shall also be made in that meeting.”

The following opinion was given:

“In the case cited for opinion, the relevant provisions of the Companies Act, 1913. governing the appointment of auditors are contained in sub – section (3) (4) (6) ofS. 144 which read as follows:

3. Every Company shall at each annual general meeting appoint an auditor or auditors to hold office until the next Annual General Meeting.
4. If an appointment of an auditor is not made at an annual general meeting, the Federal Government may, on the application of any member of the company, appoint an auditor of the Company for the current year and fix the remuneration to be paid to him by the
Company for his services.
6. A person other than a retiring auditor, shall not be capable of being appointed Juditor at an annual general meeting unless notice of an intention to nominate that person to the office of auditor has been given by a member of the Company to the Company not less than fourteen days before such Annual General Meeting and the Company shall send a copy of any such notice to the retiring auditor and shall give notice thereof to its members either by advertisement or in any other mode allowed by the articles not less than seven days before the annual general meeting.

From the foregoing provisions, it is clear that an auditor has to be appointed in an annual general meeting and he hold office till the- next . annual general meeting. Such appointment is not related to the account year of the company. In other words, if more than one year’s accounts of the company are in arrears for audit purposes the auditor appointed in the last annual general meeting could audit all the pending accounts till the next annual general meeting when he would cease to hold office as the auditor unless re – appointed.

In the case under reference, the queries were appointed in the annual general meeting held in Nov, 1980. They could have audited all such accounts as were required to be presented before the next annual general meeting held in December, 1981. If such accounts were not presented as required by provisions of S. 131 of the Companies Act, 1913 that is a separate violation, but it does not extend the tenure of. the auditor appointed in November, 1980. Similarly, if no auditors were appointed in the annual general meeting held in December, 1981. then any member of the Company could have moved the Federal Government for appointment of an auditor for the company, But non – appointment of the auditor in the meeting held in December, 1981 does not lead to the presumption that auditor appointed in November, 1980 would continue to hold office after December, 1981.

The question now of change of auditor proposed and made in annual general meeting held in June 1982 appears regular and the new auditors would be authorized to audit such accounts as the company may wish to present in the next annual general meeting of the company.

Dated: 10 – 7 – 1982 .

Removal of first auditors

Proviso to subsection ( 3 ) states that the company, in a general meeting may remove any such auditor or auditors and appoint in his or their place any other person or person who have been nominated, for appointment by any member of the company and whose nomination notice has been given to the members of the company not less than fourteen days before the date of the meeting.

The words used here are “general meeting” and not “annual general
meeting”. This implies that the first auditors can be removed in an extraordinary meeting.

Casual vacancy

Sub section (4) provides that the directors may fill any casual vacancy in the office of an auditor; but while any such vacancy continues, the surviving or continuing auditor or auditors, if any, may act.

The words casual vacancy have not been defined by the Ordinance. Generally casual vacancy means a vacancy of temporary nature. It is caused by previous valid appointment of auditor ceasing to act as such.

253. Provisions as to resolutions relating to appointment and removal of auditors

A notice shall be required for a resolution at a company’s annual general meeting appointing as auditor a person other than a retiring auditor.

The notice referred to in subsection (1) shall be given by a member of the company to the company not less than fourteen days before the annual general meeting, and the Company shall forthwith send a copy of such notice to the retiring auditor and shall also give notice thereof to its members not less than seven days before the date fixed for the annual general meeting and, if the company is a listed company, shall also publish it at least in one- issue each of a daily newspaper in English language and a daily newspaper in Urdu language having circulation in the province in which the stock exchange on which the company is listed is situate.

3. Where notice is given to such a resolution and the retiring auditor makes with respect thereto a representation in writing to the company not exceeding a reasonable length and requests its communication to the members of the company, the company shift unless the representation is received by it too late for it to do so:

a) In any notice of the resolution given to members of the company, state the fact of the representation having been made; and

b) Send a copy of the representation to every member company to whom notice of the meeting is sent whether before or after receipt
of representation by the company; and if a copy of the representation is not sent as aforesaid because it was received too late or because of the company’s default, the auditor may, without prejudice to his right to the heard in person, require that the representation shall be read out at the meeting:

Provided that it shall not be necessary to send or to read out the representation at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the registrar is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter; and the registrar any order the company’s costs on application under this section to be paid in whole or in part by the auditor, notwithstanding that ‘he is not a party to the application.

