The sections, word for word
Every section on this subject, exactly as printed in the Official Gazette (Act No. 3 of 2020). The explanation follows beneath.
Section 401. Appointment of auditors
(1) Every company shall at each annual general meeting appoint an auditor or auditors to audit the financial statements of the company, and to hold office from the conclusion of that, until the conclusion of the next, annual general meeting.
(2) At any annual general meeting a retiring auditor, however appointed, shall be re-appointed without any resolution being passed unless—
(a) he is not qualified for re-appointment ;
(b) a resolution has been passed at that meeting appointing some other person instead of him or providing expressly that he shall not be re-appointed ; or
(c) he has given the company notice in writing of his unwillingness to be re- appointed : Provided that where notice is given of an intended resolution to appoint some person or persons in place of a retiring auditor, and by reason of the death, incapacity or disqualification of that person or of all those persons, as the case may be, the resolution cannot be proceeded with, the retiring auditor shall not be automatically re-appointed by virtue of this subsection.
(3) Where at an annual general meeting, no auditors are appointed or re-appointed, the directors may appoint a person to fill the vacancy.
(4) The company shall, within one week of the power of the directors under subsection (3) becoming exercisable, give notice of that fact to the Commission; and if a company fails to give notice as required by this subsection, the company and every officer of the company shall be liable to a penalty as the Commission shall specify in its regulations.
(5) Subject to paragraphs (a) and (b), the first auditors of a company may be appointed by the directors at any time before the company is entitled to commence business and auditors so appointed hold office until the conclusion of the next annual general meeting, provided that—
(a) the company may at a general meeting remove any such auditors and appoint in their place any other person who has been nominated for appointment by any member of the company and of whose nomination notice has been given to the members of the company at least 14 days before the date of the meeting ; and
(b) if the directors fail to exercise their powers under this subsection, the company may, in a general meeting convened for that purpose, appoint the first auditors and thereupon the said powers of the directors ceases.
(6) The directors may fill any casual vacancy in the office of auditor but while any such vacancy continues, the surviving or continuing auditor or auditors, if any, may act.
Section 402. Exemption from audit requirement
(1) A company is exempt from the requirements of this Act relating to the audit of accounts in respect of a financial year if—
(a) it has not carried on any business since its incorporation ; or
(b) it is a small company within the meaning of section 394.
(2) A company is not entitled to an exemption under subsection (1) if it was at any time within the financial year in question an insurance company, a bank or any other company as may be prescribed by the Commission.
Section 403. Qualification of auditors
(1) The provisions of any Act establishing a body of accountants shall have effect in relation to any investigation or audit for the purpose of this Act and none of the following persons is qualified for appointment as auditor of a company,—
(a) an officer or servant of the company,
(b) a person who is a partner of or in the employment of an officer or servant of the company, or
(c) a body corporate.
(2) References in subsection (1) to an officer or servant shall be construed as not including references to an auditor.
(3) In the application of subsection (1), the disqualification extends and applies to persons who in respect of any period of an audit were in the employment of the company or were connected therewith in any manner.
(4) A person does not qualify for appointment as an auditor of a company if he is—
(a) disqualified for appointment as auditor of any other body corporate which is that company’s subsidiary or holding company or a subsidiary of that company’s holding company, or would be so disqualified if the body corporate were a company ;
(b) a debtor to the company or to a company that is deemed to be related to the company by virtue of interest in shares, in an amount exceeding N500,000 ;
(c) a shareholder or spouse of a shareholder of a company whose employee is an officer of the company ;
(d) a person who is or whose partner, employee or employer is responsible for the keeping of the register of holders of debentures of the company ;
(e) an employee of or consultant to the company who has been engaged for more than one year in the maintenance of any of the company’s financial records or preparation of any of its financial statements ; or (f ) under subsection (6), disqualified for appointment as auditor of any other body corporate which is that company’s subsidiary or holding company or a subsidiary of that company’s holding company, or would be so disqualified if the body corporate were a company.
(5) Notwithstanding subsections (1), (3) and (4), a firm is qualified for appointment as auditor of a company if, all the partners are qualified for appointment as auditors of the company.
(6) A person shall not act as auditor of a company when he knows that he is disqualified for appointment to that office and if an auditor of a company, to his knowledge, becomes so disqualified during his term of office, he shall thereupon vacate his office and give notice in writing to the company that he has vacated it by reason of that disqualification.
(7) A person who acts as auditor in contravention of subsection (6), or fails without reasonable excuse to give notice of vacating his office as required by that subsection commits an offence and is liable to a penalty as the Commission shall specify in its regulations.
