Company Audit, the Auditor and the Audit Committee

Shareholders own the company, but the directors run it, and the members rely on the accounts to see how the directors are doing. The audit exists so that someone independent checks those accounts. Company law therefore says who must be appointed as auditor, who cannot be, how the auditor is removed or resigns, what the auditor must examine and when the auditor is liable.

For a public company it also requires an audit committee. These topics produce short list questions every year, so this topic gives each list in full with its source.

This topic covers the appointment of auditors, the role of the Securities and Exchange Commission, the persons disqualified from acting, the audit committee and its functions, removal, resignation, the duties and powers of the auditor, the auditor’s liability, and the companies exempt from audit.

Appointment of the auditor

The legal setting

Auditing is at the core of a company’s internal control. Section 89(1) of the Investments and Securities Act 2025 (ISA) requires a public company to set up a system of internal controls over its financial reporting and the security of its assets. The board must ensure the integrity of the controls and the reporting.

A failure to comply carries a penalty of not less than ₦5,000,000 and a further ₦50,000 for each day the violation continues (section 89(4)).

The rules in section 401 of CAMA

1. Annual appointment. Every company appoints an auditor or auditors at each annual general meeting to audit its financial statements. The auditor holds office from the end of that annual general meeting (AGM) until the end of the next (section 401(1)).
2. Automatic re-appointment. A retiring auditor is re-appointed without any resolution at the AGM unless: (i) he is not qualified for re-appointment; (ii) the company has passed a resolution appointing someone else, or saying expressly that he must not be re-appointed; or (iii) he has told the company in writing that he is unwilling to be re-appointed.
3. Failure to appoint. If the company fails to appoint or re-appoint auditors at an AGM, the directors may fill the vacancy after notifying the CAC that they intend to do so. This lets the company and its officers avoid the penalty the CAC would otherwise charge.
4. Casual vacancies. The directors may fill a casual vacancy in the office of auditor. Until they do, a surviving or continuing auditor may act.
5. The first auditors. The first auditors are appointed by the board of directors, which is the answer the examiners gave in May 2023 Section A.

The appointment of auditors, and the fixing of their remuneration, are matters of ordinary business at an annual general meeting, so they appear in the list of the AGM’s business.

Registration with the SEC

• No person may audit a public company unless he is registered with the Securities and Exchange Commission on the terms and conditions the Commission prescribes (ISA 2025, section 90). May 2017 asked for the role of the SEC in the appointment of an auditor (2 marks). The answer is to register the person who audits a public company.
• If the person is not registered, the company pays a fine of ₦5,000,000 and the auditor a fine of ₦1,000,000, and each of them pays a further ₦50,000 for every day of the violation (section 91(1) and (2)).
• Section 403(1) of Companies and Allied Matters Act (CAMA) applies the provisions of any Act establishing a body of accountants to an investigation or audit for the purposes of CAMA.

Persons disqualified from being auditor

Section 403 disqualifies:

1. an officer or servant of the company;
2. a body corporate, unless all its partners are qualified to be appointed auditors of a company;
3. a person disqualified from appointment as auditor of any other body corporate, or who would be if that body corporate were a company. He must vacate office if the disqualification occurs during his term;
4. a debtor of the company, or of a related company by share interest, for more than ₦500,000;
5. a shareholder or the spouse of a shareholder of a company whose employee is an officer of the company;
6. a person who, or whose partner, employee or employer, is responsible for keeping the register of the company’s debenture holders; and
7. an employee of, or consultant to, the company for more than one year who maintains any of its financial records or prepares its financial statements.

The purpose is independence. An auditor who is part of the company, owes it money or keeps its records cannot judge its accounts fairly. November 2023 asked for five persons disqualified (5 marks).

The audit committee

Every public company must set up an audit committee.

• It has five members, of whom two are non-executive directors. The other three are members elected from the shareholders. November 2022 asked how many members must be non-executive directors, and the answer is two.
• Section 404 requires every member to be financially literate, and at least one must be a member of a professional accounting body in Nigeria established by an Act of the National Assembly.
• The auditors report to the members on the accounts, the balance sheet and the profit and loss account laid before a general meeting during their term. The audit committee examines the auditors’ report and makes recommendations on it to the AGM as it sees fit.

Functions of the audit committee (section 404(7))

Subject to the company’s articles, the committee must:

1. decide whether the company’s accounting and reporting policies comply with the law and agreed ethical practices;
2. review the scope and planning of the audit;
3. review the findings on management matters with the external auditor, and the departmental responses to them;
4. keep under review the effectiveness of the company’s system of accounting and internal control;
5. make recommendations to the board on the appointment, removal and remuneration of the external auditors; and
6. authorise the internal auditor to investigate any activity of the company that interests or concerns the committee.

May 2024 asked for four of these functions, stated and explained (8 marks), so give each function a sentence of explanation, not just a heading.

Removal of the auditor

Under section 409, a company may remove an auditor before the end of his term by passing an ordinary resolution, whatever any agreement between the parties says. The company must give notice of the removal to the CAC within 14 days of passing the resolution. Failure to do so makes the company and each of its officers liable to a penalty.

The removed auditor may still be entitled to compensation or damages for the loss of his appointment.

The steps for a public company (May 2023, 8 marks)

1. An ordinary resolution for his removal is passed at a general meeting.
2. The auditor is given notice of the general meeting at which the resolution is to be passed.
3. The auditor is given a copy of the resolution.
4. The resolution is filed with the CAC within 14 days.
5. The removed auditor is paid all entitlements due on removal.
6. The removed auditor may attend the general meeting at which his term would otherwise have ended.

