CMA Intermediate · Business Laws and Ethics

Operational and Financial Control: formula sheet

Full chapter guide

Key formulas

Core rule: Service on the prohibited list + given to the company, its holding company or its subsidiary company (directly or indirectly) = barred; If the service is not on the list, Section 144 does not bar it.
Prohibited services (Section 144): (a) Accounting and book keeping; (b) Internal audit; (c) Design and implementation of financial information system; (d) Actuarial services; (e) Investment advisory services; (f) Investment banking services; (g) Outsourced financial services; (h) Management services; (i) Any other service prescribed; Learn these nine heads in order. Questions usually give a service and ask whether it is barred.
Who is covered: Auditor appointed under the Act → services to the company, its holding company or its subsidiary company; The restriction extends to the holding and subsidiary companies, not only the audited company.
Manner: Prohibition applies directly or indirectly; Indirect provision of a barred service is also caught.
Rule on other services: Service outside the prohibited list (a)-(i) = allowed only if approved by the Board or the audit committee, as the case may be; Both conditions must be met: the service must not be prohibited, and it must be approved. Approval alone does not cure a prohibited service.
The prohibited list, (a) to (i): (a) accounting and book keeping; (b) internal audit; (c) design and implementation of any financial information system; (d) actuarial services; (e) investment advisory; (f) investment banking; (g) rendering of outsourced financial services; (h) management services; (i) any other service as may be prescribed; Memory aid: group them as books, audit, systems, actuarial, advice, banking, outsourcing, management, prescribed.
Reach of the ban: Auditor → company + its holding company + its subsidiary company; directly or indirectly; Individual auditor: indirect includes services through his relative or a connected or associated person, or an entity he controls or influences significantly or whose name or brand he uses. Firm: indirect includes services through its partners, its parent, subsidiary or associate entity, or an entity the firm or a partner controls or influences significantly or whose name or brand the firm or a partner uses.
Services barred: Section 144 list: (a) accounting and book keeping; (b) internal audit; (c) design and implementation of any financial information system; (d) actuarial; (e) investment advisory; (f) investment banking; (g) outsourced financial services; (h) management services; (i) any other prescribed service; Nine heads in the section. Item (i) is open-ended through rules.
Recipients covered: Company + its holding company + its subsidiary company; Services to any of these three are caught. Learn that associate company is not named in section 144 itself.
Individual auditor: indirect routes: Himself, or through his relative, or any other person connected or associated with him, or any entity in which he has significant influence or control or whose name, trade mark or brand he uses; Taken from the Explanation to section 144.
Firm auditor: indirect routes: Itself, or through any partner, or its parent, subsidiary or associate entity, or any entity in which the firm or any partner has significant influence or control or whose name, trade mark or brand the firm or any partner uses; Here associate entities of the auditor firm are caught, not associates of the audited company.
Approval of other services: Other services allowed only if approved by the Board of Directors or the audit committee, as the case may be; The permitted services are those outside the prohibited list.
Link to section 141: Section 141(3)(i): a person who directly or indirectly renders a section 144 service to the company, its holding or subsidiary company is not eligible. Section 141(4): disqualification after appointment means vacating office, a casual vacancy; Section 144 is the conduct rule. Section 141 is the consequence for eligibility.
Section 144 prohibited services: (a) accounting and book keeping; (b) internal audit; (c) design and implementation of any financial information system; (d) actuarial services; (e) investment advisory; (f) investment banking; (g) outsourced financial services; (h) management services; (i) any other prescribed service; Barred for the company, its holding company and its subsidiary company, directly or indirectly.
Approval rule for other services: Other services allowed only if approved by the Board of Directors or the audit committee, as the case may be; A service not on the barred list still needs approval.
Meaning of 'directly or indirectly' (individual auditor): Himself, or through a relative, or any other person connected or associated with him, or through any entity in which he has significant influence or control, or whose name, trade mark or brand he uses; Rendering the service through others does not escape the bar.
Meaning of 'directly or indirectly' (firm): Itself, or through any partner, or through its parent, subsidiary or associate entity, or any entity in which the firm or any partner has significant influence or control, or whose name, trade mark or brand the firm or any partner uses; Covers the firm's network and partners' entities.
Audit committee composition (section 177(2)): Minimum 3 directors; independent directors form a majority; Majority of members, including the Chairperson, must be able to read and understand financial statements.
Audit committee role on auditors (section 177(4)): Recommend appointment, remuneration and terms; review and monitor independence, performance and effectiveness of audit process; Also examines financial statements and the auditor's report, and evaluates internal financial controls and risk management.
Auditor's right in committee (section 177(7)): Auditors and KMP have a right to be heard when the committee considers the auditor's report, but no vote; Do not write that auditors vote.

Quick revision

Section 144: an auditor may provide only other services approved by the Board of Directors or the audit committee, as the case may be.
The prohibition covers services to the company, its holding company or subsidiary company.
It applies whether the services are rendered directly or indirectly.
Prohibited: accounting and book keeping services.
Prohibited: internal audit; design and implementation of any financial information system.
Prohibited: actuarial services; investment advisory services; investment banking services.
Prohibited: rendering of outsourced financial services; management services.
Clause (i) adds any other kind of services as may be prescribed.
Individual auditor: indirect includes services through a relative, a connected person, or an entity he controls or influences significantly, or whose name or brand he uses.
Firm: indirect includes services through partners, parent, subsidiary or associate, or entities the firm or a partner controls or influences significantly.
Auditors already giving non-audit services at commencement had to comply before the close of the first financial year after commencement.
Under Section 132, the NFRA can investigate misconduct of chartered accountants and debar them for a minimum of six months, up to ten years.

Common mistakes

Thinking a prohibited service can be made valid by some approval. Fix: The listed services are barred by the section itself. Do not write that approval can permit them.
Forgetting the holding and subsidiary companies. Fix: Always write 'company, its holding company or its subsidiary company' in your answer.
Thinking Board approval can allow a prohibited service. Fix: Approval only covers services outside the list. Listed services are barred whatever the Board says.
Forgetting that holding and subsidiary companies are covered. Fix: Always check the whole group. A barred service to the holding or subsidiary is also barred.
Thinking section 144 covers only services given to the audited company. Fix: Always write company, holding company and subsidiary company together.
Saying a service is allowed because the auditor did not do it personally. Fix: Read the Explanation. Work done by a relative, partner, parent, subsidiary or associate entity, or an entity using the auditor's name, counts.
Saying all non-audit services are prohibited. Fix: Write that only the listed services are barred; other services need approval of the Board or audit committee.
Ignoring the holding and subsidiary company. Fix: Always check whether the service goes to the holding or subsidiary company; the bar covers them.

Exam tips

Write the full prohibited list in your answer when the question asks 'which services' an auditor cannot render. Each head earns credit.
In case questions, first classify the service, then state the rule, then conclude. This gives clear step marks.
For MCQs, watch for options claiming a prohibited service can be allowed by approval. These are traps.
Always mention holding and subsidiary companies when the facts involve a group.
Link your conclusion to auditor independence in one line. Examiners like the reason behind the rule.
Learn the list in order and write it as numbered points. Examiners look for each named service.
In scenario questions, state the rule first, then match the facts, then conclude. This earns step marks.
Always mention independence as the reason behind the section.