Section 404. Auditors’ report and audit committee
(1) The auditors of a company shall make a report to its members on the accounts examined by them, and on every balance sheet and profit and loss account, and on all group financial statements, copies of which are to be laid before the company in a general meeting during the auditors’ tenure of office.
(2) The auditors’ report shall state the matters set out in the Fifth Schedule in addition to the report made under subsection (1), and the auditor shall in the case of a public company, make a report to an audit committee which shall be established by the public company.
(3) The audit committee referred to in subsection (2) shall consist of five members comprising of three members and two non-executive directors, the members of the audit committee are not entitled to remuneration, and are subject to election annually.
(4) The audit committee shall examine the auditors’ report and make recommendations thereon to the annual general meeting as it may deem fit.
(5) All members of the audit committee shall be financially literate, and at least one member shall be a member of a professional accounting body in Nigeria established by an Act of the National Assembly.
(6) Any member may nominate another member of the company to the audit committee by giving written notice of such nomination to the secretary of the company at least 21 days before the annual general meeting and any nomination not received prior to the meeting as stipulated is invalid.
(7) Subject to such other additional functions and powers that the company’s articles may stipulate, the objectives and functions of the audit committee are to—
(a) ascertain whether the accounting and reporting policies of the company are in accordance with legal requirements and agreed ethical practices ;
(b) review the scope and planning of audit requirements ;
(c) review the findings on management matters in conjunction with the external auditor and departmental responses thereon ;
(d) keep under review the effectiveness of the company’s system of accounting and internal control ;
(e) make recommendations to the board with regard to the appointment, removal and remuneration of the external auditors of the company ; and (f ) authorise the internal auditor to carry out investigations into any activities of the company which may be of interest or concern to the committee.
Section 405. Corporate responsibility for financial reports
(1) The chief executive officer and chief financial officer of a company other than a small company or persons performing similar functions shall certify in each audited financial statement that the—
(a) officer who signed the audited financial statements has reviewed them, and based on the officer’s knowledge the—
(i) audited financial statements do not contain any untrue statement of material fact or omit to state a material fact, which would make the statements misleading, in the light of the circumstances under which such statement was made, and
(ii) audited financial statements and all other financial information included in the statements fairly present, in all material respects, the financial condition and results of operation of the company as of and for, the periods covered by the audited financial statements ;
(b) officer who signed the audited financial statements—
(i) is responsible for establishing and maintaining internal controls and has designed such internal controls to ensure that material information relating to the company and its subsidiaries is made known to the officer by other officers of the companies, particularly during the period in which the audited financial statement report is being prepared,
(ii) has evaluated the effectiveness of the company’s internal controls within 90 days prior to the date of its audited financial statements, and
(iii) certifies that the company’s internal controls are effective as of that date ;
(c) officer who signed the audited financial statements disclosed to the company’s auditors and audit committee—
(i) all significant deficiencies in the design or operation of internal controls which could adversely affect the company’s ability to record, process, summarise and report financial data, and has identified for the company’s auditors any material weaknesses in internal controls, and
(ii) whether or not, there is any fraud that involves management or other employees who have a significant role in the company’s internal control ; and
(d) officer who signed the report, has indicated in the report, whether or not, there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
(2) Where a managing director, chief financial officer or person performing similar functions fails to discharge the duty imposed on him under this section, he commits an offence and is liable on conviction to a penalty as the Commission shall specify in its regulations.
Section 406. Improper influence on conduct of audit
(1) It shall be an offence for any officer, insider, director of a company, or any other person acting under the direction of such officer, insider or director, to take any action to influence, coerce, manipulate or mislead any external auditor engaged in the performance of an audit of the financial statements of that company for the purpose of rendering such financial statements misleading.
(2) A person who commits an offence under subsection (1) is liable on conviction to a penalty as the Commission shall specify in its regulations.
(3) For the purposes of this Act, “Insider” shall have the meaning given to it under the Investments and Securities Act, or any subsequent amendments thereto.
Section 407. Auditors’ duties and powers
(1) The company’s auditors shall, in preparing their report to carry out such investigations as may enable them to form an opinion whether—
(a) proper accounting records have been kept by the company and proper returns adequate for their audit have been received from branches not visited by them ; or
(b) the company’s balance sheet and (if not consolidated) its profit and loss account are in agreement with the accounting records and returns.
