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

CA Ishita Rao, the statutory auditor of Himalaya Pharma Ltd., has a close friend, Mr. Arvind, who is a director of Himalaya Pharma Ltd. CA Rao has also provided, for a fee, internal audit services to the company during the financial year. A review of the facts raises doubts on her independence. Which of the following statements is correct under the Companies Act, 2013 (Section 144) and the Code of Ethics?

Internal audit is a prohibited service for the statutory auditor under Section 144 of the Companies Act, 2013, whether provided directly or indirectly to the company or its holding or subsidiary company. There is no fee threshold that permits it, so CA Rao's provision of the service is a violation.

  1. AProviding internal audit services to the company is permitted for its statutory auditor
  2. BProviding internal audit services is a prohibited service for the statutory auditor, directly or indirectly, to the company or its holding or subsidiary companyCorrect
  3. CThe prohibition on internal audit applies only if the fee exceeds 25% of the auditor's total fees
  4. DFriendship with a director is the only matter prohibiting services; internal audit is a permitted service

Explanation

Section 144 prohibits the auditor from providing, directly or indirectly, certain services to the company or its holding or subsidiary company, and internal audit is one of those listed services. There is no fee-percentage threshold that makes it permitted. Her providing internal audit services therefore breaches the prohibition regardless of the friendship issue.

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