Ways of removing an auditor (November 2015, 5 marks)

The examiners gave three ways, each requiring a vote at the general meeting:

• the shareholders propose and approve a resolution to remove him
• the board does not recommend him for re-appointment
• the general meeting passes a resolution to appoint another auditor in his place

Resignation of the auditor

Under section 412, an auditor may resign by written notice deposited at the registered office. The notice is effective only if it contains either:

1. a statement that there are no circumstances connected with his resignation that he should bring to the notice of the members or creditors; or
2. a statement of the circumstances that make him resign.

The company must send a copy of the notice to the CAC and to every person entitled to receive copies of the financial statements. The court may order otherwise if the notice is defamatory or aims at needless publicity.

Duties and powers of the auditor

Standard of care

Section 415(1) requires the auditor to exercise reasonable care, diligence and skill. November 2015 Section A asked what the duties of an auditor require, and the answer is care and skill.

Powers

• unrestricted access to the company’s books, accounts and vouchers; and
• the power to require from the company’s officers the information and explanations he considers necessary.

What the auditor must form an opinion on

1. whether the company has kept proper accounting records and the auditors have received proper returns from branches they did not visit, and, if not, say so in the report;
2. whether the balance sheet and profit and loss account agree with the accounting records and returns, and, if not, say so;
3. whether the accounts comply with the requirements of Parts V and VI of the Second Schedule and Parts I and II of the Third Schedule, and, if not, say so; and
4. whether the directors’ report is consistent with the accounts, and, if not, say so.

May 2017 asked for three matters Hazeem’s audit must cover (6 marks), and the examiners added that the financial statements must present a true and fair view.

Liability of the auditor

An auditor is liable to the company for loss or damage arising from his negligence (section 415(2)). If the company does not sue, a member may sue the auditor 30 days afterwards.

Companies exempt from audit

A company that has not carried on business in a financial year and a small company within the meaning of CAMA are exempt from the audit requirements of the Act. The attributes of a small company are in the topic on annual returns and taxation.

A limited liability partnership is different: in November 2021 the partners of an limited liability partnership (LLP) were told that an LLP must be audited and must file annual returns, which the topic on LLPs covers.

Working through the rules

Is this person qualified to be auditor?

The timeline for removal

On 10 June the shareholders pass an ordinary resolution to remove the auditor at a meeting of which he had notice. He receives a copy. The company must notify the CAC by 24 June, which is 14 days after 10 June. He keeps his claim to compensation. If the company misses the date, the company and each officer are liable to a penalty.

The two ways an auditor leaves

Worked problems

Problem 1: the duties of an incoming auditor

1. Qualification. Kunte Plc is public, so Hazeem must be registered with the SEC. It must not be disqualified under section 403.
2. Standard. The auditor must use reasonable care, diligence and skill (section 415(1)), and has unrestricted access to books, accounts and vouchers and may require information and explanations.
3. The matters. He must form an opinion on whether proper accounting records were kept and returns received from branches not visited; whether the balance sheet and profit and loss account agree with the records; whether the accounts comply with the Second and Third Schedules; and whether the directors’ report is consistent with the accounts. He should also give a view on whether the statements show a true and fair view.
4. Liability. If he is negligent, he is liable to the company for the loss (section 415(2)).

Problem 2: removing the auditor

1. The rule. A company may remove an auditor by ordinary resolution before his term ends, whatever any agreement says (section 409).
2. The steps. The resolution is passed at a general meeting. The auditor receives notice of the meeting and a copy of the resolution, and may attend the meeting at which his term would have ended. The company files the resolution with the CAC within 14 days.
3. The cost. He may be entitled to compensation or damages for the loss of the appointment, and is paid his entitlements.
4. Advice. The engagement letter does not prevent removal, but the company should expect a claim for compensation.

Problem 3: a negligent audit

1. The rule. An auditor is liable to the company for loss caused by negligence (section 415(2)).
2. Who sues. The company is the proper plaintiff. If it does not sue, a member may sue the auditor 30 days afterwards.
3. Advice. The shareholder should ask the company to sue. If it does not do so within 30 days, he may bring the action himself.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Saying a special resolution is needed to remove an auditor. An ordinary resolution is enough.
• Forgetting the 14-day notice to the CAC, or the right to compensation.
• Saying a company can never remove an auditor before his term ends because of his contract. Section 409 overrides it.
• Saying the audit committee has six members or three non-executive directors. It has five, with two non-executive directors.
• Giving the audit committee functions without explanation when the question asks you to “state and explain”.
• Saying that any accountant can audit a public company. He must also be SEC registered.
• Mixing up the ₦500,000 debtor limit with other ₦ figures in the Act.
• Forgetting that a small company is exempt from audit.

Quick revision

• Appointed at each AGM (s.401), holds office to the next AGM. Automatic re-appointment unless unqualified, replaced or unwilling. Directors appoint the first auditors and fill casual vacancies.
• Public company auditor: SEC registration. Penalties: company ₦5m, auditor ₦1m, plus ₦50,000 a day.
• Disqualified (s.403): officer or servant; unqualified body corporate; disqualified elsewhere; debtor over ₦500,000; connected shareholder or spouse; keeper of debenture register; employee or consultant for over a year who keeps the records.
• Audit committee: public company, five members, two non-executive directors, financially literate, one an accountancy body member. Six functions (s.404(7)).
• Removal: ordinary resolution, notice to the CAC in 14 days, compensation. Resignation: written notice with a statement.
• Duties: care, diligence and skill; access and information; four matters of opinion. Liability for negligence; members may sue after 30 days.
• Exempt: small company; company not carrying on business.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

Spotted a mistake? Tell us and we will check it.