CMA Intermediate · Business Laws and Ethics

Operational and Financial Control: CMA Inter Study Guide

Operational and Financial Control in this chapter centres on Section 144 of the Companies Act, 2013. An auditor may give a company only services approved by the Board or audit committee, and never the listed prohibited services. To solve questions, identify the service, check the list, then check who rendered it, directly or indirectly.

What this chapter covers

This chapter is about keeping the auditor independent so that the control over a company's finances and operations can be trusted. The core is Section 144 of the Companies Act, 2013. It says what non-audit services an auditor can and cannot give to the company it audits.

The chapter has four parts. First, the basic rule: only services approved by the Board of Directors or the audit committee, and never the prohibited ones. Second, the list of prohibited services. Third, the scope: the ban covers services to the company, its holding company and its subsidiary company, and covers services given directly or indirectly. Fourth, the idea behind it all, auditor independence.

The chapter links to the rest of Business Laws and Ethics through the Companies Act and professional ethics. It also connects to audit-related provisions such as the National Financial Reporting Authority under Section 132. The NFRA can investigate, either on its own motion (suo motu) or on a reference from the Central Government, the misconduct of members or firms of chartered accountants registered under the Chartered Accountants Act, 1949. Only where professional or other misconduct is proved can it impose a penalty or debar the member or firm. Read this chapter together with those so you can answer both the rule and the consequence.

This chapter is short, rule-based and easy to score in both formats. The list in Section 144 is fixed, so MCQs test whether you can spot a prohibited service in a one-line scenario. Written questions reward a clear answer that states the rule, lists the services, explains the direct and indirect scope and ends with the independence reasoning. Students who learn the list exactly and practise a few scenarios rarely lose marks here.

Operational and Financial Control: topics in the order to study them

1Auditor Not to Render Certain Services (Section 144)Start with the main rule: only Board or audit committee approved services, and never the prohibited ones.
2List of Prohibited Services under Section 144Once you know the rule, learn the list of clauses (a) to (i): eight named services plus the residual clause (i) for any other services as may be prescribed. Most MCQs test them directly.
3Scope: Auditor, Associated Persons and Group CompaniesNext learn who and what is covered: holding and subsidiary companies, and services given directly or indirectly through relatives, partners or related entities.
4Auditor Independence and Operational and Financial ControlFinish with the purpose, which lets you write reasoned answers and link the chapter to the rest of the paper.

How to prepare Operational and Financial Control

Treat this as a rule-and-list chapter. Memorise the exact structure, then practise applying it to short scenarios.

Read Section 144 once in full and note its three parts: the approval condition, the prohibited list and the Explanation on direct or indirect services.
Learn the list in order: (a) accounting and book keeping services, (b) internal audit, (c) design and implementation of any financial information system, (d) actuarial services, (e) investment advisory services, (f) investment banking services, (g) rendering of outsourced financial services, (h) management services, (i) any other kind of services as may be prescribed.
Make a two-column table on paper for the Explanation: for an individual auditor (himself, relative, connected person, entities he controls or whose name is used) and for a firm (itself, partners, parent, subsidiary, associate, controlled entities).
Practise 10 to 15 scenario MCQs. For each, ask: is this service on the list, and who actually gave it?
Write one model answer of about 150 words: rule, list, scope, reason. Keep the same four-part layout in the exam.
Revise the transitional proviso and the link with Section 132 (NFRA) in the last week.

Common mistakes in Operational and Financial Control

Thinking an auditor can give no other service at all.
Fix: Remember the rule: other services are allowed if approved by the Board or audit committee, but never the listed ones.
Treating Board approval as a cure for a prohibited service.
Fix: Approval applies only to services outside the list. A listed service stays barred even if approved.
Forgetting holding and subsidiary companies.
Fix: Add 'company, its holding company or subsidiary company' to every scope answer.
Ignoring indirect services in scenarios.
Fix: Apply the Explanation: ask who gave the service and whether that person is linked to the auditor.
Writing the list from memory and missing items such as outsourced financial services or management services.
Fix: Learn the nine clauses in order, using the first letters, and recite them once daily before the exam.
Quoting penalty figures or debarment periods for Section 144 itself.
Fix: Keep them separate. Section 132 gives the NFRA penalty and debarment powers for proved misconduct. Do not attach those figures to Section 144 unless the question asks.

Last-day revision: Operational and Financial Control

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.

Operational and Financial Control practice questions

Operational and Financial Control in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Operational and Financial Control: frequently asked questions

What does Section 144 of the Companies Act, 2013 say?

It says an auditor may provide to the company only such other services as the Board of Directors or the audit committee approves. These services must not include the prohibited list, such as accounting and book keeping or internal audit. The ban covers the company, its holding company and its subsidiary company.

Does the ban apply to services given indirectly?

Yes. The section covers services rendered directly or indirectly. For an individual, this includes services through a relative, a connected person or an entity he controls or influences significantly. For a firm, it includes services through partners, parent, subsidiary, associate or similar entities.

How many prohibited services are listed?

The section lists clauses (a) to (i). Eight are named services, and clause (i) covers any other kind of services as may be prescribed. Learn them in order so you do not miss one in an MCQ.

Is this chapter more important for MCQs or written answers?

Both can come from it. MCQs usually test whether a service is prohibited. Written answers ask for the rule, list, scope and purpose, so prepare a short structured answer with all four parts.