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

CA Meera, a partner of Meera & Co., is invited to be the auditor of Delta Pharma Ltd. Her sister-in-law's husband is an employee of Delta Pharma, drawing a salary and holding no shares. During the audit, CA Meera discovers that her own firm lent Rs 3 lakh to a director of Delta Pharma three years ago, and it was fully repaid within the same financial year. Which assessment is correct under Section 141 of the Companies Act, 2013 and the Code of Ethics?

CA Meera is not disqualified. Section 141 targets relatives who are directors or key managerial personnel, and indebtedness that is outstanding above prescribed limits. Her relative is an ordinary employee, and the old loan was repaid long ago, so no statutory disqualification arises on the given facts.

  1. AShe is disqualified because of her relative's employment with the company
  2. BShe is disqualified because her firm has made a loan to a director in the past, regardless of when
  3. CShe is disqualified because the loan exceeded Rs 1 lakh
  4. DShe is not disqualified on these facts, as the relative is not a relative covered by the disqualification for employment and the loan was repaid and is not outstanding during the period of appointmentCorrect

Explanation

Section 141 disqualifies an auditor whose relative is a director or employed by the company in a key managerial position, and also where the auditor, firm or relative owes money above the prescribed limit to the company. Here the relative is a mere employee and not KMP, and the loan was historic and fully repaid, with no outstanding amount. Disqualification therefore does not arise on these facts, though the audit firm must still weigh threats under the Code of Ethics.

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