(2) If the auditors are of the opinion that proper accounting records have not been received from branches not visited by them, or if the balance sheet and (if not consolidated) the profit and loss account are not in agreement with the accounting records and returns, the auditors shall state that fact in their report.
(3) Every auditor of a company has a right of access at all times to the company’s books, accounts and vouchers, and be entitled to require from the company’s office such information and explanations as he thinks necessary for the performance of the auditor’s duties.
(4) If the requirements of Part V and VI of the Second Schedule and Parts I and II of the Third Schedule to this Act are not complied with in the accounts, it is the auditors’ duty to include in their report, so far as they are reasonably able to do so, a statement giving the required particulars.
(5) The auditors’ shall consider whether the information given in the directors’ report for the year for which the accounts are prepared is consistent with those accounts, and if they are of opinion that it is not, they shall state that fact in their report.
Section 408. Remuneration of auditors
(1) The remuneration of the auditors of a company—
(a) in the case of an auditor appointed by the directors, may be fixed by the directors ; or
(b) shall, subject to paragraph (a), be fixed by the company in general meeting or in such manner as the company in general meeting may determine.
(2) For the purposes of subsection (1), “remuneration” includes sums paid by the company in respect of the auditors’ expenses.
Section 409. Removal of auditors
(1) A company may by ordinary resolution remove an auditor before the expiration of his term of office, notwithstanding anything in any agreement between it and him.
(2) Where a resolution removing an auditor is passed at a general meeting of a company, the company shall within 14 days give notice of that fact in the prescribed form to the Commission and if a company fails to give the notice required by this subsection, the company and each officer of the company are liable to a penalty as the Commission shall specify in its regulations.
(3) Nothing in this section shall be taken as depriving a person removed under it of compensation or damages payable to him in respect of the termination of his appointment as auditor or of any appointment terminating with that as auditor.
Section 410. Auditors’ right to attend company’s meetings
(1) A company’s auditors are entitled to attend any general meeting of the company and to receive all notices of and other communications relating to any general meeting which a member of the company is entitled to receive and to be heard at any general meeting which they attend on any part of the business of the meeting which concerns them as auditor.
(2) An auditor of a company who has been removed is entitled to attend—
(a) the general meeting at which his term of office would otherwise have expired ; and
(b) any general meeting at which it is proposed to fill the vacancy caused by his removal, and to receive all notices of, and other communications relating to, any such meeting which any member of the company is entitled to receive, and to be heard at any such meeting which he attends on any part of the business of the meeting which concerns him as former auditor of the company.
Section 411. Supplementary provisions relating to auditors
(1) A special notice is required for a resolution at a general meeting of a company—
(a) appointing as auditor a person other than a retiring auditor ;
(b) filling a casual vacancy in the office of auditor ;
(c) re-appointing as auditor a retiring auditor who was appointed by the directors to fill a casual vacancy ; or
(d) removing an auditor before the expiration of his term of office.
(2) On receipt of notice of such an intended resolution as is mentioned in subsection (1), the company shall forthwith send a copy of it—
(a) to the person proposed to be appointed or removed ;
(b) in a case within subsection (1) (a), to the retiring auditors ; and
(c) in a case within subsection (1) (b) or (c), the casual vacancy was caused by the resignation of an auditor, to the auditor who resigned.
(3) Where notice is given of such a resolution as is mentioned in subsection (1) (a) or (d) and the retiring auditor (or, the auditor proposed to be removed) makes, with respect to the intended resolution, representations in writing to the company not exceeding a reasonable length, and requests their notification to members of the company, the company shall (unless the representations are 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 representations having been made ; and
(b) send a copy of the representations to every member of the company to whom notice of the meeting is or has been sent.
(4) If a copy of any such representations is not sent out as required by subsection (3) because they were received too late or because of the company’s default, the auditor may (without prejudice to his right to be heard orally) require that the representations be read out at the meeting.
(5) Copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other person claiming to be aggrieved, the court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter, and the Court may order the company’s costs on the application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application.
Section 412. Resignation of auditors
(1) An auditor of a company may resign his office by depositing a notice in writing to that effect at the company’s registered office, and such notice operates to bring his term of office to an end on the date of which the notice is deposited, or on such later date as may be specified.
(2) An auditor’s notice of resignation is not effective unless it contains either—
(a) a statement to the effect that there are no circumstances connected with his resignation which he considers should be brought to the notice of the members or creditors of the company ; or
(b) a statement of any such circumstances as are mentioned above.