4. Subsection (3) of this section shall apply to a resolution to remove the first auditors by virtue of subsection (3) or section 252 as it applies in relation to a resolution that a retiring auditor shall not be re appointed.

5. Every company shall, within fourteen days from the date of any appointment of an auditor, send to the registrar intimation thereof, together with the consent in writing of the auditor concerned.

6. Every company shall, within fourteen days from the date of retirement, removal or otherwise ceasing to hold office of an auditor, send intimation thereof to the registrar.


Certain significant implications of this section are:

1. The auditor retires every year.
2. The reappointment is ‘not automatic as appointment of auditors is a specific item in the agenda of AGM. Where the auditor is eligible for reappointment and is willing to act as auditor, passing of a resolution is still necessary for his reappointment.
3. A retiring auditor to whom it is proposed to remove .must duly receive a copy of the special notice of the appropriate resolution to be moved at the next annual general meeting of the company.
4. The auditor proposed to be removed will have a right to make a representation to the shareholders of the company and to call upon it to circulate his representation to he shareholders.
5. If for any reason this representation cannot be circulated it should be read out at the general meeting.
6. The auditor will also have a right to be heard orally at any general meeting of the company.
7. The above provision will make the removal of auditors more difficult and would secure more independence to the auditors.

XYZ & Co. a firm of chartered accountant has four partners each having independent charge of different offices. Mr. A is a chartered accountant practicing as sole proprietor under the name and style “A & Co”.

XYZ & Co. admits Mr. A as partner in its partnership with a condition
that he shall change the name of his existing office in the name of XYZ &Co.

Before this arrangement the audits were accepted by Mr. A under the name “A & Co.”

Discuss whether:

1. Mr. A should continue to complete his previous assignments as a sole proprietor (besides being partner in XYZ & Co.) particularly is case of limited companies, where his appointment as auditor has been made in sole proprietor name “A & Co.”

2. Mr. A shall complete his previous assignments under the name and style of new partnership.

3. Despite the fact that he has merged his sole proprietorship with XYZ & Co. a partnership firm, and changed the name of his office, he shall complete the previous assignments as Mr. A (although the appointment was made as ” A & Co.” and now he is a partner of XYZ & Co.

The Council’s directive 4.01 provides that a member in practice intending to join a partnership may- associate himself with two firms including his own sole proprietary concern.

It would be advisable the Mr. A should continue with the sole proprietary concern till he completes the existing audits. Discontinuation of audit practice of Mr. A would cause a casual vacancy to exist on the audit assignments of companies for which the audit report has not yet been issued.

Matters to be considered by a company to ensure that the appointment of the auditors is valid.

Certain significant matters to be considered to ensure that the appointment of the auditors is valid in the context of the Ordinance include.

a) The person appointed as auditor for public company or a private company which is a subsidiary of public company is a chartered accountant
b) He is not disqualified Under section 254.
c) Appointment was duly made at the annual general meeting of the company.
d) In the case of first auditors, the appointment is made by the directors within sixty days of the date of incorporation of the company.
e) In case of appointment of a person other than the retiring auditor, a notice for a resolution at the company’s annual general meeting has been given and compliance has been made of section 253
f) The registrar has been intimated within fourteen days from the date of appointment of an auditor together with the consent in writing of the auditor concerned.
g) If casual vacancy has arises, the vacancy is filled up by the directors.
h) Remuneration of the auditors has been fixed.
i) Other than in case of casual vacancy, the auditors should not be removed in mid stream.

254. Qualification and disqualification of auditors

1. A person shall not be qualified for appointment as an auditor:

(i) In the case of a public company or a private company which is a subsidiary of a public company unless he is a chartered accountant within the meaning of the Chartered Accountants Ordinance, 1961 (X of 1961 ):
(ii) In the case of a” private company having paid up capital of Rupees three million or more unless he is a Chartered Accountant within the meanings of the Chartered Accountants Ordinance, 1961 (x of 1961)

2. A firm whereof all the partners practicing in Pakistan are Chartered accountants may be appointed by its firm name as auditors of a company referred to in subsection (1) and may act in its firm name.

