CA Intermediate · Auditing and Ethics · Audit of Banks
A firm of Chartered Accountants is invited to be appointed as statutory central auditor of a public sector bank. One partner of the firm holds a fixed deposit and a savings account with the bank on normal terms, and has a housing loan from it, also on normal commercial terms and below any material limit. Which statement is correct regarding the firm's position under the Code of Ethics approach?
A partner's deposits and a housing loan on normal commercial terms do not automatically impair independence. The firm must still evaluate and manage any threats and comply with the applicable Companies Act and RBI limits. It is neither automatically disqualified nor free to ignore the relationship.
- AThe firm is disqualified, because holding any deposit account with the bank is prohibited
- BThe ordinary banking relationship on normal terms does not by itself impair independence, but the firm should evaluate and manage any threat and comply with the applicable RBI and Companies Act limits on loans and relationshipsCorrect
- COnly the loan creates a threat; deposits are always prohibited
- DThe firm may ignore the matter because partners' personal dealings are never relevant to independence
Explanation
Ordinary deposit and loan relationships on normal commercial terms generally do not impair independence, but the firm must evaluate threats and comply with legal limits on loans and with RBI guidelines. A blanket prohibition on deposits is wrong, and personal dealings of partners are relevant and must be assessed.
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