(3) Where a notice under this section is deposited at a company’s registered office, the company shall within 14 days send a copy of the notice—
(a) to the Commission ; and
(b) if the notice contained a statement under subsection (2) ( person who under section 387 of this Act is entitled to be sent copies of the financial statements.
(4) The company or any person claiming to be aggrieved may, within 14 days of the receipt by the company of a notice containing a statement under subsection (2) (b), apply to the Court for an order under subsection (5).
(5) If on such an application the Court is satisfied that the auditor is using the notice to secure needless publicity for defamatory matter, it may, by order, direct that copies of the notice need not be sent out, and the Court may further order the company’s costs on the application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application.
(6) The company shall, within 14 days of the Court’s decision, send to the persons mentioned in subsection (3)—
(a) if the Court makes an order under subsection (5), a statement setting out the effect of the order ; and
(b) if not, a copy of the notice containing the statement under subsection (2) (b).
(7) If default is made in complying with the provisions of subsection (3) or (6), the company and each officer of the company are liable to a penalty as the Commission shall specify in its regulations.
Section 413. Right of resigning auditor to requisition company meeting
(1) Where an auditor’s notice of resignation contains a statement under section 412 (2) (b), there may be deposited with the notice a requisition signed by the auditor calling on the directors of the company forthwith to convene an extraordinary general meeting of the company for the purpose of receiving and considering such explanation of the circumstances connected with his resignation as he may wish to place before the meeting.
(2) Where an auditor’s notice of resignation contains such a statement, the auditor may request the company to circulate to its members before—
(a) the general meeting at which his term of office would otherwise have expired ; or
(b) any general meeting at which it is proposed to fill the vacancy caused by his resignation or convened on his requisition, a statement in writing (not exceeding a reasonable length) of the circumstances connected with his resignation.
(3) If a resigning auditor requests the circulation of a statement by virtue of subsection (2), the company shall (unless the statement is received by it too late for it to comply)—
(a) in any notice of the meeting given to members of the company, state the fact of the statement having been made ; and
(b) send a copy of the statement to every member of the company to whom notice of the meeting is or has been sent.
(4) If the directors do not within 21 days from the date of the deposit of a requisition under this section proceed to convene a meeting for a day not more than 28 days after the date on which the notice convening the meeting is given, every director is liable to a penalty as the Commission shall specify in its regulations.
(5) If a copy of the statement mentioned in subsection (2) is not sent out as required by subsection (3) because it was received too late or because of the company’s default, the auditor may (without prejudice to his right to be heard orally) require that the statement be read out at the meeting.
(6) Copies of a statement need not be sent out and the statement need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the Court is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter, and the Court may order the company’s costs on such an application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application.
(7) An auditor who has resigned his office is entitled to attend any such meeting as is mentioned in subsection (2) (a) or (b) and to receive all notices of and other communications relating to any such meeting which any member of the company is entitled to receive, and to be heard at any such meeting which concerns him as former auditor of the company.
Section 414. Powers of auditors in relation to subsidiaries
(1) Where a company has a subsidiary, then—
(a) if the subsidiary is a body corporate, incorporated in Nigeria, it is the duty of the subsidiaries and its auditors to give the auditors of the holding company such information and explanation as those auditors may reasonably require for the purposes of their duties as auditors of the holding company ; and
(b) in any other case, it is the duty of the holding company, if required by its auditors to do so, to take all such steps as are reasonably open to it to obtain from the subsidiary such information and explanation mentioned in paragraph (a).
(2) If a subsidiary or holding company fails to comply with the provisions of subsection (1), the subsidiary or holding company, and each officer are liable to a penalty as the Commission shall specify in its regulations, and if an auditor fails without reasonable excuse to comply with subsection (1) ( is so liable.
Section 415. Liability of auditors for negligence
(1) A company’s auditor shall in the performance of his duties exercise all such care, diligence and skill as is reasonably necessary in each particular circumstance.
(2) Where a company suffers loss or damage as a result of the failure of its auditor to discharge the fiduciary duty imposed on him by subsection (1), the auditor is liable for negligence and the directors may institute an action for negligence against him in the Court.
(3) If the directors fail to institute an action against the auditor under subsection (2) of this section, any member may do so after the expiration of 30 days’ notice to the company of his intention to institute such action.
Section 416. False statements to auditors
(1) An officer of a company commits an offence if he knowingly or recklessly makes to a company’s auditors a statement (whether written or oral) which—
(a) conveys or purports to convey any information or explanation which the auditors require, or are entitled to require, as auditors of the company ; and
(b) is misleading, false or deceptive in a material particular.
