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CA Final · Advanced Auditing, Assurance and Professional Ethics · Overview of Audit of Public Sector Undertakings

CA Mehta is the statutory auditor of Sagar Ports Ltd., a Government company. The auditor's relative holds a small number of shares of the company, whose face value is well within the limits permitted for relatives under the Companies Act. The auditor also notes the company's large capital expenditure on a project approved by the ministry. Which is the correct approach to independence and the audit of this expenditure?

The auditor may continue because a relative's shareholding within the permitted statutory limit does not disqualify him. He must still test whether the expenditure was authorised and properly accounted for, since ministry approval is only one piece of evidence and does not replace his own audit procedures.

  1. AThe auditor is disqualified because any shareholding by a relative bars appointment
  2. BThe auditor may continue if the relative's holding is within the permitted limit, and should examine whether the expenditure was properly authorised and accounted for, since ministry approval does not remove the audit responsibilityCorrect
  3. CThe auditor should accept the ministry approval as conclusive audit evidence and perform no further tests on the expenditure
  4. DThe auditor must resign because a Government company's auditor cannot audit capital projects approved by a ministry

Explanation

The Companies Act permits relatives to hold securities in the audited company up to a prescribed small limit, so a holding within the limit does not disqualify the auditor. Ministry approval is relevant evidence on authorisation but does not replace the auditor's own tests of accounting, valuation and existence of the expenditure. Resignation is not required, and treating approval as conclusive would fail the requirement for sufficient appropriate audit evidence.

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