3. None of the following persons shall be appointed as auditor of a company, namely:

a) a person who is, or at any time during the preceding three years was, a director, other officer or employee of the company;
b) a person who is a partner of, or in the employment of, a director, officer of employee of the company;
c) the spouse of a director of a company;
d) a person who’ is indebted to the company;
e) a body corporate.
f) A person or his spouse or minor children, or in the case of a firm.  all partners of such firm who holds any shares of an audit client or any of its associated companies.

Provided that if such a person holds shares prior to his appointment as auditor, whether as an individual or a partner in a firm that fact shall be disclosed on his appointment as auditor and such person shall disinvest such shares within ninety days of such appointment.


Reference in this section to an “officer” or “employee” shall be constructed as not including reference to an auditor.

4. A person shall also not be qualified for an appointment as auditor  of a company if he is, by virtue of the provisions of subsection (3), disqualified for appointment as auditor of any other company which is that company’s subsidiary or holding company as a subsidiary of that holding company.

5. If after his appointment, and auditor becomes subject to any of the disqualification’s specified in this section, he shall be deemed to have vacated his office as auditor with effect from the date on which he becomes so disqualified.

6. A person who, not being qualified to be an auditor of a company. or being or having become subject to any 6 s qualification to act as such, acts as auditor of a company shall be liable to fine which may extend to twenty -five thousand rupees.

7. The appointment as auditor of a company of an unqualified person, or of a person who is subject to any dis-qualifications to act as such, shall be void, and where such an appointment is made by a company, the Authority may appoint a qualified person in place of the auditor appointed by the company.


Auditor to give notice to the company upon becoming ineligible to act as auditor.

An auditor who finds that he has become disqualified shall cease to be the auditor and should give notice to the company that he has become ineligible to act as auditor.

Whether a chartered accountant in practice be engaged by his
client to write up books of accounts?

In response to a query from a member as to whether a chartered accountant in practice be engaged by his client to write up books of accounts. the appropriate committee of lCAP has issued following response.

“A chartered accountant in practice may be engaged by his client write up books of accounts. However, services provided by a member practice to assist in writing up of books of accounts are advisory services, provided there is no involvement in responsibility assumed for management decisions. evertheless the chartered accountant in practice should be careful not to go beyond the  advisory function into the management sphere. A member in practice who has assisted in writing up books and preparing review of internal controls and to take all normal audit steps for expressing an opinion on such statements. Also, so far as practicable separate staff should be assigned for accounting work and auditing the financial statements.”

In response to another query as to writing up books of accounts of an entity where another firm of chartered accountants has been appointed as auditor, the appropriate committee of ICAP has issued following response:

“If a firm of chartered accountants is specifically assigned the job of
preparing accounts from books of accounts, it may prepares such accounts as a special assignment even if any other firm of chartered accountants has been appointed as statutory auditor”.

Can a partner in the audit firm accept a position of director in a company with which the audit firm has retainership agreement?

The appropriate committee of ICAP has given following opinion.

“Part 1 of Schedule 1 of the Chartered accountants ordinance, 1961 as amended to June 1983 provides as under:

A chartered accountant in practice shall be deemed to be guilty of professional misconduct if he –

engages in any business or occupation other than the profession of chartered accountants unless permitted by the Council so to engage.

Provided that nothing contained herein shall disentitle a chartered accountant from being a director of a company unless he or any of his partners is interested in such company as auditor.

As such the Committee is of the opinion that the position of director of the company can be accepted provided the firm is also not the statutory auditors.

Employee / consultant / retainer: how to differentiate”

In response to a query from a member as regards the criteria to differentiate between an employee, consultant/retainer, the appropriate committee of ICAP has issued following opinion.

1. The “consultant” in the limited context of the Institute, means a member (or members) who renders professional services other than audit that employs the practitioner’s technical skills, education, observation, experience and knowledge.