(2) A person who commits an offence under this section is liable to a penalty as the Commission shall specify in its regulations.
What this means
Short answer
A company is exempt from audit for a financial year if it has not carried on any business since incorporation, or if it is a small company (section 402(1)). The exemption is not available to a company that was at any time in the year an insurance company, a bank or another company the Commission prescribes (section 402(2)).
Who is exempt from audit
Section 402(1) exempts a company from the audit requirements for a financial year if either of these applies:
- it has not carried on any business since its incorporation; or
- it is a small company within section 394. See what counts as a small company.
A company cannot use the exemption if, at any time in the year, it was an insurance company, a bank or any other company the Commission prescribes (section 402(2)).
Appointing auditors
Every company must appoint an auditor at each annual general meeting to hold office until the end of the next one (section 401(1)). A retiring auditor is reappointed without a resolution unless he is not qualified, a resolution appoints someone else or says he will not be reappointed, or he has given written notice that he is unwilling to continue (section 401(2)).
- If no auditor is appointed or reappointed at the meeting, the directors may appoint one, and the company must tell the Commission within one week (section 401(3) and (4)).
- The directors may appoint the first auditors before the company is entitled to commence business (section 401(5)).
- The directors may fill a casual vacancy, and the continuing auditor may act while the vacancy lasts (section 401(6)).
Who cannot be an auditor
Under section 403, an officer or servant of the company, a partner or employee of an officer or servant, and a body corporate cannot be appointed. A person is also not qualified if he:
- is disqualified as auditor of the company’s subsidiary, holding company or fellow subsidiary;
- owes the company, or a related company, more than ₦500,000;
- is a shareholder, or the spouse of a shareholder, of a company whose employee is an officer of the company;
- is responsible, personally or through a partner, employee or employer, for keeping the register of debenture holders; or
- has been an employee of or consultant to the company for more than one year in maintaining its financial records or preparing its financial statements.
A firm qualifies if all its partners qualify. An auditor who knows he is disqualified must not act, and must vacate office and notify the company if he becomes disqualified during his term. Breaking this is an offence with a penalty set by the Commission (section 403(5) to (7)).
What auditors report
Auditors report to the members on the accounts and on every balance sheet and profit and loss account laid before the company in general meeting (section 404(1)). They must form an opinion on whether proper accounting records were kept and whether the accounts agree with them, and say so in the report if not. They have a right of access at all times to the books, accounts and vouchers and can require information and explanations, and they must check that the directors’ report is consistent with the accounts (section 407).
Audit committees in public companies
A public company must set up an audit committee, and the auditor reports to it as well (section 404(2)). The committee has five members, comprising three members of the company and two non-executive directors. The members are not paid, are elected annually, must be financially literate, and at least one must be a member of a professional accounting body established by an Act of the National Assembly (section 404(3) and (5)). Any member can nominate another member by written notice to the secretary at least 21 days before the annual general meeting (section 404(6)). The committee’s functions include reviewing the scope of the audit, the effectiveness of internal controls, and recommending the appointment, removal and pay of external auditors (section 404(7)).
Pay, removal and resignation
- Remuneration. Fixed by the directors for an auditor they appointed, otherwise by the company in general meeting (section 408).
- Removal. By ordinary resolution before the term ends, with notice to the Commission in 14 days (section 409). Special notice is needed (section 411), and the auditor may send written representations.
- Resignation. By written notice at the registered office, with a statement of any circumstances members or creditors should know about. The company must send a copy to the Commission within 14 days (section 412).
- Negligence. An auditor who fails to use the care, diligence and skill reasonably necessary is liable for negligence, and members can sue after 30 days’ notice if the directors do not (section 415).
- Misleading the auditor. It is an offence for an officer to knowingly or recklessly give auditors a misleading, false or deceptive statement (section 416), or to influence or manipulate an audit (section 406).
Questions and answers
Which companies are exempt from audit?
A company that has not carried on any business since incorporation, and a small company within section 394 (section 402(1)).
Can a bank or insurance company claim the audit exemption?
No. A company that was at any time in the year an insurance company, a bank or another company the Commission prescribes cannot use it (section 402(2)).
How is an auditor appointed?
At each annual general meeting, to hold office until the next one. A retiring auditor is reappointed without a resolution unless an exception in section 401(2) applies.
Can a company remove its auditor?
Yes, by ordinary resolution with special notice, and it must tell the Commission within 14 days. The auditor can send representations (sections 409 and 411).
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