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CA Intermediate · Auditing and Ethics · Ethics and Terms of Audit Engagements

Anand & Associates is the statutory auditor of Vihaan Pharma Ltd., a listed company. The firm has also been asked by Vihaan Pharma to take up the internal audit of the company for the same year. Anand & Associates' senior partner argues that adequate safeguards such as separate teams would remove any issue. Which statement is correct under the Companies Act, 2013 and the Code of Ethics?

The firm cannot accept the internal audit assignment, because the Companies Act, 2013 prohibits a statutory auditor from rendering internal audit services to the company. Separate teams or audit committee approval cannot override this statutory bar, which exists to protect independence.

  1. AThe firm may accept both assignments if separate teams are used, because safeguards always remove the threat
  2. BThe firm may accept internal audit but must not sign the audit report on the same financial statements
  3. CThe firm may accept internal audit if the audit committee approves it by a simple resolution
  4. DThe firm cannot accept the internal audit assignment because rendering internal audit services to the company is prohibited for its statutory auditor under the Companies Act, 2013Correct

Explanation

The Companies Act, 2013 lists services that an auditor may not render to the company, its holding company or subsidiary, and internal audit is one of them. Use of separate teams or approval by the audit committee cannot override a statutory prohibition. The option about not signing the report misdescribes the position, since the issue is the prohibited service itself.

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