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

CA Arjun, auditor of Bharat Steels Ltd., discovers during the audit that the company's previous auditor, CA Sharma, had issued a clean report even though the company had not recorded a significant liability. The new appointee, CA Arjun, had not communicated with CA Sharma before accepting the audit. The company's management now suggests that CA Arjun need not contact CA Sharma at all. Which best describes the position?

CA Arjun should have communicated in writing with the previous auditor before accepting the audit. Accepting without doing so is professional misconduct under the First Schedule to the Chartered Accountants Act, 1949. Management's wishes cannot waive it, and it applies whether or not the earlier auditor was removed.

  1. ACommunication was needed only if CA Sharma had been removed
  2. BCA Arjun should have communicated with the previous auditor before accepting the appointment, and failure to do so is professional misconduct under the Chartered Accountants Act, 1949Correct
  3. CCommunication with the previous auditor is voluntary under the Code of Ethics
  4. DCommunication is required only with the Registrar of Companies, not with the previous auditor

Explanation

Under the First Schedule to the Chartered Accountants Act, 1949, a chartered accountant in practice who accepts a position as auditor previously held by another chartered accountant without first communicating with him in writing is guilty of professional misconduct. Management's view cannot waive this requirement. It applies irrespective of whether the predecessor was removed or retired, so the first option is wrong.

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