2 An employee means a natural person appointed or engaged under written or verbal contract or service, whether on a full time, part-time , permanent, casual or temporary basis, essentially creating a masterservant relationship. Other natural persons who are appointed or engaged under a contract for service and who are not subject to he direction of the employer in respect of the manner or execution of those services do not fall within the definition of an employee for this limited context.

3. A consultant – retainer is one who instead of an one-off assignment holds the regular brief for the “engaged-enterprise” to employ technical skills etc. mentioned in para 1 above, as and when
requested, on agreed financial terms and conditions.

255. Powers and duties of auditors

1. Every auditor of a company shall have a right of access at all times to the books, papers, accounts and vouchers of the company,
whether kept at the registered office of the company or elsewhere, and shall be entitled to require from the company and the directors and other officers of the company such information and explanation as he thinks necessary for the performance of the duties of the auditors.

2. In case of a company having a branch office outside Pakistan, it shall be sufficient if the auditor is allowed access to such copies of, and extracts from, the books and papers of the branch as have been transmitted to the principal office of the company in Pakistan.

3. The auditor shall make a report to the members of the company on the accounts and books of accounts of the company and on every balance-sheet and profit and loss account Dr income and expenditure account and on every other document forming part of the balance – sheet and profit and loss account or income and expenditure account, including notes, statements or schedules appended thereto, which are laid before the company in general meeting during his tenure of office, and the report shall state.

a) Whether or not they have obtained all the information and explanations which to the best of their knowledge and belief were necessary for the purposes of the audit.
b) Whether or not in their opinion proper books of accounts as required by this Ordinance have been kept by the company.
c) Whether or not in their opinion the balance – sheet and profit and loss account or the income and expenditure account have been drawn up in conformity with this Ordinance and are in agreement with the books of counts;
d) Whether or not in their opinion and to the best of their information and according to the explanations given to them, the said accounts give the information required by this Ordinance in the manner so required and give a true and fair view.:

1. In the case of the balance – sheet, of the state of the company’s affairs as at the end of its financial year;
11. In the case of the profit and loss account or the income and expenditure account, of the profit or loss or surplus or deficit, as the case may be, for its financial year, and
111. In the case of the statement of changes in the financial position or sources and application of funds of a listed company, of the changes in the financial position or the sources and application of funds for its financial year;

e) Whether or not in their opinion:

i) the expenditure incurred during the year was for the purpose of the company’s business; and
ii) the business conducted, investments made and expenditure incurred during the year were in accordance with the objects of the company; and

f) Whether or not in their opinion Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), was deducted by the company and deposited in the Central Zakat Fund established under section 7 of that Ordinance.

Explanation: Where the auditor’ report contains a referent’ ‘ to any other report, statement or remarks which they have made on the balance – sheet and profit and loss account or income and expenditure account examined by them, such statement or remarks shall be annexed to the auditors’ report and shall be deemed to be part of the auditors’ report.

4. Where any of the matters referred to in subsection (3) is answered in the negative or with a qualification, the report shall state the reason for such answer along with the factual position to the best of the auditors’ information.

5. The Federal Government may, by general or special order, direct that, in the case of all companies generally or such class or description of companies as may be specified in the order, the auditors’ report shall also include a statement of such additional matters as may be so specified.

6. The auditor of a company shall be entitled to attend any general meeting of the company, and to receive all notices of, and any communications relating to, any general meeting which any-member of the company is entitled to receive, and to be heard at any general meeting which any member of the company is entitled to receive, and to be heard at any general meeting which he attends on any part of the business which concerns him as auditor:

7. Provided that, in the case of a Ii ted company. the auditor or a person authorized by him in writing shall be present in the general meeting in which the balance-sheet and profit and loss account and the auditors’ report are to be considered.

8. If any officer of a company refuses or fails, without lawful justification. the onus whereof shall lie on him. to allow any auditor access to any books and paper in his custody or power, or to give any such information possessed by him as when required. or
otherwise hinders, obstructs or delays an auditor III the performance
of his duties or the exercise of is powers or fails to give notice of any general meeting to the auditor, he shall he liable to fine which may extend to five thousand rupees and in the case of a continuing offense to a further fine which may extcid to one hundred rupee for every day after the first during which the default, refusal or contravention continues.

