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

CA Ishaan, partner of a firm auditing Lotus Retail Ltd, is told that his brother, who is not a partner in the firm, has a small shareholding of 100 shares in the company, a fraction of its paid-up capital. Considering the Companies Act, 2013 provisions on auditor disqualification, what is the correct position?

The holding does not automatically disqualify the firm. The Companies Act permits a relative to hold securities of the audited company up to a face value of Rs 1,00,000, and the partner should still evaluate any self-interest threat under the Code of Ethics.

  1. AThe firm is disqualified because any relative of a partner holding any security disqualifies it
  2. BThe firm is disqualified only if the relative holds more than 5% of the share capital
  3. CThe relative's holding does not automatically disqualify, but the partner must ensure that the holding is within the limits specified, including the face value cap of Rs 1,00,000 for relatives under the Companies Act, 2013 and its rules, and the auditor should evaluate it as a self-interest threatCorrect
  4. DThe firm is disqualified because the brother of a partner is always treated as the partner himself

Explanation

Under the Companies Act, a person is disqualified if the person or their relative holds any security of the company, but a relative may hold securities with face value not exceeding Rs 1,00,000, as per the Rules. A holding of 100 shares of small value is within this limit, so there is no automatic disqualification, though the Code of Ethics requires evaluating the threat. Treating any holding as disqualifying is too strict.

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