9. The provision of this section shall apply mutatis mutandis to the auditor appointed for audit of the books of account of a liquidator.


Rights of auditors of having access to all company records are applicable both to public and private companies.

The powers of auditor of having a right of access to all company records as he considers necessary for performance of his duties are applicable, both to public and private companies.

Inspection of books of records does not only constitute auditor’s powers and rights but, more significantly, involves duties of the auditors. In order to express an opinion on financial statements, the auditor has to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions. The basic purpose of the audit is to examine the evidence in support of amounts and disclosures in the financial statements prepared by the management, to express an opinion. The directors therefore occupy a fiduciary position in relation to the shareholders and in auditing the accounts maintained by the management, the auditor acts in the interests of the shareholders who are in the position of beneficiaries.

Restrictions cannot be placed on powers of auditors to discharge his duties

The powers to enable auditor to discharge his duties effectively cannot be restricted in any way. Thus, a resolution restricting the auditor, for example, to observe physical count of inventories or a provision to this effect in the Articles of Association will be void. Any regulations which preclude the auditors from availing themselves of all the information to which they are entitled, are inconsistent with the Act, Newton v, Birmingham Small Arms Co., (1895)

Auditor’s rights – explanation of certain terms\

The term vouchers includes all documents, correspondence, agreements and other corroborative evidence in support of account balances reflected in the financial statements whether directly or indirectly. The term books includes the financial, statutory and statistical books including computerized print outs and cost accounting records. The auditor can also examine quantitative records relating to production, sales, stocks reconciliation and ‘wastage, and idle machine hour records. The words “at all times’, mean, at any time during the tenure of the audit, Thus, the auditor can have access to all records at interim visits. The phrase implies access to records during normal business hours on any working day.

The auditor’s right of access at all time to the books of the company would include inspection of the minutes books of general meetings and the directors minutes books.

Auditor’s right to receive all notices relating to general meetings

The auditor has the right to receive all such notices and other such communications relating to any general meeting as are sent to the member of the company. He can attend the general meeting and address the general body on matters concerning him as auditor, However, the more fact that he has expressed his concern on certain observations at the general meeting, does not relieve him of his duty to express an opinion on financial statements.

Auditor as an agent

The extent to which an auditor can be regarded as an agent of the company or of the shareholders who appoint him was considered by the, House of Lords in Spackman v. Evans, (1868) LR 3 HL 171 where it was held that the auditors may well be regarded as agents of the members appointed to carry out certain duties as laid down by the Act and by a particular company’s articles. The House of Lords added that this status would be confined only to the purposes of audit and would not extend to impute to the shareholders a constructive notice of facts coming to the knowledge of the auditors; nor they would be regarded as agents for acknowledging a debt on behalf of the company, nor their signature on the balance sheet or the statutory report will have that effect, Transplanters (Holding Company) Ltd., Re., (1958) 2 All ER 711 (1958).

Auditor is a watchdog, not a bloodhound

It has been stated in a case law that the auditor is only a watch – dog and not a bloodhound, which, casting the metaphor aside, means that his duty is verification and not detection, But does not verification extend to being vigilant? Is not watch-dog bound to bark and chase too where necessary? If when sniffing around, you hit upon a trail of something wrong, surely you must follow it keep his eyes open, and his nose too. It may be that by vigilantly following this trail up to the end, he may “root up” something from which fraud is exposed” In re, Kingston Cotton Mills Co., : (1896); the Irish Woolen Co, v. Tyson, (1900).

In a Canadian case, it was observed that though the auditor may be only a watch-dog he will not have performed the functions of office, if after one how, be retreats under the barn or if he confines his protest to a fellow watch – dog. ( International Laboratories Ltd. v. Dewar, ( 1933)

In London Oil Storage Company Ltd. v. Seer Hasluck and Co. it was held that, it is the duty of the auditor, where suspicion is aroused, to probe the thing to the bottom quoted with approval in CIT, v. G.M. Dandekar, (1952).

Posted on November 3, 2015 in Legal Provisions Relating to Auditors

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